What Mr Jaitley should do

Panellists at Business Today's pre-Budget discussion want the government to take steps to accelerate economic growth, boost investment and create jobs.
twitter-logoProsenjit Dattaand twitter-logoShweta Punj | Print Edition: March 1, 2015
Our Panellists (From left) Ridham Desai, Managing Director and Head of India Research, Morgan Stanley; Laveesh Bhandari, Director and Chief Economist, Indicus Analytics; M.V. Rajeev Gowda, Congress spokesperson and Rajya Sabha MP; Bakul Dholakia, Director
Our Panellists (From left) Ridham Desai, Managing Director and Head of India Research, Morgan Stanley; Laveesh Bhandari, Director and Chief Economist, Indicus Analytics; M.V. Rajeev Gowda, Congress spokesperson and Rajya Sabha MP; Bakul Dholakia, Director General, International Management Institute, New Delhi; Surjit Bhalla, MD, Oxus Research; Rajiv Kumar, Senior Fellow, Centre for Policy Research; and Ajit Ranade, Chief Economist, Aditya Birla Group

There are high hopes from the first full Budget of the Narendra Modi government. Finance Minister Arun Jaitley has promised the second generation of reforms, rationalisation of subsidies and tight fiscal control. The Budget will also have to find ways to support Modi's Make in India programme and focus on job creation and growth. To discuss these issues, BT organised a panel discussion with Rajiv Kumar, Senior Fellow at the Centre for Policy Research; Surjit Bhalla, Managing Director of Oxus Research; Bakul Dholakia, Director General of International Management Institute, New Delhi; Professor M.V. Rajeev Gowda, Congress spokesperson and Rajya Sabha MP; Ajit Ranade, Chief Economist of the Aditya Birla group; Laveesh Bhandari, Director and Chief Economist at Indicus Analytics; and Ridham Desai, MD and Head of India Research, Morgan Stanley. BT's Prosenjit Datta and Shweta Punj moderated the discussion. Edited excerpts:

Ajit Ranade, Chief Economist, Aditya Birla Group
Ajit Ranade: The backdrop for this Budget is that, we've had this very good fortune of a steep drop in international oil prices and that gives us a triple bonus. Number one is the fiscal relief you get because of lower subsidies; the relief on the current account because of decrease in oil prices and number three is the impact on inflation. This translates into something like a de-facto stimulus to the economy without the side effects. The estimate is something like between half and one per cent of GDP.


Growth has to come from domestic factors and you can't depend on consumption growth as much as investment growth.


Co-founder, Chief Economist, Aditya Birla Group

I expect the Budget to take advantage of this huge stimulus impact coupled with a creative and aggressive disinvestment programme... we can't depend that much on export-led growth. Growth has to come from domestic factors and you can't depend on consumption growth as much as investment growth and investment has to come primarily from both public and private sector. Private sector investment is still not picking up steam. So, it's up to the government to take the lead in terms of investment.

Ridham Desai: The subsidy burden this year will be around 1.9 per cent, slightly lower than what the finance minister had budgeted last year. Now, given where oil prices are today, that number falls to 1.6 per cent next year. On top of that the government has raised excise duty on oil products, which on an annualised basis will generate revenues of 50 basis points of GDP. So, when you add up the math, the government has about 90 basis points of GDP from oil. This is probably the greatest amount of flexibility any finance minister has had in the budgeting process in quite a while... he can do a lot with this money. He can use part of this to reduce the deficit for next year and the remainder, I hope, he uses to boost investment spending.

Laveesh Bhandari: There has been this surfeit of these buzzwords, or programmes really, like Swachch Bharat, or Make in India and so on, or the smart city, where we don't know what these visions really mean. And as we all know, a vision without implementation is essentially hallucination. Now, the question is, how is this government going to try and implement this? What I definitely would not want to see is, that all these buzzwords remain buzzwords. I would like to see absolutely specific, definite implementation issues addressed for each of these.


There are two things Make in India is not about. First, it's not exports. Second, it is not import substitution. It is about competitiveness.


Co-founder, MD, Oxus Research

The second point is related to Make in India. Is this going to be an incentive-laced Make in India campaign? Because what you really want is efficiency-based manufacturing or efficiency-seeking manufacturing or efficiency-seeking investment. You do not want incentive-seeking investment in the manufacturing sector. I think it's very, very important that the Make in India campaign not be accompanied by a tax holiday here, an incentive here, some subsidy there and so on. The third issue has to do with how this government is going to strengthen the institutions.

Rajiv Kumar: The benefit of the doubt so far has been given to this government. And if this Budget disappoints, then it is going to be fairly difficult to pull the fat out of the fire. This is not going to be an ordinary Budget. This will have several major announcements. I think the first one would be and must be the reform of the direct taxation system. This is the one single, most important impediment to Make in India, to investment, to investors' climate. Second, I think you will hear some major announcements coming out of the recommendations of the expenditure management commission. This is the right time to do it because oil prices are down... Instead of another round of export-related incentives, what we need to do is to replace them with something much more specific in terms of infrastructure development and here I tend to disagree with Ajit's export pessimism. India's share in the world market is 1.7 per cent or 1.5 per cent. There's surely enough scope there for our exports to rise. India must make use of external demand and for that, this Budget must include some very specific long-term measures.

M.V. Rajeev Gowda: In the last few months, you've seen cut in healthcare spending, you've seen cut in social-sector spending overall and these are cuts that affect infrastructure of a different kind, human beings and their capabilities. This is something we really don't want to see going forward. We'd like to see the benefits of these triple benefits that Ranade talked about. All these should not just be focused on manufacturing alone, but also on those sectors that could possibly be very vital to development and growth across, especially rural India.

Jaitley is a very lucky man to have so many different things coming together so well. Not just oil prices, but the stock market is at a high. [RBI Governor] Raghuram Rajan has cut interest rates. Inflation is coming down. This is an opportunity for all kinds of strengthening of the systems... But let's not forget that one of the benefits that we are experiencing, lower inflation, is partly caused by lower spending, lower amounts of money in the hands of people in rural India and we need to do something to ensure that they are not left behind? Manufacturing growth will help to some extent but there are a lot of people who are not going to migrate. They are going to stay there.

Bakul Dholakia: All these favourable factors would pitch for some boldness in terms of decision making. But boldness alone does not serve the purpose. You require prioritisation of vision and a strategy to translate that vision. So you will have to have a focused strategy to revive manufacturing and the services sector. That is where the broader-level approach is not going to help. The devil is going to be in the detail? Each of these sectors also needs reforms. I do not agree that revival of private investment on a large scale cannot happen in 2015/16. All the factors are going right. The revival of the stock market has opened avenues in terms of private placement of equity... In addition, the interest rate cycle has reversed.

Surjit Bhalla, MD, Oxus Research
Surjit Bhalla: Oil prices only started declining just about a couple of months ago and, indeed, the best of the oil price decline is yet to come, certainly in terms of the fiscal deficit. Inflation is a more interesting story. In October, the BJP had its first chance at setting minimum support prices and they set it at an only 0.7 per cent increase. That has had a large role to play in bringing food inflation down... [Also], direct taxes reform needs to come on board and that's something I am hoping will come. And by direct taxes, I mean a reduction in corporate tax rates and a reduction in the peak personal income tax rate.

Rajiv Kumar: A massive simplification and rationalisation of tax administrative system.

Surjit Bhalla: Yeah.

Rajiv Kumar: That's the horror story.

Surjit Bhalla: Direct taxes, I am hoping, will happen. Disinvestment is certainly happening. I was not in the camp that said we should have privatisation. Disinvestment, which is our own unique Indian contribution to the English language, is happening. Then, labour reforms. Everybody has talked about it, you have talked about it for 65 years and may be 100 years. And we have all talked. This government at least has started to bring about [these reforms]. I think they have a long way to go. But it is happening.

Shweta Punj: Would labour reforms come under the Budget, though?

Surjit Bhalla: No. In terms, it comes under Make in India. It comes under deficit reduction. The point is, you want to increase jobs. You want to increase the weight of growth, you want to decrease the weight of inflation. You want to decrease the fiscal deficit.


When I talk to investors, they are all hungry to invest in India. But they are also frightened of setting up greenfi eld projects.


Managing Director and Head of India Research, Morgan Stanley

Prosenjit Datta: There seems to be almost a given that quiet a lot of the Budget will be framed in terms of Make in India or the revival of manufacturing. What exactly are going to be the specifics that you expect in Make in India?

Ajit Ranade: The Prime Minister wants Make in India to be converted into improving the ease of doing business. If you look at the ease of doing business, you can think of 10 metrics and these are well defined, including things like taxation and contract enforcement. More than half of those factors are in the domain of the state government. So, Make in India is the slogan which should be translated as Make India Competitive. Reduce the burden that's there, reduce the factors that constrain the ease of doing business in India. Reduce the adversarial relationship between the tax collector and the taxpayer. The recent decision to let go of and not appealing for the Vodafone case shows there is a change in the mindset in terms of tax-terrorism. Make in India is basically to move away from the Inspector Raj to a more self-compliant, self-declaration Raj.

Laveesh Bhandari: Inefficiency in the bureaucracy is something Modi has been quite good at in Gujarat and he seems to be doing that in Delhi as well. But I don't think that is the focus of the problem and I don't think that just one Budget is the biggest thing that this government will have to offer. Small and incessant reforms, consistently across many weeks, months, days, years and so on, that's what they are going to do.

The NITI Aayog is still a huge question mark. What is it going to do? How are these legal reforms going to happen? This government, I believe, does have a much longer vision than either the Vajpayee government or the following UPA government. I think Modi and his team do have a 10- or 20-year agenda. The question is, how are they going to get this agenda in place?

The problem of manufacturing is not something the government can take care of by passing one or two laws. It's systemic. It starts from power, the Inspector Raj in the state or the local level. You cannot do that by big-bang reforms and small reforms cannot be driven by the prime minister. So, you go back to the Centre-state interaction and I think this Budget is critical for setting the direction. It will not be able to achieve too much beyond handling some fiscal issues.

Ridham Desai, Managing Director and Head of India Research, Morgan Stanley
Ridham Desai: The world has a serious medium-term challenge. If you look at the 3Ds, if you look at the level of debt, it is very high and rising in most parts of the world. Most are faced with the prospects of deflation and their central banks are trying hard to fight that. And they also have an aging population.


The revival of the stock market has opened avenues in terms of private placement of equity... In addition, the interest rate cycle has reversed.


Senior Fellow, Centre for Policy Research

India is actually at the opposite end of the spectrum. It doesn't have that much debt. We certainly don't have a demographic problem and we are not dealing with deflation. That sets India apart. When I talk to investors, they are all hungry to invest in India. But they are also frightened of setting up greenfield projects. What you see normally in India is that foreign institution portfolio investors do not hesitate buying stocks, multinational companies do not hesitate buying existing businesses. But companies abroad are not so comfortable setting up businesses from scratch.

Prosenjit Datta: Has the government done anything at all about the small-scale industry?

Rajiv Kumar: Today we need 70 clearances every year to remain in business. We have to file 100 returns. If you get the inspectors off the back of the entrepreneurs, the people who would benefit the most are the small and medium enterprises. They also would benefit by much better access to commercial credit... that's something the Budget can fix.

Ajit Ranade: I want to make one or two somewhat radical suggestions. One is, that maybe we should have quantitative limit on dividend income. With the technology of tax administration, it is possible to do that. The holy cow of agriculture taxation is a subject I think should be opened up at some point because there is a lot of income there which is potentially taxable.

Surjit Bhalla: There are two things Make in India is not about. First, it's not exports. Second, it is not import substitution. It is about competitiveness. It is about productivity. It is about ease of doing business... GST [goods and services tax], for example, is the ease of doing business.

Shweta Punj: We have been hearing about easier clearances. The environment ministry is giving out faster clearances now. But it's been seven months now, has anything really changed on ground?

Rajiv Kumar, Senior Fellow, Centre for Policy Research
Rajiv Kumar: Apparently, it has because I think Nitin Gadkari [road transport minister] has gone on record to say that something like 116 critical projects which were waiting, have been cleared. Prakash Javadekar [environment minister] announced that they were going to put these clearances online and that's now actually online.


Make sure that rural India, the poor, social sector spending, the environment, the tribal, none of these gets sacrifi ced in this quest for growth.


Congress spokesperson and Rajya Sabha MP

The other big thing that has happened is that all these groups of ministers are gone. It was meant to be just an excuse for indecision. Defence projects worth Rs60,000 crore have been contracted and the order is given.

M.V. Rajeev Gowda: Well, there has been progress if you count on this issue about speed of clearances. You have to ask why the clearances were not coming earlier or what is the trade-off in all this? And the trade-off has to do with environmental concerns. One issue is, are we going to destroy the environment in exchange for getting more of these projects going? That's really a case by case issue you need to look at. It's a matter of great concern. The other concern has to do with who are the people going to be affected and what do you care for them and their rights and their views.

Shweta Punj: That's for a separate discussion.

M.V. Rajeev Gowda: No, no. That is very intimately tied with this whole issue of clearance. Make in India is a perfectly fine slogan. If you look at the website, you will see that the policy has been there from 2011 or something like that. The point is, this is going to take some time to roll out. I think the momentum is in that direction. However, don't expect overnight results.

Prosenjit Datta: I was speaking to somebody in Mumbai, an industrialist, who pointed out that Indian labour, at least in several states, is far more expensive and far less productive than let's say, Chinese labour.

Bakul Dholakia: Yeah, and I would say that NREGA have a contribution to make in doing so. It is because it is one thing to conceptualise a scheme driven by public expenditure and it is altogether a different thing in terms of matching expenditure with output. We have to identify the critical skills required for the kind of sectors which have potential, to generate employment, to augment income and also to help in terms of our export initiatives and so on.

Prosenjit Datta: We have seen the government's intentions in terms of infrastructure, manufacturing and all that. Has it been largely silent in terms of skilling or in education in these seven months?

Rajiv Kumar: Not really. The HRD ministry is strengthening the National Skill Development Council to make it National Skill Development Authority and has focused on it. What's been missing is the attention by the ministry of human resources development on this whole issue.

Bakul Dholakia: There is a huge focus on vocational education.

Surjit Bhalla: I just wanted to add to that in my opening statement I had said that agriculture was one sector that had been completely untouched by reform. I should have added education. India's been very unlucky to have the last four HRD ministers, who have been relatively clueless about reforms and about increasing effectiveness.

Rajiv Kumar: They just have the wrong priorities.

Surjit Bhalla: Completely wrong priorities. Sanskrit and this and that. Go back to Murli Manohar Joshi, then you have Arjun Singh, Kapil Sibbal and the Right to Education Act, which is also hugely anti-reforms and then you have no action and if you will, some negative action in the last seven months from Smriti Irani. So, we've been unlucky. I think the government hasn't been emphasising this because of the Budget and pressing economic needs.

Rajiv Kumar: This demographic dividend will be a demographic disaster. It is a pity the government doesn't assign its best person to the education ministry.

Shweta Punj: Innova- tion needs angel investors and India-based VC funds are almost absent. What can the Budget do to address this issue?

Ridham Desai: This is all about taxation , and ease of approvals. Actually, investors are very keen to come and set up shop in India, but it is not easy to do it. It's not the dearth of capital really. But if you want to encourage domestic angel funds and venture capital, then I think we need to get our hands around a couple of administrative and taxation issues.

Just to add to what Bhalla said earlier about inflation. One of the pro-active things that this government has done, which has contributed big time to inflation, is the deceleration in wage growth. For three or four years, rural wage growth was running in the 20s. It's now close to zero per cent. And that I think is going to be a big contributor to the recovery in the manufacturing sector because it has helped bring down inflation. Now, it is hurting rural consumption, but it was pain that rural India had to take after years of excess cash that they got through the Rural Employment Guarantee Scheme.

M.V. Rajeev Gowda: There is 50-60 per cent of population still essentially dependent on that in rural India. We can't say that this train of growth is only for those of us who are in urban India. We have to ensure certain safety nets. In the last 10 years, rural wage growth may have increased and affected inflation, but at the same time, it has taken 10 to 15 crore people out of poverty. So you have to balance things out.

Surjit Bhalla: The funny thing about inflation is that it decreases your purchasing power, so what you ought to look at is what has happened to real wages. To landless workers, that hasn't helped.

Rajiv Kumar: For fertiliser subsidies, to shift to cash transfers could well happen because cooking gas subsidy has already started in 49 districts.

Shweta Punj: The new thinking in the government is that growth needs to be driven by the private sector, which is a bit different from what we saw in the UPA.

Ridham Desai: Eventually, the private guy will come in. But I think the initial kick-start will have to come from the government. Look at infrastructure. The government has stopped doing public-private partnership. It's doing EPC (engineering, procurement, construction). It is basically owning these infrastructure projects because the private sector does not have the balance sheet or the appetite to actually spend money. But once you get that lifted, then the private sector will certainly walk in.

Rajiv Kumar: They need to get some public spending up to crowd in the private sector. I don't agree with Ajit about maintaining next year's fiscal deficit targets of 3.6 per cent or 3.0 per cent. If they have achieved this year, that would prove their credibility in the eyes of the credit-rating agencies and then if they give themselves a little more fiscal space and say that this is needed to restart the economy, reignite the investment cycle, I think no rating agency would come down because our debt-to-GDP ratio is still very low and our debt servicing record has been very good.

M.V. Rajeev Gowda: Disinvestment proceeds should be turned into government investment in infrastructure.

Surjit Bhalla: I don't believe there should be anything called cess. Whatever you have to tax, you should tax. I also don't think there should be any earmarking of I am selling this, and, therefore, this must go into infrastructure. That's what governments are there for. This is how much we are going to spend on infrastructure.

Bakul Dholakia, Director General, International Management Institute, New Delhi
Bakul Dholakia: I believe a signal about fiscal consolidation and fiscal prudence has to be given, so the fiscal deficit target for the next year has to be lower than 4.1 per cent. But 3.8 per cent versus 3.6 per cent is not going to do that much damage because if you continue lowering the fiscal deficit ratio, inflationary expectations will remain moderate. And, therefore, to return to the regime of higher inflation in the years to come, the fear would subside.

Prosenjit Datta: We know there are certain things the government can do. Administrative reforms on its own it can do, direct tax reforms. What about the things where it needs parliamentary support? It can't go the ordinance route all the time. Where do you see the hurdles?

Rajiv Kumar:
Rajeev Gowda's party will help the government.

M.V. Rajeev Gowda: I don't know what that statement intended to say, but I have been part of passing the Apprentice's Act, which made it easier for companies to hire people. There are various other reform measures we have introduced and we have helped in. I think the government needs to reach out. Half the challenge is in the government's hands. The other half is in the hands of the Opposition, which is still in majority in the Rajya Sabha. Parliamentary management, creating consensus, avoiding or taking responsibility to prevent divisive issues overtaking development, we need to see the government doing their part.

Rajiv Kumar: Given the critical nature of reforms needed today, I think the government should not be shy at all of calling any number of joint sessions of the two Houses and getting the reforms passed. Precedents have to be created in a young democracy and if the need of the hour is to pass these reforms, bunch them up, call a joint discussion, get them passed and tell the Opposition you mean business.

Ridham Desai: If we lift growth, I think a lot of problems the economy faces today will start receding. The private sector will come in, poverty levels will start reducing. In my view, pro-growth is how it should look and how it should be positioned.

Rajiv Kumar: Pro-investment and pro-employment Budget. It must be pro-employment Budget because I think the government's future is at stake on this. The country's future is at stake on this.

M.V. Rajeev Gowda: The last Budget was a major disappointment. It was name changing, rather than a game-changing Budget... I have no problem with investment, industry, capital and corporate India doing well. I just want to make sure that we look over our shoulders and make sure that rural India, the poor, social sector spending, the environment, the tribal, none of these get sacrificed in this quest for growth.

Surjit Bhalla: The poor will be helped more by growth, the tribals will be helped more by growth and by better targeting their welfare will improve.


A signal about fiscal consolidation and fiscal prudence has to be given, so the fiscal deficit target for the next year has to be lower than 4.1%.


Director General, International Management Institute, New Delhi

Bakul Dholakia: It should not be a populist Budget. This is something that the time has come to at least give a vacation to populism.

Prosenjit Datta: We have come to a certain degree of agreement that almost everybody is expecting a pro-growth Budget, certain degree of administrative reform, pro-investor, may be tax reforms, perhaps not so much of agricultural reforms, some degree of fertiliser rationalisation. Let's see if the finance minister meets these expectations or he just tinkles around the margins. So far he seems to have shown the intentions. Whether that will come into the Budget, we will know soon enough.

@prosenjitdatta; @shwetapunj

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