INDIAN EXPRESS
- Budget is well intentioned on the big themes, but Execution is the key.
The first budget of the government’s second term was always going to be a delicate balancing act. On the one hand, growth momentum in India — and indeed, around the world — has slowed markedly in recent months. On the other hand, there was no space for a fiscal stimulus, as some had clamoured for. The broader public sector is already eating up virtually all household financial savings. Bond yields have finally witnessed a rally in recent weeks. Any widening of the fiscal deficit would have reversed those gains, pushed up interest rates more generally, and thereby undermined the efficacy of the RBI’s monetary easing cycle. How, then, should the government have tried to boost growth, investment and savings without any fiscal latitude?
Given these difficult constraints, the budget is well-intentioned, and hits all the right chords. But the key is going to be in the execution. The devil will, eventually, lie in the details.
First, however, let us talk about the intentions. There is a concerted effort to attract foreign capital to augment declining domestic financial savings. Increasing FDI limits in insurance, aviation and the media are on the anvil. Domestic sourcing requirements for single-brand retail are expected to be eased, foreign portfolio flows (FPIs) will now be allowed to invest in real estate investment trusts (REITs) and infrastructure investment trusts (INVITs), and, KYC norms for FPIs are, more generally, expected to be rationalised. In addition, authorities may float a dollar bond to have access to a broader international investor base. With some caveats, these are welcome moves. In a world of low and negative interest rates, where capital is desperately searching for productive use, the Indian government’s intention to seek foreign savings to augment domestic savings is understandable.
Perhaps the area that deserves the most immediate attention is India’s financial sector. Credit markets for NBFCs are frozen, public sector banks have the liquidity but not the growth capital, and private sector banks are stretched to their limits with rising incremental credit-deposit ratios. Here, too, the government has tried to strike the right notes. Public sector banks will be re-capitalised by another Rs 70,000 crore, and some of this will hopefully translate into growth — and not just resolution — capital. On the NBFC front, a temporary and partial credit-guarantee will be offered to public sector banks to purchase high-rate pools of assets from “financially sound” NBFCs — as a means of trying to inject liquidity and break the logjam.
Also, eschewing the clamour for a stimulus, the government has shown admirable restraint by pegging the deficit at 3.3 per cent of GDP.
All told, therefore, the budget appears well-intentioned on fiscal discipline — as it tries to unclog the financial sector and attract foreign capital flows into India.
But intentions apart, much will depend on execution. Take the fiscal math for example. To achieve the fiscal deficit target, gross tax revenues will need to grow at an ambitious 15 per cent over last year’s actual outturn, even after adjusting for the tax rate increases for high-income individuals and the excise/custom duty increases. To put this in context, gross taxes grew at less than 9 per cent last year. Therefore, unless growth rebounds sharply and/or GST collections are tightened meaningfully, tax targets are going to remain under pressure all year long, with question marks about expenditure having to be slashed again at the end of the year.
Similarly, disinvestment targets are higher, but questions linger. Will the approach be true strategic sales/asset recycling to the private sector — which is more efficient at operating many of these assets/enterprises? Or will one arm of the government simply buy out another? Will asset sales fund more public investment or simply cover for tax shortfalls, which is akin to selling the family silver to pay the credit card bill?
On the financial sector, bank recapitalisation is positive. But only if (i) the allocation of capital is meritocratic to ensure incentives and monies are aligned; and, (ii) bank governance reforms (read the P J Nayak Committee Report) proceed in tandem. Capital without reforms risks engendering another public sector bank NPA crisis down the line. On the NBFC front, there is a fine line between ensuring illiquidity does not spawn an insolvency crisis and stoking moral hazard. The credit guarantee should, therefore, be temporary and very targeted. And if this temporary lifeline does not work, one cannot ignore the long-run fix anymore: An asset quality review.
On the external front, attracting foreign capital is well and good. But FPI flows are notoriously fickle and pro-cyclical — elusive when most needed. They can only temporarily substitute for boosting domestic financial savings. While the sovereign dollar bond could attract a new class of investors, there is a risk of it cannibalising existing FPIs that hold rupee assets. A small issuance in international markets may not materially change things but if FPIs are willing to hold rupee assets, why not further liberalise and induce FPI flows into the domestic market, so that they — and not the sovereign — bear the currency risk? What we don’t want over time is a dollar bond in international markets — over which policymakers have no control — disproportionally impacting domestic yields, as investors eventually arbitrage across the two markets.
All told, the budget has performed an artful balancing act against a difficult macro backdrop. The big themes — financial, external, fiscal — are all well-intentioned. Now, the authorities must walk the talk with equal skill.
- The real beneficiary of Direct benefit transfer of fertilizer subsidy will be the industry:
The industry strategy on fertiliser subsidy remains similar to the tobacco industry’s response to cancer claims since 1954. Robert Proctor, a historian at Stanford coined a term for it, “agnotology”, that is, when ignorance is deliberately produced and indisputable facts do not win arguments. Proponents of the “Direct Benefit Transfer (DBT) of Fertiliser Subsidy” pilot claim it generates point of sale farmer traceability to stops leakages and timely payments to the industry; which while good, does not present the complete picture. To pick these low hanging fruit, one needn’t cut down the tree itself. But that is exactly what’s planned.
The truth is that DBT is about transferring benefits to the fertiliser industry. The fertiliser subsidy DBT pilot project in 17 districts is a well-planned Trojan horse. It is misleading as it doesn’t incorporate all the draconian measures that will eventually be a part of the full roll-out. The final form of the DBT will allow the industry to price fertilisers at will, and the burden of collecting the subsidy from the government will be transferred to farmers. It’s all similar to US sugar industry in 1960 successfully paying scientists & academics to delink sugar and heart disease by diverting attention to saturated fat. Realising the enormous opportunity, for the first time international fertiliser giants like Yara International have started to buy Indian urea fertiliser plants to gain a toehold in the lucrative market.
Fertiliser price has two components — the retail price which is fixed and the subsidy component which is variable. Today, irrespective of how the international urea price fluctuates, the farmers get to buy the urea bag at a fixed cost of Rs 284. With the new DBT regime, that will be reversed. The price of a urea bag will become variable while the subsidy component will be constant. In 2008, the international urea price breached the $500 per tonne mark and in India the urea retail price was Rs 239 per bag. International prices are about half of that today, but are perking up. Should the international price rise to 2008 levels, under the new DBT regime the farmer could have to shell out Rs 1,200 per bag.
A perfect analogy to explain the final version of the DBT of fertiliser subsidy regime is the LPG gas cylinder cost borne by the consumers. Before the DBT on LPG, consumers paid Rs 450 for a gas cylinder. After the regime change, a gas cylinder’s price has risen to Rs 805. The consumer purchases the cylinder at full cost and is later reimbursed the subsidy component, if applicable. Similarly, farmers now pay the subsidised retail price and take home the bag of urea. However, in the new regime, the farmer will have to register with land documents (difficult to procure) and pay the full price upfront and be reimbursed the subsidised amount. It simply means that the capital expenditure and credit requirement for the farmer will increase by a third. The most common cause for farmer suicides remains credit.
Tim Harford explained “distort, dispute, distract” in ‘The problem with facts’; first the fertiliser industry appeared to engage, next it sowed doubt on prioritising farmer needs over fertiliser industry profitability and in third stage employing their enormous pool of resources they are using amenable experts to undermine farmers concerns & real expertise.
The new regime will also limit the quantity of subsidised fertiliser a farmer will be allowed to purchase. Wheat, rice, potatoes, pulses, millets etc. each require different nutrients in varying quantities depending of soil and crop selection. The policy negates this fact and goes back to old bureaucratic generalisation of Indian agriculture which has failed the nation repeatedly. Today, 10 crore tenant farmers can buy subsidised fertilisers. In the new regime, they will not be entitled to the subsidy because land records don’t carry their names.
The DBT of fertiliser subsidy can be beneficial if it is tweaked to protect farmers. Farmers, with their backs to the wall, pray for a parliamentary guarantee safeguards because mere words aren’t legally binding. Framers are hurt and feeling betrayed because issues of livelihood are not the primary concern of farmer fertiliser cooperatives any more. The last bulwark against the international fertiliser mafia has fallen.
The government’s grand vision for a “New India” is at variance with its narrow economic policies. Officials only hope to rein in fertiliser subsidy expenditure. The number of economists advising the government has reached an affliction point and sadly “doubling farmer income” is becoming a parody against the establishment. Farmers’ voices are being drowned in the din generated by the fertiliser industry. Is anybody listening?
- Budget rightly resists the temptation of a fiscal stimulus, but its inability to take political tough, but much needed, reform decision is striking:
CREATIVE incrementalism, as opposed to big bang reforms, has been the hallmark of the Narendra Modi government with regard to economic policymaking. That approach can be seen even in the Union Budget for 2019-20, the first after its return to power with a resounding mandate. Many would have expected this political verdict, more remarkable than the one five years ago, to provide an opportunity to announce something more than ordinary — like the budgets of 1991-92, 1997-98 and 2000-01. Moreover, the current backdrop of a deepening growth slowdown and drying up of investments would have demanded such a response to revive the animal spirits of entrepreneurs, a theme well articulated in the finance ministry’s Economic Survey. Nirmala Sitharaman’s maiden budget has disappointed on that count, as reflected in the BSE Sensex falling by 395 points or almost 1 per cent.
The budget is, however, not without positives. For one, Sitharaman has, rightly, not succumbed to the temptation of a fiscal stimulus. The Centre’s fiscal deficit has been budgeted at 3.3 per cent of GDP, below last year’s revised estimate of 3.4 per cent and in line with meeting the “glide path” target of 3 per cent by 2020-21. That, along with the bold proposal to raise a part of the government’s gross borrowings in foreign currency from external markets, led to a rally in the bond and currency (as opposed to stock) markets: Benchmark 10-year security yields fell from 6.75 to 6.69 per cent, while the rupee gained 8 paise against the dollar. Going in for sovereign bond floatations — an idea mooted first in the late Nineties — will enable the Centre to borrow more cheaply and result in less crowding out of private firms in the domestic market. Only 3.5 per cent of the Centre’s public debt is now held by external agencies. At the same time, the prospect of greater scrutiny by global investors on account of the government borrowing directly in overseas markets will impose much-needed fiscal restraint. The Reserve Bank of India’s interest rate reductions cannot have the desired impact with a profligate government; it’s good that this message has been internalised in successive budgets in the Modi regime.
There are other bright sparks, too, in the latest budget — such as the proposed monetisation of surplus land held by Central public sector undertakings/departments for affordable housing and infrastructure development through public-private partnerships; resolution of the “angel tax” issue by not subjecting start-ups to arbitrary scrutiny by assessing officers in respect of share premium valuations; a reasonably aggressive disinvestment programme of Rs 1,05,000 crore (up from last year’s Rs 90,000 crore); and a Rs 70,000-crore recapitalisation of public sector banks. The last measure comes at the right time with their credit growth just about picking up, alongside signs of a bottoming-out of non-performing assets, and non-banking finance companies (NBFC) unable to lend as before. No announcement of any 2008-like special liquidity window for NBFCs, which would have invited moral hazard, is welcome. The bailout has, instead, been limited to providing a one-time partial credit guarantee to banks for purchase of up to Rs 1,00,000 crore of high-quality diversified assets of financially-sound NBFCs. This strategy — of separating the good apples from the bad, even while strengthening the RBI’s regulatory authority over NBFCs — makes sense.
BUT where the budget fails is offering a coherent reform vision for investors. The most apt example here is agriculture. What stopped the finance minister from announcing the government’s intention to dismantle all provisions in the Essential Commodities Act and Agriculture Produce Market Committee laws that allow restrictions on sale, movement, stocking and export of farm commodities? Such controls have no meaning when consumer food inflation has been in low single-digits or even negative for the last three years and India has transformed from a structurally deficit to surplus producer in most crops. A single statement of intent would have generated confidence among agri-businesses, including large retailers and traders, keen to invest in grading, processing, warehousing, transport and port infrastructure — all of which are necessary to meet the much-talked-about goal of doubling farmers’ incomes.
A similar lack of ambition is seen vis-à-vis rationalisation of farm subsidies. For 2019-20, the budgeted figure for food, fertiliser and crop loan subsidies — plus the PM-Kisan income support scheme — adds up to a mammoth Rs 3,57,216 crore. At least half of this amount could be saved by capping sales of subsidised fertiliser (to, say, 20 bags of urea per farmer per year) and physical procurement of foodgrains to not more than 50 million tonnes. The resultant savings would be enough to make the PM-Kisan a genuine direct benefit transfer scheme, providing non-market distorting support of up to Rs 4,000 or so per acre to all farmers.
The inability to take politically tough reform decisions is striking, especially for a government enjoying a decisive majority not seen in decades. Risk-taking is an attribute normally associated with private enterprise. In times such as these, it is the government that needs to think and act like an entrepreneur. An across-the-board reduction in the corporate tax rate to 25 per cent, rather than limiting it to companies with annual turnover below Rs 400 crore, would have been timely. The current budget is proof of caution taking precedence over ambition. That would have been fine in 2015-16, not in today’s uncertain global economic environment with India Inc facing a crisis of confidence. Hopefully, this is not a lost opportunity.
- Budget misses the opportunity to weigh in on some big issues. It lacks bold ideas:
First, during Modi 1.0, we heard a lot about Make in India and the imperative to grow the manufacturing sector. While the budget proposes incentives for high-tech manufacturing in products such as photovoltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers and laptops — a much more comprehensive plan across a wider range of job-creating manufacturing opportunities is needed.
Second, we had also heard during Modi 1.0 about Digital India. This budget was minimalist in this essential area. There are incentives to continue a shift towards digital payments and some platitudes about upskilling India’s youth with education in the usual cliched areas — Artificial Intelligence, Internet of Things, Robotics and Virtual Reality — but little else. At The Fletcher School, we are about to release a major study on the ease of doing digital business around the world, and India has a big distance to cover to become globally competitive. There was little in the budget that offered hope for any breakthroughs around the corner.
Third, the budget left the pressing issue of climate change out in the cold. Other than lowering GST on electric vehicles and tax benefits on loans for such vehicles, there was silence on the central existential issue of our time. Maybe it was because the monsoon had finally made an appearance in Delhi in time for the budget speech, that the issues of scorching heat and horrendous air quality had not been in the foreground.
THE HINDU
- The rhetoric in the budget od accelerated, inclusive and sustainable developments receives only limited financial baking:
Ambition is not lacking. India, which was an approximately $1.85 trillion economy when the previous government took over (2014), and has grown to become a $2.7 trillion economy today will, the Prime Minister promises, grow to be a $5 trillion economy by 2024. Allowing for an inflation rate of 5%, that requires a real growth rate of 8% or more per annum. If GDP has to grow at that rate, investment must rise sharply. The Budget is clear on the government’s role in this process. It cannot invest too much, but it must ensure huge investments in infrastructure and elsewhere by attracting and incentivising private investors. Optimistically leaving this to the private sector, the government focusses on taking the benefits of growth to the rural areas, the Micro, Small and Medium Enterprises and the marginalised.
A shortfall
However, one striking feature of the figures that make up the Budget is that the allocations to match this ambition are significantly short of requirement. Going by the nominal GDP figures implicit in the fiscal deficit ratios provided, total expenditure of the Central government which rose from 12.7% of GDP in 2017-18 to 13.2% of GDP in 2018-19, would remain at 13.1% of GDP in 2019-20. Spending to “kick-start” growth is absent.
Math for welfare programmes
This is true of allocations for the government’s social welfare schemes as well. If we take the six major schemes labelled “core of the core schemes” (including the National Social Assistance Programme and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), nominal allocations, which amounted to ₹84,361 crore in 2018-19 as per the revised estimates are projected to fall to ₹81,863 crore in 2019-20. Allow for inflation and that 3% fall would imply a significant real cut. In the case of the MGNREGA, the budgetary allocation for 2019-20 at ₹60,000 crore is lower than even the inadequate ₹61,084 crore spent in 2018-19. Elsewhere, in the case of some flagship schemes extolled in the Budget speech, budgetary allocations for the Pradhan Mantri Gram Sadak Yojana is the same in 2019-20 as it was in 2018-19 and that for the Pradhan Mantri Awas Yojana are lower for 2018-19 than it was in the Budget for the previous year. It is principally the farmer income support scheme of ₹6,000 per identified household that receives a significantly large and enhanced allocation of ₹75,000 crore. But even this has to an extent been financed by cutting allocations for other schemes. In effect, the rhetoric of accelerated, inclusive and sustainable development receives only limited financial backing.
The difficulty is that to finance even this curtailed thrust, the Finance Minister is hard put to find the resources, especially because the government wants to show it is committed to fiscal deficit reduction, with the deficit projected at 3.3% in 2019-20. It does make one effort at squeezing surpluses out of the system with increased taxes on the super-rich. Surcharges on those with taxable incomes in the ₹2-5 crore and above ₹5 crore ranges are to be increased so as to raise the effective tax rate applicable by 3 and 7 percentage points respectively.
Though in 2017-18 almost 99% of returns filed were of those with taxable incomes less than ₹2 crore, the tax makes a small difference, inasmuch as the 0.05% of returns filed that fell in the above ₹5 crore taxable income group accounted for close to 32% of taxable income declared. But this gain has been partly neutralised by reducing tax rates for corporations with a turnover in the ₹250 crore to ₹400 crore range from 30% to 25%. The government has also resorted to some regressive taxation. At a time when oil prices are on the rise because of American sanctions on Iran, the Finance Minister has decided to raise the duty on petrol and diesel by ₹1 per litre each.
Public sector sale
The other major source of non-debt receipts is disinvestment and privatisation which is to be accelerated. Strategic sales will continue and equity even in public sector enterprises where government shareholding has reached the 51% floor is to be sold. That is expected to yield ₹1,05,000 crore in 2019-20, compared with the ₹80,000 crore last year. But, as noted, all this has not been enough to deliver resources that match the ambition reflected in the rhetoric of the new government.
Which leads naturally to dependence on welfare hype and the strategy of hopelessly depending on private initiative to drive growth.
- The Union Budget is hoping to spur the economy by revitalizing the financial sector:
The maiden budget of Nirmala Sitharaman has many interesting features, but it does not have a defining central theme. There were expectations of a big growth push through either tax cuts or large expenditure programmes even if it meant a rise in the fiscal deficit. But the Finance Minister has chosen to be fiscally conservative, opting to play the long-term game, though it could lead to pain in the short term. The only indulgence she has permitted herself is a big ₹70,000 crore capital infusion in banks that will, it is hoped, spur lending to growth sectors in the economy. Also, quite notably, the budget has sought to address the problems that have plagued the non-banking finance companies space over the last few months and the consequent credit freeze and loss of confidence in the market. Ms. Sitharaman has comprehensively addressed the important issues of liquidity, solvency and poor governance in the NBFC sector. She has made available a liquidity window of ₹1 lakh crore to public sector banks through the Reserve Bank of India to buy pooled assets of NBFCs and offered a one-time credit guarantee for first loss of up to 10%. To enable better supervision of the sector, housing finance companies, which have been the main villains of the piece, will come under the RBI’s regulatory ambit. A long-standing demand of NBFCs for equitable treatment with banks in the matter of taxing interest receivable on bad loans has been conceded. They will not need to maintain a Debenture Redemption Reserve on public placements that was leading to locking-up of funds, which is their raw material for business. These are important reform measures for NBFCs. More interesting is the move towards reviving development financial institutions. The big problem faced by NBFC financing infrastructure is the lack of long-term funding sources to match their lending tenure. This pushed them into borrowing short-term funds to lend to long-term projects, leading to asset-liability mismatches. The proposal to set up a committee to study the issue, including the experience with development finance institutions, is welcome.
There are several reform measures that have been announced, but the most interesting is the reiteration of the government’s commitment to strategic disinvestment and the declaration that it is willing to allow its stake to fall below 51% in non-financial PSUs. Start-ups can heave a sigh of relief as the angel tax is practically off the table. The government seems to be moving towards a single identity card for citizens in the form of Aadhaar, which will now be interchangeable with the PAN card. Taxpayers who do not have a PAN card can file returns quoting their Aadhaar number, which effectively can be a substitute for PAN in all transactions. Another reform measure is the introduction of faceless e-assessment of tax returns taken up for scrutiny. This will eliminate the scope for rent-seeking by officers as there will be no interface between assessee and official. In fact, the assessee will not even know the identity of the officer scrutinising the return. This is an absolutely welcome measure but needs to be closely watched for implementation. The corporate sector has got a minor sop with the turnover limit for the 25% tax bracket being raised to ₹400 crore per annum from ₹250 crore. The expectation was that this would be extended to all companies irrespective of size. It appears that the government wants to wait for the finalisation of the Direct Taxes Code, which is being examined by a committee. Real estate companies may have reason to cheer as the generous tax concession for affordable housing may create demand, especially in the smaller metros.
The ‘nudge theory’ of economist Richard Thaler, mentioned extensively in the Economic Survey 2018-19 presented in Parliament on Thursday, has been put to use by the Finance Minister to push forward two of this government’s pet themes — increasing digitalisation of money and promoting electric mobility. On the first, there will now be a 2% tax deducted at source when withdrawals from bank accounts exceed ₹1 crore in a year. This is a commendable measure, but it could lead to genuine problems for businesses such as construction and real estate that are forced to deal in cash for wage payments. Of course, the TDS can be set off against their overall tax liability. The second, and more interesting ‘nudge’, is towards electric vehicles where those taking loans to buy one will get a tax deduction of up to ₹1.5 lakh on the interest paid by them. But the fact is that there are not too many electric vehicles in the market now. And even for those that are there, the waiting period to deliver one is long. Besides, there is no ecosystem, such as charging points, even in the major cities. The government’s hope seems to be that this incentive will create a market for e-vehicles that will then lead to the development of the ecosystem.
The budget documents show that the government has stuck to the glide path for fiscal deficit, which will be at 3.3% this fiscal. This is, however, based on exaggerated growth projections in tax revenues. The estimated total revenue receipts this fiscal is ₹19.62 lakh crore, which implies a 25.56% growth compared to the actual receipts of ₹15.63 lakh crore (as presented in the Economic Survey) in 2018-19. This is an extremely ambitious projection, especially given the ongoing slowdown in the economy. Of course, the Finance Minister could get a comfortable buffer if the Bimal Jalan committee that is going into the sharing of RBI’s reserves with the government comes up with favourable recommendations. The government also appears to be sliding into a protectionist mode, going by the increase in customs duty on everything from cashew kernels to PVC, newsprint and even auto parts. While some of it may be well-intentioned to promote domestic manufacturing, this sends out a retrograde signal on the reforms front.
- The Budget describes with admirable practicality what we would like to see in India, but it is not convincing on how we can have the growth to afford the same.
The maiden Budget presented by Finance Minister Nirmala Sitharaman was much looked forward to partly because she is the first woman to hold this post full time, an achievement for our democracy.
Attention to detail
Though her speech was perhaps a little combative, as she kept asserting the achievements of the first Narendra Modi government, it was nevertheless marked by an even-handedness and attention to detail that is rare. The first was seen in the methodical way in which she ranged over the areas — manufacturing, Gramin India, Shahari India, women, and the youth. One of the many instances in which the second was evident is in the elaboration of the proposed elimination of human interface in the conduct of scrutiny for taxpayers.
However, there was a disconnect in the speech. At the outset, Ms. Sitharaman appeared to assert that India is headed towards becoming a $5 trillion economy by 2024. However, much of the rest of her speech was concerned with what this economy would look like — there would be widely dispersed social and physical infrastructure; a low-carbon footprint; and housing for all, among other desirable things. We were not told how the country will get there. And getting there is important, for the things that have been promised need to be paid for and there has to be the income for this.
Improving ease of living
If only five points in the Budget are to be highlighted, I would choose bank capitalisation; rural electrification to be completed by 2022; a final push for water and sanitation, making India open defecation free by October 2 this year; encouraging solar power usage; and tax-related changes. Of these, electrification, water and solar power may not require large outlays but they make a big difference to people’s lives, a reality ably grasped by the Bharatiya Janata Party (BJP), which portrays its actions in these areas as aimed at improving ‘the ease of living’.
The infusion of ₹70,000 crore into public sector banks would be a significant contribution to easing the liquidity situation caused by non-performing assets. It is mentioned that this will be accompanied by governance reforms, though we do not know as yet what form they will take, which alone will determine how significant they will be.
The package for the financial sector also includes a time-bound public guarantee to commercial banks that acquire assets of the presently troubled Non-Banking Financial Companies (NBFCs). This should bring some stability to the NBFC sector, instability in which would ruin the lives of hundreds of investors and choke lines of credit outside the banking sector.
In case it is found that the capital infusion is inadequate, the government can always increase it later in the financial year, but to have intervened at this stage of liquidity shortage is statesmanly. The proposals on taxation include changes in both tax liability and administration. The exemption limit on the income tax has been raised but the surcharge has now been increased on those in the highest two tax brackets. There is a balancing act here. Similarly, the upper limit for eligibility for the lowest slab of the corporate tax has been raised from ₹250 crore to ₹400 crore.
This in in line with the demands of India’s corporate sector but it may not be what is best for the economy at a time when the government needs as much revenue as it can garner to quicken it.
New era of tax administration
However, the Budget may have initiated a new era with respect to the tax administration. Compliance is to be made easier for the taxpayer. There are to be pre-filled tax returns and less human interaction in the event of tax scrutiny. There will be ‘faceless assessment’ through the use of an electronic mode. Face-to-face encounters between inspectors and the assesses will be eliminated, with notices sent from a central Income Tax cell. Some similar simplification is to be done in the sphere of the Goods and Services Tax too. The Minister is right to speak of all this as a “paradigm shift” in the functioning of the tax department.
While it is surprising that she equated the ease of paying taxes with the ease of living in India, which must take far more into account, it is the case that individuals have experienced powerlessness when dealing with the tax department.
Where the Budget fails
This Budget’s failing is in not setting out the means by which the government is to take the economy to the aspirational $5 trillion level. Barring unforeseen productivity surges, we must assume that investment holds the key. At least the Economic Survey tabled earlier spoke of the importance of investment, even though it somewhat ideologically confined validity to private investment.
The Budget has nothing to say on the matter. Perhaps it is believed that the very return of this government is sufficient to release the ‘animal spirits’ of private investors. However, this would amount to overlooking the history since 2014. In this period, though there has been macroeconomic stability and much attention has been paid to the ease of doing business, private investment has declined. This points to the limits to confining yourself to the supply side when you are interested in growth, which this government is doing.
Moving to a $5 trillion economy by 2024 would require growing at a rate faster than the average that has been achieved since 2014. There is no mention in the Budget of public investment, stepping up of which would be essential even to stimulate private investment right now. Capital expenditure has been raised by much less than the actual increase in the past year.
One way of seeing this Budget is that it is something good in parts. It describes with admirable practicality what we would like to see in India, from water connections to roads. But it is not convincing on how we can have the growth to afford them. We might say then that the macroeconomics does notgel with the microeconomics.
- It would seem that since the government is unable to catalyse the domestic investment, it is now turning abroad to fuel growth:
Union Finance Minister Nirmala Sitharaman is mistaken if she thinks her first Budget is going to revive a slowing economy.
The economy grew by just 5.8% in real terms in the last quarter of 2018-19. Yet, the Union Budget for 2019-20 assumes that the economy will grow this year by 12% in nominal terms, or by 7-8% in real terms. How can that dramatic a turnaround take place? Only if there is a sharp pick-up in investment — private and/or public.
There is little in the Budget that is likely to boost domestic private investment. There are neither any incentives for private investment nor support for public investment. To make matters worse, the Budget has actually projected a decline in central government capital expenditure (public investment) in 2019-20 by 6% in nominal terms. This is perhaps the first ever decline in public investment in the past half century, which, once adjusted for inflation, could measure over 10%. It is no wonder that the Finance Minister, shedding the convention of decades, did not mention any allocations for schemes in her speech and pushed all the numbers to the fine print.
Same direction as before
It would seem that since the government is unable to catalyse domestic investment or fund public investment, it is now turning abroad to fuel growth. Some of the norms for foreign institutional investment (FII) are to be liberalised, so too for foreign portfolio investment (FPI) and ceilings on foreign direct investment (FDI) are to be raised in some sectors. More ominously, the government has now decided to go in for external commercial borrowings to meet part of its borrowing requirements, claiming that India’s external debt to GDP ratio is very small. This is very much like what the governments of the 1980s did, which eventually led to the balance of payments crisis of the early 1990s. Why are we again heading in that direction?
Prime Minister Narendra Modi’s slogan of a $5 trillion economy by 2024-25 has taken over the discourse on the economy. The Economic Survey gave it considerable importance and now the Union Budget has too. We have forgotten that a larger economy does not necessarily translate into improved well being for all. A larger economy is of value only if in the process it delivers more jobs and better services. It is significant that the word “jobs” found no mention in the Finance Minister’s speech.
The approach of the Narendra Modi government in its second term seems much like in the first — focus on a select group of welfare schemes like Ujjwala Yojana, Swachh Bharat, Sowbhagya and Jan Dhan (all of which are believed to have served it well in the 2019 elections) and now Jal Shakti, while leaving it to private investment or private consumption to deliver economic growth.
If private investment does not deliver, then the assumption is that private consumption will. Indeed, consumption with the help of household debt has been driving growth in recent years. The dangers of consumption loaded by private debt are obvious.
Numbers from interim Budget
Since the numbers in the Budget papers have steadily lost their integrity, it seems pointless to examine them in much detail. Last month, the Controller General of Accounts had made public the provisional numbers for 2018-19. These showed that central tax revenues were lower than the revised (yes, revised and not Budget) estimates by as much as ₹1.67 trillion. In order to hold down the fiscal deficit, the government cut its expenditure by ₹1.33 trillion. Though these updated figures are available (with the Finance Secretary himself saying in the post Budget press conference that the actuals for 2018-19 are now with the government), why on earth do the Budget papers reproduce the numbers from the interim Budget of February 2019? Obviously because presenting the final numbers for 2018-19 now would have shown the Modi government in a poor light: unable to fulfil its promises on tax collection and spending commitments in its last year of its first five-year term.
To be fair to the Finance Minister, the revenue projections, especially in income tax, are more modest and therefore perhaps more realistic than that of her predecessor. They are modest enough to project a decline in gross tax receipts from 11.9% of GDP (2018-19) to 11.7% of GDP (2019-20), arising from a slump in both direct and indirect taxes. It is interesting that the last time there was a fall in tax revenue was in 2014-15, the first year of the first Modi government.
How then is the government planning to marginally lower its fiscal deficit in 2019-20 to 3.3% of GDP (assuming that this is indeed a reliable estimate)? It turns out a boost in non-tax revenue will make the difference. The biggest jump is of dividends from the Reserve Bank of India and the nationalised banks: ₹1.06 trillion, a 43% jump over 2018-19. Since few public sector banks are making money, most of this must be expected from the RBI. These dividends have more than doubled from 2017-18. We now know why the government-RBI tussle was so bitter last year.
Cooperative federalism?
True to form, the government swears by cooperative federalism in words but does actually the opposite in practice. A major source of revenue mobilisation is to come from a higher cess and special additional excise duty on petrol/diesel. That is good for the Centre because cesses are not to be shared with the States!
With the year ahead already threatening to be a difficult one because of a monsoon that increasingly looks likely to be less than normal, we have to buckle up. We will not get any support from the second Modi government’s first Budget.
A feel good spirit from an impressive electoral victory and slogans about a $5 trillion economy are by themselves not going to give any buoyancy to the economy.