Depending upon the past for deriving ideas and inspiration for the present obviously has its limitations, as the Finance Minister’s revelation on deciphering the Harappan script had made apparent. The budget has brought out the emptiness of our fiscal toolkit to deal with present economic crisis along with the lack of imagination, first to admit the crisis and then to display the courage and boldness demanded to fight it.
Admittedly, the FM had an extremely difficult task, given the plummeting growth and bleak prospects of the economy. But to begin with an assertion of strong economic fundamentals when every parameter was indicating an accelerating slowdown, particularly commerce and trade which apparently had brought prosperity to the Saraswati-Sindhu civilization, does not really inspire much confidence.
Somewhere in her marathon speech, she could at least have acknowledged that the slowdown was not merely cyclical but there were structural factors too responsible for impeding growth, to tackle which more than hyperbole was necessary. To that extent the first part of the budget speech was reading somewhat like our archaic five-year plans ~ phoney and without substance. Some of the budget expectations were clearly misplaced, for example, the estimated receipt of Rs 2.1 lakh crore from the disinvestment or strategic sale of public sector enterprises, including Rs 90000 crore from the LIC.
Last year, this was estimated at Rs 1.05 lakh crore, against which only Rs 18094 crore could be raised so far, and even the revised estimate of Rs 65000 crore during the remaining two months seems unrealisable. The government’s plan to sell several loss making enterprises and other assets had failed to attract investors and are unlikely to do so now. Immediately after the budget, the withdrawal of the FPO of Rs 1400 crore by the state-controlled ITI, despite having a very good order book position and despite two extensions, could be an indication of the things to come.
LIC arguably is the highest-value public company in India now, and has the potential to yield much more, but the target of Rs 21000 crore from PSU sale and disinvestment may be a tad too ambitious. The weakness in trade and investment was globally widespread during the last year, affecting both advanced and emerging economies. As the World Bank’s Global Economic Prospects, January 2020, notes, the key indicators of economic activity are approaching their lowest levels since the global financial crisis of 2008, and the effect was particularly pronounced in the contraction of global goods trade and manufacturing activities for a significant part of 2019.
Along with these global headwinds, tightening of domestic non-bank credit led to a substantial weakening of demand in India and consequent drop in private consumption. Liquidity issues among the nonbanking financial companies (NBFCs) is among the structural factors that continue to afflict the Indian economy, besides the perennial problems of high non-performing assets of the banking sector. Though improved somewhat, the twin balancesheet problem is also far from getting resolved.
Since the perpetually stressed NBFCs account for a substantial share of the loans, the banking and financial systems with their close links with the NBFCs continue to remain structurally vulnerable to the contagion risks, as was seen after the fraud called IL&FS. The credit market in India has virtually gone into deep freeze, and the budget did nothing to revive it. It seems that a 5-6 percent growth may be the new normal for India now, given our dismal export performance and misplaced emphasis on import substitution. In fact, the prospect of a $5 trillion economy has become a little dimmer after the budget.
History shows that for a developing economy to grow fast, export must be the major driver. Even Bangladesh, now the third-largest economy in South Asia, is growing at around 8 per cent rate piggybacking on its high export performance, while we are only creating protective barriers by imposing higher import duties on an ever-widening range of products in the hope that this will boost indigenous manufacturing activities and create the elusive jobs for our youth. Apparently no lesson has been learnt from our withdrawal from the RCEP due to the global incompetitiveness of our domestic industries.
This is also hardly a recipe for attracting foreign investments as inefficiency never attracts capital. Of course the budget also brought some good tidings, especially in its emphasis on promoting access to finance for small enterprises, and for improving infrastructure. Indeed, a National Infrastructure Pipeline of Rs 103 lakh crore was launched in December 2019 comprising more than 6500 projects across sectors, but its financing remains rather opaque. The Centre and the states are equally supposed to share 78 per cent of the cost, with the private sector accounting for the rest 22 per cent which is expected to increase to 30 per cent by 2025.
With shortfalls in revenue estimates likely to suppress government spending in the next year as well, financing of such ambitious projects will remain a problem. Realisation of the 12 per cent projected revenue growth compared to the nominal GDP growth at 10 per cent may also turn out to be wishful thinking, especially in view of the suboptimal performance of revenue from the GST, where a host of issues continue to afflict collection, ranging from the government’s inability to fix the glitches in the Infosys-created GSTN system, the issue of fake invoices, delayed refunds and allocation of IGST shares and timely compensation to the states.
The fundamental premise of automatic matching of invoices of GST continues to elude us even after two years since the launch of the transformational tax reform measure, whose potential is yet to be unleashed to boost growth. The reduction of direct tax rates to the exclusion of all exemptions and deductions was a long-overdue reform ~ though the six-slab system cannot really be called a simplification. But to be fair to the FM, this was a bold step in the right direction, coming after the sharp cuts in corporate taxes, and is expected to lower the tax burden in varying degrees across all slabs, those in the lower slabs benefiting the most.
The FM should carry the exercise to its logical conclusion in the next budget by eliminating all exemptions and deductions, and reducing the number of slabs. A similar exercise of reducing the slabs needs to be taken in respect of the GST, which responsibility, however, rests with the GST council and not with the legislatures. Focus on agricultural sector, especially in liberalising farm markets and encouraging the states to implement of the model laws was also a welcome feature, but agriculture being a state subject, it is not clear how many of the ideas would actually be implemented by the states, given the huge trust deficit between the Centre and the oppositionruled states, and also because of the inherent capacity constraints of the states.
With the committed expenditure on interest, pension and subsidy along with defence taking away almost half the total expenditure, there was hardly any fiscal space left for manoeuvring by the FM to address the woes of the financing sector that is crying for capital or for increasing government spending in areas that would boost demand and consumption. Taking advantage of the escape clauses in the FRBM Act which allow for a deviation from the March 2021 limit of 3 per cent on account of “structural reforms with unanticipated fiscal implications”, the FM had hiked the fiscal deficit at 3.5 per cent for FY 21.
There is not yet much clarity on the off-budget borrowings, despite the FM’s promise of clarity on this through an annex. One does not know how many unpaid bills are lying with the ministries; some estimates point to Rs 3 lakh crore, equivalent to 1.5 per cent of GDP. It seems the process of fiscal consolidation will continue to be an ever receding mirage. To be fair to the Government, during the past few years, it has indeed brought in some remarkable reforms in taxation and corporate and financial sectors.
It has sincerely tried to cleanse the rot that has accumulated into our financial system over the decades. The budget offered another opportunity to carry the process forward, but it fell short on imagination and boldness. A crisis is not to be wasted, as the wisdom goes. We wasted the current economic crisis for lack of ideas.
(The writer is a commentator. Opinions are personal)