Budget Ahoy!

Budget Ahoy!

K.M. Chandrasekhar

K.M. Chandrasekhar

Budget times are here again. With barely a couple of weeks to go, the figures would have been finalised and ready for the printers. The Budget Speech would also have been largely written although there would be space for last minute changes. The Budget Speech does not reveal the whole truth. To get the complete picture, the small print in the Budget documents would have to be carefully perused. Commentators and experts who are ready with their opinions on the basis of the Speech, therefore, speak without knowing all the facts.

The sanctity of the Budget and the surprise element in it has diminished over time. Indirect taxes are now largely subsumed in GST and decisions regarding this tax are made by the GST Council, which consists of all State Finance Ministers. . The second part of the Budget Speech, which contains tax proposals is therefore now limited to direct taxes , customs duties and procedural changes. Moreover, the Modi government has been making significant policy announcements after the Budget and throughout the year. A major reduction in corporate tax rates was announced by the Finance Minister late last year. She also announced in December a big scheme for investment of ₹ 102 lakh crore in infrastructure while the Railway Minister announced major changes in the structure and methods of working of the Indian Railways, including a new role for the private sector in the running of trains. The ““super rich surcharge” levied in the last Budget on foreign portfolio investors was withdrawn. Economic policy changes, therefore, now take place at various times in the year and are not necessarily articulated through the Budget.

This is obviously a very difficult time for the government both politically and on the economic front. With more than four years of their tenure yet to go, they have the unenviable task of pulling the economy out of a deep slowdown which shows as yet few signs of abatement. Virtually every indicator looks ominous. A sliver of hope arises from the marginal increase of 1.8% in the Index of Industrial Production in November as compared to a contraction of 3.8% in October. It is, however, too early to say that the slowdown has bottomed out. As an ICICI Bank report puts it, “This was just after the festive season and residual demand from the same could have been playing the role along with a hugely favourable base effect.” The main improvement was in intermediate goods, which showed an increase of 17.1%. Manufacturing,mining and consumer non-durables showed some improvement, but electricity output fell 5%,capital goods 8.6% and primary goods, consumer durables and infrastructure goods declined, showing that there is still not enough confidence to invest and produce. Imports declined by 8.8% and exports by 1.8%. The fall in imports is indicative of insufficient expectation of demand both within India and abroad.

Another indicator of distress in the manufacturing sector is the low level of capacity utilisation, which was barely 69% in the second quarter of 2019-20. This is the lowest level since the Great Recession of 2008-09, when capacity utilisation dipped to 74 % in the first quarter. With so much of capacity remaining unutilised, which manufacturer will have the courage to invest more? For the same reason, the ratio of foreign direct investment to GDP declined to 1.1% in 2018-19, the lowest since the crisis year of 2008. FDI inflows fell 56% in telecommunications, 74% in pharmaceuticals and investment in the power sector fell by half a billion dollars.

Savings and investment have steeply fallen. China achieved a level of saving as well as investment of 45% even as late as 2017. On the other hand, in India, RBI data shows that gross domestic savings and investment as per cent of GDP reached a new low of 30.3% and 29.1% of GDP in 2017-18 as compared to highs of 34.6% and 36.7% in 2011-12.

All these figures go to show that the fundamental problem confronting the economy today is that of falling incomes, rising unemployment and diminishing demand. The SBI produced a report titled “Root Cause of the Current Demand Slowdown” in August 2019, where it argued that growth in both urban and rural areas had crashed from high double digit figures a few years ago to single digits in 2018-19. In another study in September 2019, the bank said that household financial liabilities had jumped up by a massive 58% from ₹4.7 lakh crore in 2016-17 to ₹7.4 lakh crore in 2017-18.

An unpublished government survey reveals that there was actually a fall in rural per capita expenditure.from a level of ₹ 1501 in 2011-12 to ₹1446 in 2017-18 . In 2011-12, monthly per capita consumption expenditure had gone up by a healthy 13% over a two year span. The fall in rural consumption even raises fears of growing malnutrition.

So what should the Finance Minister do with the economy so down in the dumps? Obviously, the first requirement is that she should listen carefully to those who are out there battling it out in the economy’s trenches. I read that both the PM and the FM have been talking to economists, businessmen and others. I only hope that they have been told the unvarnished truth. The problem with Indian businessmen in general, particularly their associations which have evolved over time into pure event management companies, is that they tend to say what men in authority want to hear.

Particularly when there is an apprehension that this Government will not hesitate to ruthlessly use its regulatory, investigative and tax collecting and enforcement agencies as instruments to repress dissent or criticism of any kind. I cannot resist quoting Dr. Manmohan Singh who wrote in “The Hindu” recently, “ Many industrialists tell me that they live in fear of harassment by the government authorities. Bankers are reluctant to make new loans for fear of retribution. Technology start-ups…seem to live under a shadow of constant surveillance and deep suspicion. Policy makers in government and other institutions are scared to speak the truth or engage in intellectually honest policy discussions.There is profound fear and distress among people who act as agents of economic growth.”

If the PM and the FM have been told the truth and have listened carefully without prejudices and preconceptions, they would have understood that the Government has hitherto approached this problem from the wrong end. The problem is one of stimulating demand and pump priming the economy, not something that can be resolved through supply side concessions. A bonanza by way of corporate tax cuts of ₹ 1.45 lakh crore will not induce industry to invest or produce more if demand for the products they make is on the decline. They will use this amount to reduce their debt or add to their reserves. As Nobel Laureate Abhijit Banerjee said in Mumbai some weeks ago, “We are really extremely close to a point where we could be dipping into a major recession. The critical problem in the Indian economy is demand. You definitely want to stimulate demand.”

What is needed today is more government spending and more measures to stimulate private consumption.The decision announced by the PM recently to distribute ₹ 12000 crore under the PM Kisan programme is a step in the right direction.

The government has to address upfront the problem of agrarian distress and declining rural wages. It has to seriously examine what can be done to create many more jobs. It has to put money into the pockets of those in need, people who will spend, create demand and thus persuade manufacturers to use their surplus production capacity and invest more on creating new capacity. It is not enough to keep repeating ad nauseam that the fundamentals of the economy are strong.

Of course the fundamentals of the economy are strong but we need to transcend our short term woes to achieve long term prosperity.

Fiscal stress does exist. It is an accepted fact that fiscal deficit this year will be considerably higher than the budgeted 3.3%,especially when the off-Budget borrowings of public entities in the State and Central sectors are counted. It would be wise to look at the entire pattern of expenditure and postpone for a couple of years such expenditures as will not contribute directly to the revival of the economy. The sources of revenue, both tax and non-tax would have to be studied to maximise collection. Even with such fiscal prudence, it would be difficult to maintain FRBM targets. The objective of government policy cannot be just the maintenance of fiscal deficit figures, regardless of the economic situation. It will need to borrow and spend more to get the economy moving.

Once momentum has been regained, the State must step back and allow growth processes to work by themselves, confining itself to the structural policy changes that have to be made. Monetary policy alone cannot generate demand. The RBI has, during the year 2019, reduced repo rates by 135 points and taken a number of other measures to improve liquidity. The pass through of these measures through banks and financing institutions has been inadequate as credit demand is not present in a slowing economy and as economic distress itself is generating new non-productive assets which further discourage lending. Fiscal support is now required to pull back the economy. The Reserve Bank, other financial entities and State governments have to work in tandem with the Central Government.

The recent sudden surge in consumer price inflation is obviously a transient one, caused entirely by late withdrawal of the monsoons and consequent damage to crops. If it has resulted in some more prosperity for the farmers, it will have beneficial spread effects. An anticipated good Rabi crop should bring prices under control in a few weeks. In the long run, the terms of trade, which have turned against the farmer in the last few years, have to be brought back to normalcy through specific measures to support the rural sector.

The year 2019 was also marred by political controversy on several fronts. To revive the economy, political issues must take back seat for some time. All political and financial entities need to be entirely focused on the gigantic economic task before the nation. This is not the time for whipping up ultranationalist fervour or for creating divisions in society or for Pakistan baiting. This is time for the entire nation to work together with the sole objective of economic revival.

The Budget 2020 is, above all, an opportunity to rethink our strategies and reset our priorities. If we do that, sustained growth may push GDP to higher and higher levels and the goal of a five trillion dollar economy would be realistically within reach.