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Capital Grapevine
Capital Matters

Capital Grapevine

Virendra Kapoor

A TINKERER’S BUDGET: WITH FOUR YEARS TO GO MODI COULD HAVE BEEN BOLDER

A budget is supposed to take stock of the strengths and weaknesses of the economy --- and list ways to enhance the former and lessen the latter. If only Nirmala Sitharaman were aware of her own strength she could have vastly pruned what was the longest ever budget speech, and thus spared her faltering voice- box and tens of millions glued to the television a rather overstretched humdrum ritual. But even in that two-and-a-half-hour marathon if you were looking for a certain prescription for revival of the sagging economy, you were certain to have felt disappointed.

The reaction of the markets ought not to have surprised anyone. Despite the abolition of the dividend tax deduction, giving corporates additional Rs.25,000 crores to play around with, and the creation of two separate corporate tax regimes, namely the old one at 25 percent and the new one at a mouth-watering 15 percent, marketmen remained unenthused. Sharp drop in the US and European markets on Friday may be partially responsible for the damp response of the post-budget markets, but there was no mistaking the overall disappointment due to the absence of a big-ticket reform in the budget. In the last budget at least the FM had referred to the partial reform of the labour markets of which nothing much had been heard since. However, there was nothing in this one on land and labour reforms and only a minor tinkering in the financial sector.

The hub of the problem was this: The more Modi was willing to be adventurous politically, the more run-of-the-mill he tended to be in the economic sphere. His statist approach to the economy has allowed no headway in disinvestment. Despite setting herself a target of mopping up Rs. 1.05 lakhs from stake sale in PSUs during the current financial, it is public knowledge that not even a fraction was actually realized. And even the proceeds from the revised, one-hundred percent stake sale of Air India, would accrue next year.

Aside from the welcome corporatization of the LIC and public port trusts, and probably the foreign investment in education and issuance of overseas bonds by educational institutions , there were only small and largely ineffective boosters for some sectors. The headline grabbing proposal in the last budget to raise foreign funds through issue of sovereign bonds was dead on arrival. However, returning to the traditional mould of budget-making, Sitharaman did take care to please the ruling party’s urban middle class base ( Delhi elects a new government coming Saturday), offering substantial income-tax concessions. Yet, this too was needlessly burdened with difficult choices.

Between the old and new tax regimes under which those availing of the now reduced tax rate would forgo the benefit of exemptions such as on life and health insurance premiums, interest on home loans, or leave travel allowance, etc., most would feel obliged to stick with the prevailing rates. This confusion was better avoided by providing uniform tax slabs. Another measure singling a return to the traditional budget headlines after a gap of a couple of years was the hike in the duty on cigarettes and tobacco.

The big picture however was none-too-inspiring and unlikely to power the economy out of the current stagnancy. Fiscal deficit for the outgoing year has been now budgeted at 3.8 percent as against the earlier 3.3 percent, admittedly within the permissible parameters of the Fiscal Responsibility and Budget Management Act. Of course, this increased deficit too hides more than it reveals given that there was no effort to do away with the off-budget financing of government expenditure. Transparency of budget would have required a one-time accounting of all off-budget infusions of funds whether from the central bank or cash-rich public sector companies and even from the postal small savings. The pernicious practice was followed with a vengeance by P. Chidambaram and continues unabated under the Modi dispensation.

The fisc for the coming financial has been fixed at 3.5 percent, the unmet target of 2019-20. Nominal growth at 10 percent for 2020-21 does not appear to be ambitious given that inflation is now hovering around four-plus percentage. Meanwhile, there was a significant downward revision in GDP numbers in the last three years. Real GDP, according to the NSO data released a day ahead of the budget, in 2018-19 was 6.1 percent against the budgeted 6.8 percent and 7 percent against the budgeted 7.2 percent in the previous year.

Without doubt, the most positive measure announced on Saturday and which can go a long way in bridging the gap between revenue and expenditure is the corporatization of the LIC. One of the biggest investors in the stock markets with assets of nearly Rs.30,000 lakh crores, and annual investment in the range of over 50-60,000 crores in shares, bonds, IPOs, etc., corporatization of the national insurer would make it the largest company by some distance by market capitalization. LIC is presently one-hundred-percent government-owned and has remarkably small capital base of only Rs five crores. However, it is not clear whether the new target of raising Rs. 2.10 lakhs through disinvestment in the next year subsumes other proceeds or only the easily doable LIC partial stake sale.

Aside from the expected hike in allocations for various sectors such as health, education , etc. and provisions for piped-water supply to all households, agriculture has got massive funds. It will get Rs. 15 lakh crores for rural credit alone. Sitharaman showed that she was alive to a few other common man’s concerns. Following the collapse of the Punjab and Maharashtra Bank, for instance, it was sensible to raise the limit of bank deposit insurance from Rs. one lakh to five lakh. This should be reassuring for those who easily panic about the security of their meager savings every time a bank is in distress.

It was good but not bold enough to offer one-time settlement for nearly five lakh direct tax disputants to pay only the claimed tax without interest and penalty to lighten the burden on the tax authorities. So was the continuing effort to minimize taxman’s discretion by further digitization of the processing of income tax returns. Paring down the 100-plus list of exemptions to simplify tax payments and collections too was a good idea.

However, the budget failed on the one count where it ought to have succeeded. That is, in reviving the animal spirits. Having announced major concessions to the corporate sector after her maiden budget , which proved a damp squib, there was nothing to revive animal spirits in the economy. She said the budget was inspired by the triple themes of economic development, aspirational India and a caring society. On all three counts, only a half-hearted effort was made. She also left out the slump in the real estate sector, a big employer, while pinning the causes of the slowdown on mining, manufacturing and farm sector.

Overall, it was a tinkerers’ budget, touching upon a number of facets of the economy without moving real big on any one of them. How tax sops to the salariat would boost consumption, how the credit take-off would pick up, how exports would regain momentum in a stressed global economic scenario, how assemble-in-India would succeed without major concessions to the assemblers whereas made-in-India had gone down without a trace, are some of the several questions which remain unanswered.

Given that Modi had still four more years before a fresh parliamentary poll, he could afford to be bold in dismantling the constraining infrastructures of the old socialist era economy --- and taken India into a new entrepreneur-based economic order where people and not government serve as the real engine of growth. Public investment alone cannot continue to drive growth because governments necessarily must allocate funds for more pressing needs such as food and farm subsidies, defence, education, etc. Another lost opportunity.

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The views and facts expressed in the article are that of the author