Navigating India's Budget: Opportunities, Challenges, and Implications

In February 2020, at the CNBC award function, Maharashtra's then Chief Minister Uddhav Thackeray gave a speech on the occasion of the budget, which went viral. He said “The most successful finance minister is the one who picks someone's pocket, and the person never gets to know about it.”

So, was Finance Minister Nirmala Sitharaman able to do this in this budget? In this video, I'll talk about taxes, why people are angry with this budget, and how this budget will affect our country.

Before discussing the budget, let's first understand the context.

What is the situation of our Indian economy? What are the problems of our economy?

You'd know that there are four things in the GDP. Consumption, investment, government spending, and net exports. The main problem in the Indian economy is consumption.

In other words, people in our country are not spending money. Why aren't they spending money? Because they're not earning enough. This leads to many problems.

Let me give you an example.

In the past few years, Indian companies have earned a lot of money. Between 2018 and 2022, net sales of 5000 listed companies increased by 52% and net profit by 187%. How did these companies earn money in our country? Mainly from the rich.

For example, Bata, an affordable shoe brand, in 4 years, its sales increased by 20%. While Metro, a premium brand of shoes, its sales increased by 70%. How many companies focus on a few cities because that's where money is concentrated.

Let's take the example of Zomato. 5% of Zomato's customers are responsible for 45% of their orders. These companies are earning a lot of money, but they're not investing their profits. Why?

Because they're afraid that after investing, they won't get any money. Because even the rich have a limit in our country. If you sell your goods to them, where will you go after that? Ex-Chief Economic Advisor of India, Arvind Subramaniam, talked about this when he said that “Modi-nomics hasn't increased investment in our country.”

Companies will invest only when they believe that people will spend money and buy their goods. So our government had to do one thing through this budget. They had to increase domestic consumption. This can be done with two things. First, give people with money some other reason to spend it. Second, give jobs to those who don't have money so that they can spend their money in the future. Now that you've understood the context of our problems,

let's see if the government tried to do the same or not. If you're a business owner, you must have seen the budget.

First, let's talk about income tax. Many people hoped that income taxes would be reduced so that private consumption could kick-start. But that didn't happen. Two changes were made. First, the standard deduction was reduced in the new income tax regime.

Standard deduction is the amount that you can deduct from your income without having to pay any income tax. It was increased from Rs. 50,000 to Rs. 75,000. Many income tax slabs were also changed. So, what benefits will people get from it?

Very little.

"As a result of these changes, a salaried employee in the new tax regime stands to save up to Rs. 17,500 in income tax." According to the new tax regime, the maximum benefit is Rs. 17,500. And since nothing has been done in the old tax regime, you won't get any benefit.

Many times, the mood of the consumers is also important to increase private consumption. But unfortunately, the mood was affected because not much was changed in the new income tax regime. Apart from that, many other taxes were increased in the stock market. "Short-term gains on certain financial assets shall henceforth attract a tax rate of 20%." "Long-term gains on all financial and non-financial assets will attract a tax rate of 12.5%.

For example, the short-term capital gains tax which is imposed on assets that you hold for less than a year was increased from 15% to 20%. Whereas the long-term capital gains tax which is imposed on assets that you hold for more than a year was increased from 10% to 12.5%.

Many investors are not happy with this. Apart from this, the securities transaction tax was also increased on futures and options. People are obviously angry with these changes. But if you've read the recent statements of SEBI or the Finance Ministry, it shouldn't be surprising.

In fact, a day before the release of the budget, the government's economic survey said that the Indian market has been over-financialized. That is, Indian families are investing their savings in the stock market heavily. And this was what the government feared. They thought that the stock market is overheating.

Apart from this, it's an open secret that options trading is a madness in the Indian market. Many people aren't using options and futures to hedge their trades. Instead, they're gambling on them because they want to earn 10 crores in 10 days.

So, the government introduced all these tax changes so that the stock market doesn't overheat. And because of this, investing in the stock market has become more expensive. People are angry because the government that said maximum governance, minimum government is reducing retail participation in the stock market. Especially when many families are entering the stock market. But now, you'll have to pay more taxes not just on the sale of stocks, but also on the sale of property.

Because the government has removed the indexation benefit. What is indexation? Indexation basically saves a taxpayer from inflation. Let's say you bought a house worth 10 lakhs 15 years ago. Today, you're selling it for 20 lakhs. But in 15 years, there's been inflation. So, the price of the house has doubled not just because of its value, but also because of inflation. So, let's say the government says that the house's value has increased by 6 lakhs because of inflation. Then you'll have to pay taxes not on 10 lakhs, but on 4 lakhs. But now, the benefit of inflation has been removed. So, if you sell this property today, you'll have to pay taxes on 10 lakhs. The tax rate has indeed gone down. It's reduced from 20% to 12.5%. So, you'll have to decide whether reducing the tax rate or removing the indexation benefit will result in a net profit or net loss.

Simply put, if you've been holding the property for many years, then, on average, you'll be at a loss.

So, looking at this situation, the urban taxpayer is angry.

Because the tax rates didn't decrease, the capital gains tax increased, and the indexation benefit was removed. What did we get in return?

In this situation, will people spend money? And if they don't, how will the country's consumption increase? There are two reasons behind this anger that's not mentioned in the budget. The urban taxpayer doesn't have a problem with paying taxes. The problem is what they're getting in return. Mainly, quality of life, which I've made many videos on recently. In Indian cities, the road infrastructure, public transport, air pollution, and waste management systems are so worse that where there's no involvement of the government, mainly inside the homes, life is good there. But as soon as you step out of the home, problems start.

Delhi is famous for its garbage landfills. Gokhale Bridge and Barfi Flyover don't connect in Mumbai. And roads in Bengaluru are like the craters of the moon. This problem isn't due to a lack of money, but because of accountability. The people who are responsible for our cities have so little accountability that no matter how much garbage there is in the city, they aren't asked questions.

If urban management improves in our country, many people will be willing to pay a 30% marginal tax.

The Central government isn't solely responsible for this. The state and local levels will have to play a role as well. But I haven't received any signal from any central or state government that urban governance is their main priority.

To improve urban governance, the Prime Minister and Chief Ministers have to reduce their own power. And they don't want to do that. To improve the situation of our cities, we have to give more money and power to the local level.

But in India, the reverse is taking place.

In the US and China, most of the money is spent on local government.

But in India, it's the opposite. The government's attention is limited. They also have only 24 hours a day. If they're going to spend these 24 hours deciding whether a Muslim shopkeeper should write his name outside the shop or not, it means that they're not paying attention to urban governance issues.

Because such identity politics does give you votes, but cities don't improve. The government has undoubtedly talked about urban infrastructure in its budget. Like they said that they want to make cities growth hubs with better transportation. They also said that they want to improve the water supply, sewage treatment and waste management in 100 big cities.

Announcing this is a good step, but it's an easy one. It'll be difficult to execute and this will decide whether the taxpayer is getting anything in return. Another reason why urban taxpayers are so angry is that there's tax on the salary class but no tax on agricultural income.

Why is that? It's crucial to ask this question. A few years ago, an RTI found out that agriculture grew by 3-5% in our country, but the declared agricultural income to tax authorities is 20 times more than GDP. So people are misusing this system so that they don't have to pay taxes. Raju Awasthi, a specialist at the World Bank, said that we should tax rich farmers, like those who own more than 10 hectares of land. Tax should be on the basis of income, whether it's from agriculture or elsewhere.

But there's some criticism that I don't agree with. It's a fashion on social media to call yourself middle class. That's why a driver considers himself middle class. And the boss sitting in the back belives the same.

The average monthly salary in Indian cities is only Rs. 20,000. But those who earn Rs. 2 lakh call themselves middle class. One thing we should realize is that after the reforms of 1991, our economy has favored the urban elite. That's why software engineers are earning a lot of money. Because our governments focused more on the service industry and not on manufacturing.

But the actual middle class people who could get good jobs through manufacturing, didn't benefit. Because the service economy needs English and computers which they have never learnt.

If we put aside the middle class debate, the budget has reduced the trust between the Modi government and the urban elite, who are their core supporters. They don't know what they're getting in return of the taxes they pay. That's why it's difficult to say whether consumption will increase in our country or not.

Now, let's move to the second way to increase consumption. That is, to give jobs to those who don't have jobs. The government has announced many things for jobs. For example, the government will transfer direct benefits of one month's salary in three instalments to those who are new to the workforce.

The finance minister said that this will benefit more than 2 crore people. She also talked about a scheme under which 1 crore people will get internships in the top 500 companies in the next 5 years. 1 crore people, 500 top companies, and 5 years mean that the companies will have to give internships to at least 4,000 people annually.

Is this feasible? It's right to focus on jobs and skilling. But the real test will be when it's executed. Because a company won't just give internships to 4,000 people because of financial incentives. A company gives internships if it benefits them in some way, which means when the company is growing. If the company's revenue isn't increasing, why would it give internships?

It's not because of money but because of economic conditions. So it's better for the government to improve infrastructure to increase jobs, reduce regulation, and promote low-value manufacturing. Because low-value manufacturing is the only way where shoes and T-shirts are made to give jobs to millions of people. But we haven't seen such ideas in the budget that could revolutionise our country's job situation. Rohit Lamba, an economist, wrote that the budget didn't have a vision for fundamental and structural changes. So, people aren't convinced that the budget will increase our consumption.

In fact, they believe that the Modi government didn't do anything new. They focused on the things they were focusing on earlier. For instance, infrastructure.

The Modi government promised that they will spend a record Rs.11 lakh crore, i.e. 3.4% of GDP, on infrastructure. We've seen this focus in the last 8 years.

A significant focus of infrastructure was on Bihar and Andhra Pradesh because they are the coalition partners of the BJP. So, many people believe that this budget was for Andhra Pradesh and Bihar. The government announced that they will spend Rs.26,000 crore

to build expressways like Patna-Purnia, and Bhagalpur-Buxar. And a two-lane bridge will be built in Buxar. We can only hope that the government chooses a good contractor. And not someone who built this. If you look at this budget closely, the Modi government took a conservative approach.

They're mainly concerned about the fiscal deficit. They want to reduce the fiscal deficit. In fact, when the target was 5.1% earlier, now it's 4.9% of GDP. So the government decided to save money and spend it in the future. Because according to them, India's consumption situation is not that desperate.

What do you think? Is it desperate or not?