Budget 2020: Economy-focused market not impressed, says analyst

Harsha Vardhana Singh,
Financial Times, 2 February 2020.
https://www.financialexpress.com/budget/budget-2020-economy-focused-market-not-impressed-says-analyst/1850853/

Union Budget 2020: The finance minister presented a Union Budget covering a range of objectives and issues, both social and economic. The stock market, which is more focused on the economy, however has not been impressed. This reflects a perceived lack of major reform or providing the economy with a strong momentum, despite finance minister Nirmala Sitharaman providing initiatives for the financial sector, ease of working capital, credit guarantee, ease of doing business, investment facilitation, a focus on developing value chains or efforts to promote exports.

The message in this Union Budget is rather mixed. On one hand, the finance minister stated the importance of promoting competitiveness (paragraph 20 of the Budget speech). On the other hand, import tariffs are being increased on a number of inputs, while they are being reduced for “certain inputs and raw materials” (paragraph 141*). If customs duty is “being revised upward on certain goods that are being made domestically” (paragraph 141), it is not clear how this would improve competitiveness.

The message that comes out is that of a position torn between import substitution and an aspiration to promote exports. It is worth noting that according to the World Economic Forum’s Global Competitiveness Index, India dropped by 10 ranks in 2019 compared to 2018. One of the factors considered for the Global Competitiveness Index is trade openness.

India’s main competitor countries—including Vietnam, China and Bangladesh—emphasise priority areas and provide focused policy support and facilitation to these areas. It is encouraging that the Union Budget has identified certain priority sectors in a similar way, especially electronics and mobile phones. Reportedly, policies to support the sector have been assessed for several months now. The policy should be simple to implement, without multiple requirements or criteria that would result in bureaucratic interventions, delays, and cost and time increase.

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This raises two related issues, i.e. global value chains and a focus on coordinated practical steps to effectively implement policy. Paragraph 42 of the Budget speech states that “India needs to manufacture Networked products. That will make it a part of global value chains.” Global value chains (GVCs) require quick turnaround and consistent quality products, managed by “lead firms” with presence in multiple countries. Efficiency in a value chain requires timeliness (i.e. very few bureaucratic controls), consistent quality, stability of the facilitating policy regime, and coordination among the various parts of the government whose approval is required for conducting business.

The Indian government has made some improvements in this direction, but much more is needed for quicker, simpler and facilitating approach to implementing policies. The policies that follow the Budget could change the perception of investors about the overall policy thrust. Till then, it is a mixture of objectives and aspirations for which greater clarity is required through policies implemented on the ground.
(* In other changes, customs duty is being reduced on certain inputs and raw materials while it is being revised upward on certain goods which are being made domestically.”)
Harsha Vardjana Singh is Former Deputy Director General, World Trade Organisation