Can He Walk the Talk?
Arun Jaitley has shown the right intent by focusing on the rural economy in his Budget, but appears to have failed to outline a clear roadmap for delivering on his promises.
Narendra Modi government's second full-fledged Budget came on the back of high expectations. There was hope that it would further the economic reform process, and resuscitate the rural economy while paving the way for a unified tax regime. It also came at a time when the global macroeconomic headwinds appeared to be taking a toll on India. Seven thought leaders - Abhijit Sen, former head of the department of Economics, JNU, and former member of the Planning Commission; Harsh Mander, Director of the Centre for Equity Studies; Sumant Sinha, Chairman and CEO of ReNew Power; Subhashish Gangopadhyay, Research Director at India Development Foundation; Omkar Goswami, Chairman of CERG Advisory; Ashwani Mahajan, National Co-convenor, Swadeshi Jagran Manch; and Girish Vanvari, Head of Tax at KPMG India - joined Business Today Editor Prosenjit Datta to analyse Arun Jaitley's Budget and whether it lived up to the expectations.
Prosenjit Datta: What in your opinion were the good and the bad things about the Budget, and what do you think it was like overall?
Sumant Sinha: The biggest issue in this Budget was the fact that the finance minister has eschewed all temptation and started with the 3.5 per cent fiscal deficit target. We have had too many finance ministers in the past that have set the trajectory and have not really met it. The temptation was pretty high in the current circumstances to again deviate from that target. So I am glad he stuck to it because there are many benefits of it - be it in the context of borrowings, or the bond market, the supply of new UDAY bonds, and that the Central government itself is borrowing less is fairly important. Potentially, it lays the groundwork for RBI now to step in and cut rates by 25, if not 50, basis points, which will then trigger a whole wave of lower interest rates from banks and their own balance sheets will improve. As a result, the consumption, demand will improve. There was a lot of apprehension about the taxation regime being a lot stricter than it ended up being, about capital gains tax coming in, service tax going up. Fortunately, none of that happened other than some tweaks on dividend taxation for individuals.
Subhashis Gangopadhyay: The rural economy as it stands today is simply not sustainable as more and more people are looking for things outside agriculture. In this aspect, the Budget did try to support the rural population but there was no plan on how to make this transition out of agriculture. I did like certain consistencies in approach. For example, it attacked all three - insurance against income uncertainty, health, and talking about LPG for the poor. These policies are a little difficult to implement, because they are targeted and there is a huge scope for leakages and corruption. The idea was right, the approach was right, but there was some possibility of new thinking on this.
Abhijit Sen: After two Budgets, where one was simply a continuation of the past and the other was relatively listless, this was a Budget that tried to send two big messages - that I am going to stick to the path of fiscal consolidation and higher rural spend. On the first, we will have to see how the numbers turn out to be - the tax projections are fairly reasonable and the non-tax side is not that reasonable. There is worry whether the revenue side will be met. On rural economy revival, the numbers are at best confusing. If you take all the ministries that add up to rural spends, the expenditure was Rs 1,02,000 crore in 2014/15, Rs 1,10,000 crore in 2015/16 revised estimates and it is projected to be Rs 1,20,000 crore next year. Now, if last year was supposedly a very bad year, it is not this Budget that is going to deliver. It is God that is going to deliver with the monsoon. On the fiscal deficit target, he (Jaitley) has shown he will stick to the plan but that ties him up. There is very little he can do after that and that shows in all the other numbers, including the fact he talked a lot about this Budget being for capital expenditure.
Harsh Mander: Talking about doubling farm incomes in the next five years seems to be an announcement with no roadmap at all. There have been farmers' commissions telling us minimum support price at the cost of production plus 50 per cent. It was also in the manifesto, but we don't see any signs of that. Instead there is amnesia about the fact that certain states are reeling under drought. On the other side, the kind of blindness or a black hole for social sector reflected in the last Budget continues. Words that don't appear anywhere in the Budget speech at all: children, social security, mid-day meals, security, ICDS, nutrition, pension. There is very little on the schools education or the Sarva Siksha Abhiyaan. All of them remain in dark shadows as I can see.
Girish Vanvari: On the taxation side, 3.5 per cent fiscal deficit target didn't leave any room for cuts. There were expectations that the personal tax rates, slabs would go up, rates would effectively go down, corporates thought 30 per cent would taper down to 25. But I think the biggest issue in Budget in tax is on personal tax, on provident funds and on superannuation funds, especially when you speak of micro savings and attracting savings to long- term investments. This is the biggest dampener. So this is to be dealt with sensitively. Also, there is a controversial income scheme where you go out and disclose undisclosed income. One can debate in public interest because of the 1997 Supreme Court verdict. Is it fair to existing taxpayers? How will this succeed?
Ashwani Mahajan: Nobody would disagree that this Budget has been able to break the trend of neglecting agriculture and rural development. There has been better allocation for rural roads, irrigation and infrastructure, but as far as doubling rural income is concerned, this Budget lacks a roadmap for the same. There is a need to augment the income of farmers by promoting activities other than farming. So far, we only consider growing wheat and rice as farming. A lot of income opportunities can be created through dairy, mushroom farming and horticulture. By setting up cold storages and warehousing, government can also help farmers in preserving perishable products like fruits and vegetables.
Omkar Goswami: The situation, barring the windfall gain due to falling crude price, all of which went through excise duty to government, appears to be very bad. It was bad last year, and continues to be so this year. There are serious global headwinds, and agriculture and rural economy is in a very bad shape. Given the circumstances, the allocation made to infrastructure - particularly in roads, highways as well as Rs 19,000 crore given to rural road programme under Pradhan Mantri Grameen Sadak Yojna - is the right way to go. These are significant employment generators in addition to creating networks that are quite important for the economic sinews of the nation. It is also impressive that they held the line at 3.5 per cent. Not only that, they have in absolute terms, compressed the fiscal deficit by Rs 1,200 crore over the revised estimate. It shows the intent of the government though I suspect they would be more flexible in the next couple of years. The days of $30 oil is over, though we don't know where it will go, but there would be a bite in urea and naphtha. So it needs to be closely monitored how expenditures are going and how the revenues are coming. This is a very tough managerial task ahead. There was expectation of some genuine movement of widening of the tax net and creating progressiveness in taxation. There is marginal progressiveness on taxes but no movement on widening of the tax base.
Then there is complete and abject failure of the disinvestment process. Against the Budget estimate of Rs 69,500 crore, they think they will end up with Rs 25,000 crore. And their next year's target is Rs 58,500 crore.
Prosenjit Datta: There is universal agreement that sticking to the fiscal deficit target was a good thing, but from the next year the finance minister said they are thinking about a range, which would give them more flexibility. What does it signify?
Omkar Goswami: It is a clear signal, he is going to lose it. He has two more Budgets before the election, so he is going to widen it.
Sumant Sinha: He didn't say what the range would be.
Abhijit Sen: He said he would appoint a committee (to decide the range).
Ashwani Mahajan: There are two viewpoints in this government. One is, including RBI's view, that we are still reeling under inflation. The second, that we are in deep deflation. Even Arun Jaitley in his Budget speech mentioned this. I argued on this point with Niti Aayog's Arvind Panagariya, who was in favour of sticking with the 3.5 per cent target. Instead of 3.5 per cent if the government would have gone for 4.2 per cent fiscal deficit, they would have got Rs 84,000 crore extra for spending on social sectors that people were expecting. This year we could have afforded this as next year the situation may not be ripe for it. The government is too concerned about the message to the international community at the cost of the message sent to the people.
Sumant Sinha: The issue is whether you want to create an economy which is investment-oriented, where the hand of the government is gradually going down or do you want the government to raise more and more capital and use it for its own leaky infrastructure. In my view, government is not in a position to spend money given its past track record. So I don't see a reason why as an individual or citizen we should keep more money in the hands of the government. In some sense, government is trying to get more investment, empowerment, create more jobs - so the focus is on entrepreneurship and this is the right way to go forward. Whether the tax rate should be 1 or 2 per cent higher hardly matters as it will not alter investment environment significantly. Even if we widen the fiscal deficit by 0.1, 0.2, 0.3 per cent , it would be inconsequential. If we have to widen it should be 4.5 per cent, which would be more meaningful but it would send wrong signals not merely to international investors but the overall macroeconomic environment, the investment climate. It would be valid not just for foreign companies but also domestic companies, including start-ups as well as consumers who would then face higher interest rate which becomes like a tax on everybody.
Girish Vanvari: Well one area where some expenditure was justified was the re-capitalisation of banks.
Omkar Goswami: Well, I completely disagree. I think Rs 25,000 crore is just about enough, anything more would have huge moral hazard. These guys (banks) for whatever reasons for five years behaved antithetically to all precepts of banking and now if I were to increase the recapitalisation from Rs 25,000 crore to say Rs 1 lakh crore, we are basically saying "naughty boy, here is your lollypop". They better figure out how to clean their balance sheet, to go after their bad debts, to get as much recovery as possible, and to work out an adjustment process with the central bank which is where their first line lies. The government is at best the shareholder.
Prosenjit Datta: There is mention of some changes in the SARFAESI Act that makes it easier to bring some money back from the banks if they really want to get it back.
Subhashis Gangopadhyay: Going back to the bankruptcy and insolvency code that came up last year will be a good thing when it happens. However, when it will happen we don't know. The focus on start-ups is very important, but the continuous focus on small-scale industries completely destroys the entire set-up because it encourages informalisation of labour and it is the reason why 90 per cent of employment is in the informal sector. We cannot have growth leading to greater incomes and more disparity unless we can address this. And the small-scale industry allows us to not address this. This is something that requires careful thought.
Prosenjit Datta: Let us get back to the need to create more manufacturing jobs so that roughly 57 per cent of the people are not stuck. Nothing has been done about manufacturing to create jobs.
Subhashis Gangopadhyay: We have more than 50 per cent dropout from schools and we are not going to get our manufacturing going with that. If we have to grow manufacturing, there has to be serious consistent packages being developed in terms of labour laws, of getting rid of support to the small-scale sector so that the labour laws could be implemented the right way. It's a much bigger problem which will not be solved by some investment allowances SEZ or tax rebates. While the quality of fiscal expenditure matters, the amount of infrastructure we have in the cities compared to rural areas is a big problem. You cannot talk about general levels of growth and employment if we don't have infrastructure in rural parts of India. No amount of PPP is going to lead to any growth in infrastructure in rural areas, but the government alone has to do it and there is a huge gap in rural infrastructure. This constant worry about fiscal deficit is completely wrong as it was something we picked from abroad because that was what was being talked about in the 90s. They devised a strategy that worked for them and our biggest strength is human resource. If we are unwilling to spend on human resource, then no amount of investment is going to generate a more equitable growth.
Sumant Sinha: Having said that, we have to realise there were periods in the past when fiscal deficit was more than 6 per cent but that has not resulted in any positive activity of the kind that the people are craving for. Within the current constraints itself the government can rejig the overall fiscal management in a way that you keep the fiscal deficit and do all the things that are required to further growth. Let's not give the government the profligacy that is not their due.
Abhijit Sen: The main point that is being made is on human resources and infrastructure. You cannot have somebody other than the government to make the investment. On both of these you have a huge deficit which is not a matter of a year but something that has carried on for decades. We have to accept that the gap has to be filled and it has to be paid for, which is where the whole notion of not just thinking about the fiscal deficit comes from.
Sumant Sinha: But even the government has been very poor in doing this. So why do we always keep looking at the government?
Omkar Goswami: It is a 30-to-40 year failure which is coming back to bite us in such a serious way that 1.5-2 million people are coming into the market to look for jobs every month and we do not have jobs for them. The problem goes back to class 10 and class 12. It's a huge back-up. Somewhere down the line we have to be creative enough. This cannot be just the job of the Central government.
Harsh Mander: The bigger point is we have reached a stage where we either have growth or equity. We have to admit that without greater equity we cannot sustain growth. You need a Budget or economic policy which understands that.
Subhashis Gangopadhyay: One has to follow the political economy, so saying it is growth versus equity there would be disagreement, so let's just call it growth versus poverty.
Omkar Goswami: Do we seriously think that the Central government and state governments in some places are the instruments to bring about the kind of re-imagination and spends we are talking about. I sincerely cannot see the entire bureaucracy actually being able to spend the kind of capital being put forth in the Budget.
Abhijit Sen: I don't think that's the bottleneck. It may be spent very badly and may be you need to devise better ways of spending it, but a lot of money is now going to the panchayats and that is where money is well spent. Everybody tries to run down the panchayat, but if you actually look at where money is being spent well, they are right up there.
Prosenjit Datta: Let's look at the taxation side now. Our record has been fairly bad in cesses. On the one hand, we give more power to the state through devolution but to a certain extent the Centre also needs money so they resort to cesses. Practically a cess which applies to all service taxes will affect almost every good. What is the thinking behind this?
Abhijit Sen: Till we see the revised estimates on the state side, we will not have the complete picture. A discussion like this should really not be held after the Union Budget. This is a country with a Union Budget, about 28 state Budgets and you know that the whole thing would add up. I think to project the Uentral Budget as such a big thing is pointless.
Omkar Goswami: The cess is a very bad tendency. I really wish it is substantially reduced going forward. The temptation is always high.
Subhashis Gangopadhyay: This is fooling the people. It's telling them that you don't have to pay more in taxes. But you pay more period. I don't think this is good, we should see through this.
Prosenjit Datta: What is the view on practically singling out the automobile sector for a lot of things whether it is anything over Rs 10 lakh plus?
Abhijit Sen: That was a political answer to this odd-even (in Delhi).
Ashwani Mahajan: This is to legitimise the only sector which has been taxed.
Subhashis Gangopadhyay: In India it is standard to think of getting better roads for buses and cars, better trains, but we never think in terms of moving people. We always think in terms of moving objects. We must start thinking of transportation in a different fashion. Public transport is not for the poor. The metro was not meant for the poor, but poor and rich both travel in it. We must think in terms of citizens, not in terms of rich and poor.
Prosenjit Datta: Jaitley started his speech by pointing out that it's a terrible global economy, which everybody agrees. But how much of a constraint does global economy really put on our own economy?
Harsh Mander: We have tried to do something that no country in the world has done. It is to believe we can sustain a very high level of economic growth on a very unequal foundation - without public provided education, health care, with very poor nutrition and so on. The global economy is more of an alibi rather than the explanation of why we are facing challenges in growth.
Sumant Sinha: The issue is not either-or. On the domestic economy what the government can do they should be doing, but from an external economy standpoint, if the global economy had been doing well that would have been an additional boost.
Ashwani Mahajan: In fact, if global economy is in trouble it gives us opportunities as well. It is not that only global upheavals can affect us adversely. We have made our economy vulnerable by bringing in FIIs. So the only problem we have is in our stock markets.
Omkar Goswami: If the global economy continues to be the way it is, is it going to affect growth? It's yes. The cost of capital will go up and it will be completely unpredictable. The banks will be much more reluctant to lend.
Girish Vanvari: It is a coupled world and you can't say that if the world will crash we will do well. So, if the global economy does not do well, we will also be in trouble.