The first full Budget of the Narendra Modi government has lots of good stuff and may be described as a "Chhoti Chhoti Bang Bang" Budget. But will this help India in its journey towards a modern and competitive economy? What are the game changers and how inflationary is it? To find out all this, and more, BT's Prosenjit Datta and Shweta Punj moderated a discussion with D.K. Srivastava, Chief Policy Advisor, EY India; Surjit Bhalla, Managing Director, Oxus Research; Laveesh Bhandari, Director and Chief Economist, Indicus Analytics; M.V. Rajeev Gowda, Con-gress Spokesperson, and Rajya Sabha MP; Sumant Sinha, Founder Chairman & CEO, RenewPower Ventures; Ajit Ranade, Chief Economist, Aditya Birla Group; and R. Venkatara-man, Group Mana-ging Director and Co-founder, India Info-line. Excerpts:
Prosenjit Datta: Your opening comments on the Union Budget, please.
D.K. Srivastava: The Finance Minister is planning for an increase in investment in line with the targeted growth rate of about four percentage points, but hardly anything is going to come from the Union Budget or from the state Budgets directly. This is so, because they are facing the same kind of problems. There is negligible increase from transfers. They are also suffering revenue erosion because sales taxes are ad-valorem and both the state and central governments depend a lot on petroleum taxes. Therefore, as far as government finances are concerned, stimulus will not come. It is not going to support the investment side, nor is it going to support the consumption side. In fact, the size of the central Budget is actually the lowest in the last two to three years. It is now about 12.6 per cent of the gross domestic product (GDP), down from about 13.5 per cent. The impact of the Budget, therefore, is not going to be introduced directly through government intervention. It is neither going to support additional demand nor hike investment rates. Most of that will now have to come from the stimuli that might be introduced and might affect the behaviour of the private sector.
Surjit Bhalla: There are a series of policy initiatives taken in the Budget that suggests a definite change in the mindset, as well as in the path towards how one manages an economy. Most of them, if not all, have to do with the lowering of the role of the states. Then, lot of us had expected that there will be significant step forward on subsidies, including fertiliser and food. But, it is not there in fine print, as to how these subsidies will be replaced by the cash transfer schemes. They said that Rs 1 a month is all you need to pay to purchase? this is the change in the mindset. Perhaps, over time, they will increase the figure. I think they will. Then, there was an important message about black money abroad. How much one will achieve can be questioned, but I think as part of the sentiment you will need to have severe punishments so that some of the people will have some fear. My personal view, however, is that the black money issue has to be first addressed domestically. It's not so much about the foreign accounts. I'm disappointed that (nothing was done) about the black money that comes out of property transactions, which is the major generator of black money in India.
Prosenjit Datta: One question that nobody is asking is about the tax base. The number of individual tax payers has remained more or less the same for the last 10 years. Right?
Surjit Bhalla: No. I have explicitly done numbers on this and, today, the number of individual tax payers is 20 per cent more than what it was, that is, around 20 per cent of the workforce. Almost 80 million people are eligible to come under the tax net. Whether they pay tax or not is a separate issue. A decade ago it was around 40 million-45 million. The tax base has broadened. That is why direct taxes have done phenomenally well along with corporate tax. And the average compliance ratio has gone up to around 55 per cent from the 30-35 per cent, 10 years ago. This still means that you will not be getting about half the taxes that you should be collecting, because of noncompliance. We started off from a very low collection ratio of 15-20 per cent. Most of the rich pay taxes and most of the people having an income of below Rs 7.5 lakh pay taxes because they are salaried.
Laveesh Bhandari: Is this Budget taking us towards a goal 20 years from now? If you have a long-term vision for India, the first thing you must do is to be on the same page with the people. This Budget has a credible piece of document, something that was not true of most recent Budgets, including the last one, and, of course, towards the last part of the UPA years. There was lot of fudging of numbers and so on. On that account, this Budget, at least, is a very very transparent document and, I think, the government needs to be congratulated for that. I do like the growth projections, the revenue projections and, I think, they are based on reality and they are not dreamt up, which they were till now. We have decided that Aadhar Card will be the way forward for India. Direct benefit transfers will be the way forward. However, I do not see how fertiliser subsidies, food subsidies and fuel subsidies are going to be addressed. If you do not address these three elements, you automatically slow down the fiscal consolidation process. I think this was something which this Budget definitely needed, and the fact that nothing has been said in this regard, is a major flaw. A very very UPA style (of functioning). I do not see any movement towards an improvement of the efficiency of the government. I believe that health and education expenditure cut is not a cut, and no one is going to cut it. It's just that states will have to bear a greater burden, as they should. I feel, overall, especially on the allocation on expenditure, this Budget could have done much more than it has.
Prosenjit Datta: Do they have the money to do it?
Laveesh Bhandari: Obviously they did not. The point is not about not having the money. The point is about what statements you make right now. The deficit figure has already been stretched a bit to make investments and there are enough ways of funding these issues, if you really want to. Anyway, on the taxation side, I'm not sure on the deductions. We will have fewer deductions, but what kind of deductions, we do not know. There are a couple of things that I really didn't like. For example, for every new problem you cannot have a new law. It is the last thing that you want do. In this regard, the government goes back to the UPA days. Most of these problems can be corrected without any new law.
Shweta Punj: What are you referring to?
"The Budget, at least, is a very very transparent document and, I think, the government needs to be congratulated for that"
LAVEESH BHANDARILaveesh Bhandari: If you go through the Budget, there are mentions of at least seven or eight proposed new laws. On the financial side, mostly. Someone in the government, perhaps someone in Niti Ayog, should take a marker and mark out all the new laws that are being thought and talked about and eliminate them. Bibek (Debroy) or (Arvind) Panagariya, anyone can do it.
Surjit Bhalla: Bibek has studied this and has already recommended certain eliminations.
Laveesh Bhandari: We haven't got rid of the Securities Transaction Tax (STT). You need to eliminate it. It's a stupid tax to have. The government is saying all these nice things, but when they are going about doing it, they are following the UPA. I would really like to see the people who are drafting (these laws) to actually read what the Finance Minister and the Prime Minister are saying, and, I think, that's when this Budget will become really great. One last point I would like to say. Simplification and rules. You create a better environment for investments by simplification not by creating more rules. For instance, if I really want to get black money back from abroad, by saying that I'm going to go after the people, I will not be able to get it back. If I want to collect more taxes by saying that you have to give PAN number for every Rs 1 lakh cheque, believe me, you'll put people in the cash domain instead of getting them in the banking domain.
Rajeev Gowda: I speak for large number of people on India who are let down by this government's Budget because they had an extraordinary confluence of factors that gave them an opportunity to do something dramatic and transformative. You know, low inflation rate, low oil prices, mandate in the lower house, you know, things like that. We want infrastructure and this Budget does address infrastructure, but even in the economic survey they talk about huge percentage of GDP, about 7.5 per cent, stuck in infrastructure projects. This is probably one of the areas, where much more attention and much more allocation of resources could have yielded much bigger bang. We see much less attention to that.
"This Budget does address infrastructure, but there are areas, where much more allocation of resources could have yielded much bigger bang"
RAJEEV GOWDAThe other factor is the increase in service tax. Our economy is 50-60 per cent services, and now that service tax has gone up from 12.36 per cent to 14 per cent, there's talk about a couple of more cesses. We don't know how much will get into every single transaction. And even more so as it adds to fuel inflation as well. At a time when inflation is coming down why do we want to do something of that sort and send wrong signals to the RBI and others. Investing a lot more on financial inclusion, Aadhar and benefits transfer, and finally moving more into mobile and RuPay, are all positive measures.
I also like this concept of plug-and-play power projects, because, so far, we did not have that. We have people getting into big investments and then finding themselves stuck because of land and consent, along with various other factors, all of which have their place in a democratic economy and society. Now, if you can come up with more of these kind of initiatives, where you have taken care of everything, then, of course, you'll be able to increase the ease of doing business on large-scale projects.
One worry, of course, is when we have moved towards committing to those deficit targets, and holding on to them, why postpone? And the last point, of course, is why do we need this mega bonanza to corporates? You know the effective tax rates for corporates? It is apparently just about 23-24 per cent. Given that, why do we need to bring it down, when we are otherwise talking about having a challenge meeting fiscal targets or revenue targets.
Sumant Sinha: The focus has been more around improving the overall economic environment in terms of ease of doing business, and in providing basic security to the common man. I think that's where the thrust has been when it comes to the bankruptcy law. To me that's a very big thing. We have seen messy break-ups and unwinding of some of the corporates, particularly in the airlines space. It takes a long time and that also prohibits banks from actually moving their assets faster, unwinding their NPA positions, and so on. It is a fairly big move forward. The second big thrust to me has been on infrastructure and the creation of National Infrastructure Invest-ment Fund with a Rs 20,000 crore equity corpus, which can be leveraged at least eight to 10 times. This will make almost Rs 2 lakh crore of extra funds available for investment. That's a lot.
R. Venkataraman: The markets had huge expectations from the Budget. Lot of hype and expectations were built around it, especially on the back of what the Finance Minister had said last time, that, he didn't have adequate time to prepare for his maiden Budget. I think there was some kind of disappointment. The minister has taken a very pragmatic step in delaying the fiscal deficit target instead of sticking to it without taking cognisance of the overall circumstances. The second point is related to subsidies. This government is now clearly having a change in mind set when it comes to dealing with subsidies; Rs 1 per month is a very small amount, but it is a big mind set change because, previously, all governments were much more used to giving things for free. So, I think, the government, in the next six to 12 months, will take concrete steps to rationalise subsidies and better targeting of subsidies. Especially with the JAM (Jan Dhan Yojana, Aadhar and mobile). I'm sure they will make sure that people pay for JAM instead of expecting JAM for free. Postponement of GAAR to all transactions after April 1 is again a step in the right direction because everybody wants a predictive tax environment and nobody wants files to be opened for transactions done 3-4 years ago. Typically, markets reflect corporate earnings. So, last year, we had a stellar performance from the market, the markets returned almost 40 per cent if you consider the past one year. This year, I think markets should give 15-17 per cent returns, which is broadly in line with the earnings growth. The re-rating story of India is more or less over.
"There is a great alignment between the economic survey vision and what was in this 'Chhoti Chhoti Bang Bang' Budget with lots of good stuff"
AJIT RANADEAjit Ranade: I must say that there's been a great alignment between the economic survey vision and what was in the Budget, in the sense, that the economic survey had made it amply clear that this is not a roadmap and you don't expect big bang reforms. This is the first year of a five-year journey, if not longer. In that sense, I'd like to call it a "Chhoti Chhoti Bang Bang" Budget with lots of good stuff. But, there are lots of stuff as well that we could object to. A standard criticism, of course, is that it was a missed opportunity. JAM is obviously a game changer. It was referred to in the economic survey and the Budget is using the concept of triangulating between these three sources. Direct transfer through bank accounts, triangulation of identity through Aadhar and mobile. In some way, it is a good thing because it validates the concept of Aadhar. The second good thing about the Budget is SARFAESI (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). There was a big anomaly in the Act, which gave bankers, banks and lenders to excercise their rights, but it was not extended to non-banking finance companies. It's a good thing that at least the larger NBFCs have been brought under it. Lots of good things for SMEs, too. I like the concept of an electronic market place for receivables. It's called loan discounting or factoring. This is a concept that was being pushed by the RBI for some time, and it's now got a formal nod. It's positive for SMEs because they often get squeezed between customers and the market. The fourth positive thing is that the government has taken the first step towards a universal social security that is potentially a very big thing. The fifth is gold monetisation. I hope they will be able to float this gold instrument or gold substitute paper delinked, unlike an exchange-traded fund. This is not backed by any metal. Simply a fee-add paper like the Kisan Vikas Patra.
One of the big challenges facing the country today is the stressed assets of the baking sector. It's not because of wilful defaulters, but for huge bottlenecks between the consortium lenders and the various states of NPAs. Here was the very big missed opportunity. It is not only about providing capital but the government should have set up, say, a three-member empowered committee outside the Finance Ministry to give the banks, say, a 200-day or 100-day time table to sort out the top 200 NPAs in the country.
Overall, the budget has provided little bit of inflationary signals. For example, a hike on coal freight in the Railways Budget. There's also an increase in service tax rates, and in various cesses. I call it a pool of cess rather than cesspool. There are now three kinds of cesses: a clean energy cess, a Swachh Bharat cess, and a road cess. And, all of it, if you incrementally add up, is definitely inflationary. My last point is about plan versus non-plan. Since the Planning Commission is being revamped, why do we still have the plan versus non-plan approach? They had plenty of time, almost nine months since August, to work on this and make it like a capex versus revenue spending structure. But, overall, this is to be seen as the first Budget of a five-year journey.
"I think this Budget is fundamentally revolutionary, in the sense that a step has been taken to make India both a modern and a competitive economy"
SUMANT SINHAR. Venkataraman: This is a pragmatic and growth-oriented Budget. There have been some negatives. One such negative is from the market's perspective. It is about recapitalisation or capitalisation of public sector banks. Apart from that, it was more to do with expectations and most market observers are not quite happy. The expectations were huge and is difficult to manage such expectations. But, it is a practical Budget.
Shweta Punj: Is the government taking too much risk? When one talks about financing infrastructure projects entirely on ones own, one has to take huge amounts of debt. Are we putting too much at stake?
Surjit Bhalla: Currently, 60-70 per cent of fiscal deficit is due to interest payments. But the funny thing about deficits is that if you achieve growth, your deficits go down, and if interest rates are cut, even then, your deficits go down. So, I think, the Rs 70,000 crore that the Centre is planning to spend, should be the minimum amount that they should be spending.
Prosenjit Datta: How inflationary is the Budget?
Surjit Bhalla: The RBI believes that larger the deficit, greater the inflation. There is no empirical relationship between the two. In this case, by increasing freight and service tax, you are decreasing the Budget deficit. Damned if you do, damned if you don't. Inflation will be there.
Rajeev Gowda: You see the RBI is one of the key players in this growth story, because if it cuts rates you will have an impetus to growth. There is no argument on that. Here, the combination of freight increases, of cesses, and of service tax increases, will have an inflationary impact on inflation and, therefore, it sends the wrong signal at a time when you actually want to go the other way. So why do it?
Laveesh Bhandari: At this point in time you want to allow the RBI a freeway so that it does reduce interest rates. Does this Budget do that? In short, it does not.
D.K. Srivastava: I think the point about inflation is that it's going to be cost push, most of it will translate into administrative prices moving up and, therefore, there is an implicit signal that there is an inflationary component in this. The broad point, however, is that inflation is actually heading downwards right now. In fact, WPI (wholesale price index) has gone into the negative zone. So, the impact of these cost push factors would be quite incremental.
Prosenjit Datta: Is there a lot more money going to the states? There seems to be a difference in the degree of money going into different states.
D.K. Srivastava: Lot more money is definitely not going to the states.
Surjit Bhalla: But, won't the states fight for getting the base realigned?
D.K. Srivastava: No. That calculation is over. The states cannot fight because the Finance Commi-ssion is not there to revise those assumptions.
Ajit Ranade: According to the Budget document of the Finance Minis-try website, the number is 37, it has gone up from 36 per cent to 37 per cent - the devolution to states out of the total spendings.
Rajeev Gowda: The Finance Minister went on TV before the Budget and said that we are making this dramatic announcement of devolution by accepting the Finance Commission's numbers. He also said that we are cutting down social sector spendings because the states are going to do it. Now we are concerned whether there is actually money for that. If one year later we find out that inflation has gone up as a result and these amounts have not reached the states nor has it been spent, what are we going to say? We are going to take back our words and say my God, he pulled a fast one.
Laveesh Bhandari: The most critical part of fiscal federalism is not that greater amounts have been given, but greater amounts of untied funds have been given. The most important part is that this government has appreciated and taken on the task of fiscal federalism.
Shweta Punj: One thing that makes me optimistic is the recognition of the unorganised and the informal sector, which creates over 100 million jobs. Could this be a potential game changer?
Rajeev Gowda: There is this new Mudra Bank where you are focussed on Dalit entrepreneurs and NBFCs, and giving them some sort of cushion so that they can lend more. It is targeted at groups which historically didn't have an opportunity to become entrepreneurs.
"This is a pragmatic and growthoriented Budget. There have been some negatives. One such negative is from the market's perspective"
R. VENKATARAMANSumant Sinha: There is no one thing that one can point to and that is why people have an objection to this Budget. It's not a big bang Budget because it does not have one central defining idea behind it. But there are lots of different little things. When you add them all up, it makes ease of doing business better, going forward. And, that's really where the focus has been - just trying to de-bottleneck different sectors of the Indian economy and make it easier for everyone.
Surjit Bhalla: On that, I am ready to challenge anyone. Name one central idea, a big bang idea that we can have, other than freeing up agriculture. There isn't any. They are all incremental. And, in that sense, it's very unfair, you cannot have a big bang Budget in an economy any more. You could have one in 1991.
Ajit Ranade: That's exactly what the economic survey did. It said: One, India is not under any economic or financial crisis right now, Two, power is diffused vertically and horizontally - vertically between the states and the Centre, horizontally between the governments, courts and the CAG. In such a system, you can't have a decisive game-changing push and, perhaps, it is unadvisable. You have to look at these small small things, but they are potentially very important. Universal insurance, social security, focus on SMEs, using JAM for various beneficiaries, all of them are important individually and cumulatively they add up to something significant.
Prosenjit Datta: What will happen if there is a crude price spike?
Ajit Ranade: Given that the oil bounty was a big background factor to this Budget, if crude spikes, and I think the chances are very low, then there will be slippage on fiscal deficit. There may be compromise on various spending ambitions. But thankfully, according to me, the outlook for oil prices is range bound at $60 to $65 for the next 12 months.
D.K. Srivastava: I think I agree with that, $60 to $65 is the expected rate. We don't expect any steep rise. There may be some variation. If it were to increase much more beyond this, then, of course, it will have adverse impacts in the medium- to long-term for the Indian economy. The benefit of the fall in crude price is actually going to come to the Indian economy quite slowly. The first impact was the fall in inflation. Overall, prices of goods and services will fall, demand from the private sector will increase, cost of production will go down, our competitiveness will increase and, therefore, the benefits of the crude oil price collapse, as it were, are yet to really take off. They will slowly factor in. At this time a steady level of crude oil price of $60-65 will be very beneficial for the Indian economy.
Laveesh Bhandari: I do believe they will harden and the benefit that we got will reduce a bit. That, however, does not mean that it will get completely eliminated. The goodies we got will reduce in size. But having said that, there will be some other effects that are happening globally which are going to hit us not very positively. We do need to have a low inflation climate. That's the only way to deal with global ups and downs.
Rajeev Gowda: The reason why everyone was hoping for the big bangs rather than the chhoti chhoti ones, is the rhetoric of the election campaign. Essentially, what we have is a huge viability gap between what Mr. Modi promised and what Mr. Jaitley delivered in the Budget.
Shweta Punj: Some closing comments from everyone, please.
Ajit Ranade: In the conventional scheme of things, this Budget would get eight out of 10, but given the huge expectations that were riding on this, even that is not good enough. In a way it's unfair to the Finance Minister, because of the competing objectives he had to meet. Perhaps, the game is really about expectations management and not so much about the actual numbers. I think there are many positives. SARFAESI combined with SME is a big thing. Universalising first step towards social security is another. I personally like the gold monetisation initiative. The big thing that was missed out is the undercapitalisation of public sector banks and a focussed push to untangling the NPAs, which I think is holding back private sector investments. Two, we could have perhaps tried to keep the 3.6 per cent promise.
D.K. Srivastava: Well, I think it's a missed opportunity. The government should have eliminated the difference between plan and non-plan expenditures. This was the right opportunity. We know that we are going to live with a much smaller size of government as a whole, relative to what we need in terms of education and health needs, and so on, and, therefore, whatever small size of government we have, we must efficiently use those resources. This whole distinction of non-plan and plan is very inefficient. It actually emphasises creation of incomplete assets and non-maintenance of completed assets and, therefore, if we are going to live with a relatively small size of government, we must become more efficient. This is first step that could have been taken. If not now, may be by next year, the government and the Finance Minister must have the courage to take that up.
"I think this Budget is fundamentally revolutionary, in the sense that a step has been taken to make India both a modern and a competitive economy"
SURJIT BHALLASurjit Bhalla: I think this Budget is fundamentally revolutionary in the following very important sense. The first, and very important, step has been taken to make India both a modern and a competitive economy. This is a major message of the Budget and all the others - the economic surveys, Finance Commission and Railways Budget - have been pointing at the same. The content of the Budget should be looked at. The first step has been taken towards a very competitive economy which we must have in this day and age to survive.
Laveesh Bhandari: I think this Budget needs to be seen from two different angles. One, the top level angle, where the broad direction is being spelt out: transparency, federalism and greater investment. And, I think, the Budget does a great job. The second level, is the implementation part. Here, the Budget needs a bit of (improvement). It seems people who drafted the vision did not bother to go with the nitty gritty. So the Budget does fall on the details, but hopefully, next time people who draft the Budget will be able to take care of the details.
Rajeev Gowda: The one thing interesting about India is that from 1991 we have had many different governments come and go, and we have seen essentially a trajectory that is broadly maintained - liberalisation, making the economy more modern, competitive and humane. In the last 10 years we have seen lot of programmes focussed on initiatives to pay attention to the people at the base of the pyramid, people who had been left behind by the growth story. The good thing about this Budget and the government's initiatives is that it is continuing in those directions. We created subsistence, survival, income, food and, now, they are going to add the other dimensions that financial inclusion is all about - pensions and insurance, and everything else. I am really glad that has not been forsaken in this mood to please the corporate sector.
(Follow the authors on Twitter at: @prosenjitdatta; @shwetapunj)