There was a heightened sense of anticipation among economy watchers and the corporate sector in the run up to Finance Minister Nirmala Sitharaman's maiden Budget, and not just because she was the first full time woman Finance Minister in India. (Indira Gandhi, as Prime Minister, had handled the defence and finance portfolios with for brief periods.)
The anticipation was because the Narendra Modi-led NDA government had come back to power with an even greater majority than the first term, and there were some expectations that the first Budget of this term would unveil bold, long-term reforms that would put the economy on a high growth trajectory.
Would the Budget signal new policy priorities? Could it do something to bring back private sector confidence and investment, which had been sorely lacking in the previous five years? Would it announce new ideas that would make farming more remunerative as a profession for the small and marginal farmer? Would it announce steps to make India a manufacturing hub at par with countries like Vietnam and South Korea? Could it make India export competitive in merchandise beyond the traditional areas like leather, gems and jewellery, etc? Would a bold new direct tax reform be unveiled? Would there be something to spur private consumption, which had begun to slow down? And finally, would there be new ideas on generating revenues?
As it turned out, the Budget speech and allocations disappointed on almost all those scores. Nirmala Sitharaman's first Budget speech laid out a dream for citizens - of Ease of Living, or a Super Charged Economy, of a Connected Future, both in the physical realm as well as on the digital highway. But the actual Budget did not unveil a pathway to achieve them. There weren't too many fresh ideas - most were incremental improvements instead of changes of direction. The only break from convention was the cloth pouch (bahikhata) she carried instead of the briefcase that her predecessors carried. And in giving a two hour-plus long Budget speech that was notable for the near complete absence of any talk of allocations (there was a brief mention of Rs 70,000 crore for public sector bank recapitalisation and another Rs 1 lakh crore fund that the PSBs could use to prevent a panic in the NBFC sector but those were all).
Apart from that, the Finance Minister firmly stuck to measured additions to the path followed in the past five years in everything, talked extensively about the achievements of the programmes and schemes of Modi 1.0 and then talked of more schemes that would be implemented in the coming five years. There were some goals and targets like the $5 trillion economy by 2024/25 and piped water connections to all citizens, again in five years, and focusing on ease of living being as big a goal for Modi 2.0 as ease of doing business was for Modi 1.0. Beyond that though, the Budget presentation left us with the feeling that the government was either not listening to its economic advisers or lacked the courage to follow some of their more radical suggestions. It seemed comfortable in charting out a path of incremental improvements.
The Good and The Pedestrian
The past five years had seen the government focussing on infrastructure development and connectivity to keep economic growth humming. The first Budget of the second term stayed firmly on course, though there was a recognition that the government did not have the resources to keep spending on infrastructure on its own. The Indian Railways alone would need Rs 50 lakh crore between 2018 and 2030. Roads, ports, airports, digital connectivity and water ways would require vastly more. The Finance Minister talked of public-private partnerships (PPPs) that would bring in private sector investment and expertise to bridge the finance gap. The only problem here is that PPPs in infrastructure has been an idea that was tried out by multiple Indian governments with less than satisfactory results. Most private sector players who dabbled in infrastructure have ended up with massive debt, and have not found returns commensurate with the risks taken.
The better ideas from the Budget speech came in the area of the banking and finance. First, there was the Rs 70,000 crore for PSB recapitalisation - that would help many of them meet Basel III norms and others to get out of the Prompt Corrective Action (PCA) norms of the Reserve Bank of India (RBI) which was preventing them from giving fresh loans. The more novel idea was the Rs 1 lakh crore fund that would act as a sort of insurance for banks to keep lending to the non-banking financial corporations (NBFCs) reeling under liquidity crisis. The way it would work is interesting.
Banks could provide liquidity to NBFCs by picking up high-quality bundled assets from them. If the banks made losses in these, the first 10 per cent loss would be squared by this fund. In essence, it signalled that the government would not let NBFCs fail only because of a liquidity crisis and lack of confidence among lenders.
There were other announcements as well. One was about setting up a proper infrastructure financing organisation that would act the way ICICI and IDBI did originally when they were set up as developmental finance institutions engaged in long-term lending. This has been a long standing demand of infrastructure players because current lenders end up with an asset liability mismatch when funding for projects that have 10-year or longer paybacks.
There were some other ideas thrown in as well in the speech - including steps to be taken to make life easier for Foreign Portfolio Investors (FPIs) and also allowing them to buy more shares in good companies as well as an examination of how the corporate debt market could be deepened.
Finally, there was a brief mention of the government taking a look at raising money using dollar denominated bonds. It is a slightly controversial issue - it has obvious benefits but it can quickly lead a country into trouble. Many emerging economies have got into trouble with these instruments, but if the economy is managed properly, there is no harm in these bonds.
If the ideas on the financial sector gave the impression that the government was at least willing to consider fresh ideas, there was no such indication on the agricultural front. The government did increase allocation - in line with its promise of Direct Income Transfer of Rs 6,000 - but beyond that seemed to have run out of ideas (See Skew Towards PM-Kisan, pg 40). There was really no idea about how the profession of farming itself could be made more remunerative and how farmer incomes would be doubled in two and a half years (2022). There was a mention of starting as many as 10,000 new Farmer Producer Organisations (FPOs) and using E-NAM to help farmers get better price discovery and a talk of adopting Zero Budget Farming. But none of them have given satisfactory results to marginal farmers in the past, and agricultural experts remain doubtful about whether they can really solve the root problems.
The same incremental thinking was seen in the proposals meant to incentivise the corporate sector. The 25 per cent corporate tax was expanded to cover firms up to Rs 400 crore of revenues, which the Finance Minister says cover 99.3 per cent of all firms, but it did not cover the bigger firms - which account for the bulk of revenues, employment creation and new investments. And while the angel tax scrutiny would be minimised, there was really nothing that would help a start-up or a venture capitalist.
Even the steps to attract more FDI were tiny. The FDI limit in insurance intermediaries was raised to 100 per cent (but not for insurance companies themselves) while FDI norms for single-brand retail was made easier (but multi-brand retail foreign investment remains barred). There was 100 per cent FDI in animation but not an increase in the overall media sector. There was an announcement that the government would, through a bidding procedure, try to get big investments in high-end manufacturing in areas like semi conductors, etc, but how this would work was entirely unclear. The problems holding back large scale investing in India range from infrastructure and land issues to power costs and tax norms. If the government has a plan, at least the Finance Minister stayed clear of the specifics.
There was a mention of making labour laws easier to comprehend by putting them into four codes, but that has been in the works for many years and does not constitute genuine labour reforms that would satisfy the industry. More thinking seemed to have gone towards reviving the affordable housing sector, which saw tax incentives for buyers as well as big goals set by the government.
Among the bad ideas presented in the Budget were the excise increase and additional cess on petrol and diesel, the surcharge on income tax for the super rich and the plethora of custom duty hikes, ostensibly to help domestic manufacturers become more competitive. The steep hike in excise and cess on petrol and diesel even as crude prices remain lower shows that the government does not worry about increasing the tax burden on the middle class or the fact that it will further dampen private consumption and make cost of living in urban areas even higher.
Perhaps the government had simply run out of ideas on how else to bridge the revenue gap - after all, the lofty direct tax targets (including GST) set by the February interim Budget have been lowered by Rs 1.55 lakh crore. But the government does not seem to care that the increase in petrol and diesel cess and excise would further hamper the recovery in the automobile sector, which is reeling under lower sales. Railways is one of the big consumers of diesel. So, petrol and diesel hikes, apart from dampening consumer spends, would also show up in inflationary pressures. The sops for electric vehicle purchases also seemed a bit muddled given that much of the infrastructure does not exist.
The additional surcharge on the super rich incomes is frankly a silly idea. Sure it will fetch some revenues but it will also encourage tax evasion, and make more rich people shift residence to more tax friendly countries. It would also create a problem for big corporations that would need to figure out ways to compensate for this additional tax burden on their top managers.
The idea of TDS on cash withdrawals is again a muddle headed one, though it goes with bureaucratic thinking of disincentives and the government's own ham handed efforts to make citizens adopt digital transactions. (Demonetisation was one such idea).
The range of custom duty hikes could have worked if there was a specific industrial policy backing it, along with a clear idea on which sectors to encourage for manufacturing and exports. Currently, it only gives some protection. The logic behind custom duty hikes on books and newsprint are hard to understand.
Finally, there seemed no real idea about how to generate jobs except to spend more on infrastructure and hope that will provide enough employment at the bottom end of the pyramid.
At the end of her speech, almost as an afterthought, the Finance Minister talked about a new fiscal deficit target - 3.3 per cent - instead of 3.4 per cent in the interim Budget presented by Piyush Goyal. The Modi government has always set great store with the headline fiscal deficit, though its means of achieving those numbers have been through some dodgy accounting, off balance sheet borrowings and some nifty assumptions. The new target shows the same approach.
The Budget hopes to achieve a nominal GDP growth of 12 per cent (given that the real GDP growth is expected to be 7 per cent, which too is optimistic given the last quarter growth of 5.8 per cent, this would mean an average inflation of 5 per cent. The current inflation is under 4 per cent. So both real growth and inflation would need to go up sharply to achieve those averages). More importantly, even after lowering the tax targets, the government assumes a direct tax growth of 17.34 per cent against a nominal GDP growth of 12 per cent.
There are other assumptions - cash from the RBI and higher dividends, as well money mopped up by the additional excise and cess on petrol and diesel, higher disinvestment targets and dividends from PSUs. The fiscal deficit target could well be met - but by a generous amount of sleight of hand involving both sharp reduction of expenditure at the end of the year and extra budgetary borrowings. But that does nothing to improve the real state of government finances.
This government has taken over the ropes after learning for the first five years. It is a pity that it has nothing much to offer than more of the same. Sure, being only in its first year of the second term, it still has plenty of time to unveil the bigger changes and reforms that are required to achieve the economic dreams that the Modi government has woven for the citizens. But time is ticking away and the government needs to realise that with its massive mandate, if it does not drive change early, it will not be able to do so once the election cycle starts again.