»The Honest Truth by Ajit Dayal

A Quantum Budget?

Finance Minister Sitharaman had two difficult tasks ahead of her. Firstly, she had to deliver a speech for 160 minutes without a break. Secondly, she had to deliver a zing budget that inspired India to set the tone for her three building blocks: Aspirational India, Economic Development and a Caring Society.

Well, she failed on both counts. Being human, she had to take a deserved and necessary break for completing the record-setting budget speech. Being uninspired, the budget proposals are so confusing that to assemble all the parts into a meaningful whole requires the forces of Quantum Computing. As such, the budget proposal to invest INR 8,000 crore over the next five years in the National Mission on Quantum Technology or the Quantum-Enabled Science & Technology (QuEST) programme is welcome. Future economists, commentators, lawyers and accountants will not have to huddle over the fine print and "notwithstanding", "whereas" and "subject to" that tends to drown any inspiration in a cesspool of muck. The corporate honchos don't need any Quantum-computing skills: they have their caged parrot lines to recite. For fear of upsetting any government these mandarins of market capitalisation continue to show their lack of spine. For all their billions (or maybe they made their billions?!), they have given every budget in the Chidambaram, Mukherjee, Jaitley era an "8/10"!

Ironically, former Finance Minister Chidambaram came up with the only near-accurate quote: "10 has a 1 and a 0, you pick a number". It's not that the budget was bad - but India needed something dramatically more powerful at this point in its economic cycle.

The stingy heart.

The details of a budget speech always tend to deflate rather than energise - irrespective of whether the Finance Minister was P. Chidambaram, Pranab Mukherjee, or the late Arun Jaitley. For the past decade, the desire to inspire and feel good - glorified by quoting a now-routine couplet from a long-dead poet by every FM - is layered with footnotes of meanness, or just stupidity. It's as if the government wants us not to be one with the spiritual text of the poets they quote in the budget speeches but unify us with their physical state - by making us the soon-to-be-dead and squeezing out our desire to flourish.


Take the example of the lower personal income taxes - provided you don't claim the deductions! Really? I can see the accountants rubbing their hands with glee on this lifetime source of fee income. Or take the examples of the removal of the dividend withholding tax (which results in the dividend being taxed at a potentially higher rate in your hands), or the addition of a TDS when a mutual fund makes a distribution of over INR 5,000. What is the objective - to deflate the morale and clip the income? Why not make a simple statement like "all marginal income from any source will be free of tax if that income is below INR 12 lakh per annum, it will be taxed at 10% if above INR 12 lakh, and taxed at 20% if above INR 50 lakh"...or whatever. Why must this bouquet of flowers be covered and packaged in hidden thorns? Why must we have access to Quantum computing to figure out whether the budget has indeed brought in the promised "minimal government" and more money into our homes - or made a monkey of us again?

If India is to grow from a USD 2.9 trillion to a USD 5 trillion economy by March 2025, it needs to grow on average by approximately 15% per annum for each of the next 5 years. There is nothing in this budget to suggest that we are preparing ourselves to grow at anything more than a 9% to 10% rate of growth (this is the combination of the real rate of growth and the inflation or price movement). As such, we will be lucky to cross the USD 4 trillion level of GDP in 5 years. And that assumes the INR does not continue its habitual 2.5% per annum decline against the US Dollar, as it has since 1966. In any case, the USD 5 trillion target is a meaningless sound byte and twitter feed to excite people and make them feel good even as they experience bad!

Table 1: Lower Gross Tax Revenues, but Capital Expenditure still required

 Gross Tax CollectionCapital Expenditure
Original est for March 31 2020Rs 24.6 lakh crore
USD 346.6 billion
Rs 3.39 lakh crore
USD 47.7 billion
Revised est as per Budget speechRs 21.6 lakh crore
USD 304.7 billion
Rs 3.49 lakh crore
USD 49.2 billion
Change over time-12%+3%
New est made for March 2021Rs 24.2 lakh crore;
USD 341.2 billion
Rs 4.12 lakh crore;
USD 58.0 billion
Source: Quantum Advisors, Budget speech (USD/INR = 71)

The most immediate task of this budget should have been to kick start the sluggish economy and remove stress in rural and urban India. There has been little or no meaningful job creation since November 2016 thanks to the demonetisation. Hiring loyalists to troll those who disagree with the social or economic policies of the BJP government, or exciting loyalists with a warped belief system to emulate speeches made by their leaders, does not amount to economic activity. And certainly not an activity which results in any taxation revenue to the government. The original estimates for the year ending March 2020 was a gross tax collection of INR 24.6 lakh crore, the end results was a -12% decline at INR 21.6 lakh crore. The budget has plans for tax collections to surge by 12% in the year ending March 2021 to a level of INR 24.2 lakh crore. Interestingly, this is still below the estimated INR 24.6 lakh crore forecasts made for the year March 2020. It is a confession that either March 2020 estimates were fiction or that things are so bad that getting to a higher collection number will take time. Inspiration is not an it-can-wait thing - you either switch it on now or wait for some other policy announcement.

Here is a quote from Kahlil Gibran that may come in handy in a few months when the economy continues to sink and the policy makers try to figure out what to do next and which couplet to quote:

"It is well to give when asked,

But it is better to give unasked, through understanding.

And to the open-handed the search

For one who will receive is joy greater than giving."

No stimulus.

Every home maker knows that if you don't have money coming in, your ability to spend is limited. With lower tax revenues it was inevitable that the INR 24.5 lakh crore of revenue expenditure envisaged for the year end March 2020, clocked in 4% lower at INR 23.5 lakh crore. With the private sector unwilling to spend, the government had a capital expenditure plan of INR 3.39 lakh crore but actually spent 3% more at INR 3.49 lakh crore. The tax cut in September 2019 may have fired up the stock market but is unlikely to do anything to the economy for a long time. Most factories are not being run to their full capacity since demand is slow. Giving the companies a tax cut has resulted in a share price surge in the near term. Sending that INR 1.5 lakh crore (USD 20 billion) to people in the job-guarantee NREGA scheme (total outlay of INR 70,000 crore in March 2020) and to lower and middle income households would have been far better and would have had an immediate impact on consumption.

To be fair, the Finance Minister had a very difficult choice to make: spend more by borrowing (just as household gets tempted to borrow to consume or buy more today). This higher fiscal deficit could have spooked investors in government bonds who would have demanded a higher rate of interest on future borrowings from the government and any other Indian entity. The FM has been advised to play safe and go through the motions of promising a controlled borrowing programme and a controlled fiscal deficit by presenting to the nation and the world the bouquet that she did. But it may have been worth the gamble to borrow more and boost investment in rural projects or distribute more to rural India. The tax cuts of September 2019 were a waste of "funds" (no money was paid out, but less will be received by the government) to that extent.

Getting real on real estate.

The government continues to drip-feed the all-important real estate sector. With 3 years of unsold inventory or incomplete apartments in many cities, a forced write-down of estimated profits for developers is one way out of the mess. To read a detailed Honest Truth article on this, please click here. Any developer with a loan should no longer be given any loans by any entity. This will force the developer to sell their ready stock - or sell their project - to generate the cash flow to repay the loans. Or they will hand over the keys of their projects to the bank and walk away. The bank can then be the sponsor of the project and hire a contractor to complete the job and take bookings. And provide the home loans for that project. The purchase of property is the largest possible stimulus in a country which has a natural housing shortage. Once you buy the apartment, it gets furnished, a 2-wheeler or a car ends up in the parking space....the economy sees activity...when companies see their plants running at a higher capacity, then they will begin to invest in more factories. When real estate developers see activity in real estate, they will start to invest in new projects: those developers who survive this cycle will emerge stronger.

The budget has sprinkled a little petal here, and a little petal there. It is devoid of the fragrance of bold action that was needed. You know, The Musk stuff: bold, sensual.... Instead we got Red Ginger, a fragrance that fades quickly. No matter what the stock market is made to do by LIC on February 3, this odorless tasteless budget will be go down as yet another lost opportunity to get the zing back in the Indian economy.

Author's Note: An earlier version of this article had an incorrect conversion between Rs lakh crore and USD billion. Our apologies...