Budget 2014: Experts seek boost to manufacturing sector, tax reforms and reviving infrastructure
Shweta Punj July 3, 2014
On his election campaign trail, Prime Minister Narendra Modi successfully sold the idea of hope. Finance Minister Arun Jaitley is now gearing to present the first budget. But Jaitley is facing a slew of challenges that could potentially derail Modi's grand economic vision for the country. A delayed monsoon, looming Iraq crisis, rising inflation, low investor confidence and the fact that the previous government has left a messy state of finances to work with are expected to make Jaitley's job tougher.
To assess the strengths and weaknesses of the government, Business Today organised a panel discussion with Ajit Ranade, Chief Economist, Aditya Birla Group; Arvind Virmani, former chief economic advisor to the finance ministry; Satya Poddar, Partner, EY; and Dhiraj Mathur, Executive Director, PricewaterhouseCoopers, and Shweta Punj moderated the discussion. Edited excerpts:
Ajit Ranade: The backdrop of this budget is not very cheerful. We have had two to three years of slow growth, and in manufacturing we have had zero growth. The Iraq flare-up has pushed oil prices higher to the levels seen one year ago during the Syrian crisis. Oil prices directly affect the fiscal deficit and trade deficit because three-fourth of the oil is imported and also affect inflation. Apart from Iraq, there's also the El Nino factor. About four weeks ago, El Nino was just a possibility but now we are more and more concerned that the monsoon is delayed. As if that wasn't enough, we also have the railway price hike that will contribute to inflation. We have had an increase in the import duty of sugar. The one cheerful [thing] is that the foreign money has come in substantially and the stock markets are doing well.
In such a backdrop, if you ask me what the budget will be about, I think the number one priority should be to provide a very strong anti-inflationary stance. I feel that fighting inflation is a joint responsibility of both fiscal and monetary authorities. One can't leave it only to the Reserve Bank of India (RBI). So how do you give this anti-inflationary signal? The first is, don't increase taxes, don't introduce new surcharges and don't increase administered prices. It's very important to attack inflation. The second priority is fiscal consolidation because we want to get into the virtuous cycle which we saw when the last time the National Democratic Alliance (NDA) was in power. Lower inflation and lower interest rates lead to higher savings and higher investment, which in turn lead to higher growth eventually. We want to get into that situation.
The third and fourth priorities will be agriculture and manufacturing. We have had the spectre of food inflation, for which there are short-term factors but the longer-term reality is that our supply is not keeping pace with demand. We can't remain dependent on imported food for a large part of our demand. We have to find ways to increase productivity substantially and tackle things like water scarcity, and overuse of fertilisers and free electricity.
In manufacturing, the national ambition is to go from 15 per cent to 25 per cent of gross domestic product (GDP). We need to do a lot of things to revive manufacturing, as I said there has been zero growth in the last two-three years. In the past six months, the Indian rupee has lost almost eight per cent against the Chinese yuan. While we think the rupee has gained substantially from 67 to 60 [against the US dollar] because of the new government and the RBI policies, against our competing currencies we have actually lost. This may directly translate into manufacturing disadvantage.
The government can itself stimulate capital expenditure by investing in railways as they are promising to do. I think the government can provide boost to the growth rate to 6-6.2 per cent through increase in capex. The increase in capital expenditure can come in four buckets: increase in direct federal capital spending, increase in spending by public-sector units, increase in spending by state governments, and increase in private spending through appropriate monetary policy and incentive regime. In terms of creating policy certainty, the public is anticipating at large to provide a clear road map for the GST [goods and services tax]. I expect the government to make a major announcement on reversal of the tax policies that were announced in 2012 budget, deferral of GAAR (General Anti-Avoidance Rules) and reversal of the retrospective changes. Investors need very clear policies. If the policy is detrimental, then they should reverse those policies. Clarity is the number one priority of the government.
The revenue deficit has been stuck at 3.0 to 3.2 per cent for the last 10 years. That's a measure proposed in the FRBM (Fiscal Responsibility and Budget Management) Act which was never achieved. That's a big failing which is not pointed out by too many people but it is critical and I hope they will not only make a start towards reducing that but also lay out a map for bringing it to zero in the next two-three years. It should've actually been done by 2007 but it wasn't. That is the critical element of restoring macro stability.
The second thing I expect is some kind of a partial accrual accounting or at least a couple of lines in the budget which show the carryover much more clearly. I expect they will do that because the only way to start the hard decision process is to bring out in the open the fiscal and revenue deficit situation that the country is left with.
The third aspect of the budget is taxation. Most of us have been working on taxation. I definitely expect that this government - and they have made it clear both in their manifesto and the president's address - to simplify taxes. All taxes which are under the control of the government - corporate taxes and income taxes.
ON RECAPITALISATION OF BANKS
ON TAX DISPUTESSatya Poddar: First of all, they have to remove ambiguity which is the source of disputes. Best example is if the GAAR was to be implemented, it's going to confound everybody. Retrospective amendments, indirect transfers of capital gains, these are issues on which there is a lot of confusion. The biggest volume of disputes today in terms of value as well as the numbers is transfer pricing. Now the government has brought in two very significant changes, one is called the safe harbour rules, other was the APAs (advanced pricing agreements). They started very well but to date they have only signed five APAs. There are 45 agreements stuck in the bureaucratic files. I don't think the government can free up the money that is locked up in existing disputes. They will require a more thoughtful approach but prospectively if they bring clarity, they can create a new dispute resolution mechanism.
ON EXPANDING THE TAX BASE
Satya Poddar: You have to look at the indirect taxes - CENVAT, service tax -- and the income tax system. In the case of the CENVAT and service tax, there is a scope of eliminating some of the red cuts. In the case of personal income taxes, there's a substantial room for base broadening. And that was indeed the focus of the direct tax code. But at the moment, the best that can happen is for the government to send the direct tax code back to the drawing board and in that context they could say that we want this direct tax code to be re-examined with a view to broadening the base, and lowering the rates and simplifying the structure.
On inheritance tax and increasing revenue base
Ajit Ranade: For a large section of India, inheritance is in the form of a house. A tiny fraction actually has liquid monetised assets to pass on as inheritance. If a house has been passed on, you actually have to liquidate the house to pay your inheritance tax. If today somebody gets Rs10 crore in dividend, it is tax free. But if you earn income as salary or fixed deposit in a bank, it is taxable. People say dividend is taxed at the company level in dividend distribution tax. But I think we need to revisit this issue, like we have introduced the concept of quantitative caps for gas cylinders. Can we say dividend income up to a certain level is tax free? Let's say up to Rs5 crore and above Rs5 crore will be taxable.
ON IRAQ CRISIS AND OIL SUBSIDIES
There is a medium to longer term issue. India is a standout country where the ratio of freight handled by road and rail is almost 80:20. That means 80 per cent of the freight moves on roads and only 20-25 per cent moves by rail, which is very energy inefficient. And one of India's sources of competitive disadvantage is that the freight cost is a big part of the manufacturing cost.
Why are we not aligning ourselves to international trends where more stuff has to move by trains and not by road, and that requires rail modernisation. It certainly does not mean that you keep it subsidized or something and it is not just modernisation of tracks or the safety systems, it is door to door delivery. Here, the stuff can come to your railway godown, but that last three miles where it has to be delivered, we do not have enough systems and connectivity to give a door-to-door service for freight needs.