Fuelling Economic Growth
Team BT February 4, 2020
Finance Minister Nirmala Sitharaman presented her second Union Budget in the midst of a desperate economic situation - a slowdown that hasn't seen the bottom yet; consumption, private investment and exports refusing to pick up and even public expenditure suffering a setback due to lower than expected tax collections in FY20. It was imperative to kick-start at least one or the other growth engines of the economy to bring the fast decelerating economy back on track. Instead, Sitharaman aimed at two engines - consumption and investment cycle - in the hope that disposable income in the hands of individuals and money with corporates would restart the two engines. She answered the call with a new personal income tax regime offering more money to tax payers, protectionist import tariff hikes to strengthen corporate balance sheets and a generous amnesty scheme to unlock Rs 9.41 lakh crore of direct tax disputes. Business Today spoke to a dozen leaders including noted economists, CEOs, tax experts, exporters and bankers to gauge the mood of the country.
The experts include Kiran Mazumdar-Shaw, Chairperson and Managing Director, Biocon; Preetha Reddy, Vice Chairperson, Apollo Hospitals; Rathin Roy, Director, National Institute of Public Finance and Policy; Mukesh Butani, Managing Partner at BMR Legal; Ashu Suyash, Managing Director and CEO, Crisil; R.S. Sodhi, Managing Director, Gujarat Cooperative Milk Marketing Federation (Amul); Saugata Gupta, Managing Director, Marico; Surendra Rosha, Group General Manager and CEO, HSBC India; Vishesh C. Chandiok, CEO, Grant Thornton India; Nimesh Shah, Managing Director and CEO, ICICI Prudential Mutual Fund; Sachchidanand Shukla, Chief Economist, Mahindra Group; Partha Chatterjee, Dean-International Partnerships, Professor and Head, Economics Department, Shiv Nadar University.
Here's what they had to say on whether Budget 2020 will revive Indian economy:
Are Budget announcements enough to pull the Indian economy out of slowdown?
Ashu Suyash: There is some support to growth, but not enough to give a material impetus in the short term. That means, the government is opting to not spend its way out of the slowdown. That said, it maintains a rural spending focus. As the government is still eyeing the long term, it has pushed capex. The multiplier impact of this will be positive, but lagged. In the absence of growth kickers, the pick-up in growth in fiscal 2021 is expected to be largely base-effect led and supported by somewhat better farm incomes (led by a good rabi crop), PM-KISAN and delayed impact of monetary easing.
Mukesh Butani: There is extensive push in infrastructure, which is clearly a must for boosting economic sentiments. There is an open handed budget allocation to health, sanitation, environment, agriculture and blue economy, which are foundational pillars. It is clear that this Budget is a conscious push to revive economic fundamentals and growth.
Rathin Roy: If you look at the government's expenditure plans for 2020/21, you will see that half of the allocations are towards committed expenditure like administrative costs and interest payments. This has remained constant at between 6.8 per cent and 7 per cent of the GDP from 2018/19 onwards. Of the balance, barring agriculture spending, which grows significantly by 28 per cent, you cannot find any allocation that is higher than the nominal GDP growth rate.
Saugata Gupta: There was a fine balancing act to be done, but under the circumstances, it is a decent Budget. The investment on rural sector, skill building and leaving little more money in the hands of a certain class of tax payers will help. The middle class will have more money in their pockets. But a lot of what has been announced will depend on implementation. They have taken a right call by saying they will sacrifice fiscal deficit targets. If some of the pending disinvestments of this year and of course the Life Insurance Corporation of India (LIC) IPO go through, it will be great. Otherwise, there will be issues in fiscal deficit.
Vishesh C. Chandiok: There is no 'silver bullet' to pull the Indian economy out of the slowdown. Boosting consumption, investment and exports are the three drivers of GDP growth and there were enough measures to provide an impetus to each.
Surendra Rosha: India is in the midst of a demand-side slowdown while being impacted by global cues and developments. The Budget announcements make various interventions and provide support measures to revive the economy. A tough balancing act, it is aimed at simplifying processes and enhancing ease of doing business with limited stimulus measures. While the Budget puts more money in the hands of the people and hence is aimed at driving consumption, economic recovery is likely to be gradual given the limited demand stimulus. The intent to double farm income by 2022 is aimed at boosting rural income and purchasing power.
Partha Chatterjee: The slowdown is significant and not a blip of one or two quarters. The long-run trend itself has fallen to a level not seen in the last two decades. Let us also understand that the slowdown is not caused by external factors or by one sector or one event - it is systemic uncertainty that has pulled the economy down. The systemic uncertainty was created, and it persists, because of the lack of clarity in the direction of government's economic policy. Moreover, there is a lingering question about the intent and the ability of the government to handle issues on the economic front. To that extent, the government had to first acknowledge the situation and take some bold measures to regain trust. There is some covert acknowledgement of this, and measures to deal with it like attempting to resolve tax disputes, including a tax payer's charter, or correcting the companies Act to decriminalise many non-compliances. These measures will help. Yet, what was needed were some big, bold ideas.
R.S. Sodhi: The Budget will help pull the economy out of the slowdown. The Finance Minister said that fiscal deficit will be reduced, she has also talked about a 10 per cent nominal GDP growth. If not 10 per cent, I am hoping for at least a 7 per cent growth. The Budget has put cooperatives and corporates on a similar platform by reducing taxes from 30 per cent to 22 per cent.
Nimesh Shah: From a series of measures required, the Budget announcements and its various provisions are one of the steps required to aid economic revival.
Sachchidanand Shukla: The Budget has chosen to go in for a fiscally prudent, long-term middle path. However, measures enumerated will not be enough to pull the economy out of the slowdown and will require more on the go as we navigate the next year.
Kiran Mazumdar-Shaw: While the Budget tries to address the concerns around slowdown, and going by the measures announced, may not slow it down further, it is unlikely to trigger any speedy revival either.
Preetha Reddy: Not immediately. But consistently, it will (help the Indian economy).
How long will it take for annual GDP growth to get back to 7 per cent plus range?
Roy: Even the finance minister was silent on growth projections. There was no mention of the growth slowdown in her speech or whether the government can go for an expansionary fiscal policy to trigger growth. The fact is that this was a contractionary Budget, and not an expansionary one. The total off-budget borrowing has been pegged at 4.6 per cent of GDP this year and, assuming India's nominal GDP growth at a reasonable 10 per cent, has been projected at 4.3 per cent next year. The bulk of this expenditure is meant to fund the Food Corporation of India, and hence does not address the slowdown. The government does not have any fiscal space to go for expansionary fiscal policy to drive growth.
Sachchidanand Shukla: At present a 7 per cent GDP growth number looks quite distant and may take us about 24 months to scale provided there are no shocks and the government responds with proactive policies. The long-term measures on agricultural supply chain, mitigating water distress, proposed Logistics Policy, extending the ambit of Ayushman Bharat, boost to export credit disbursement via NIRVIK scheme, setting up of Investment Clearance Cell, focus on digitisation to facilitate governance are medium- to long-term positives.
Suyash: There is no visibility of that in the near-term. However, over the medium term, if global conditions turn favourable and financial sector stress eases out, growth can start inching towards 7 per cent. This, however, will have to be accompanied by a sustained pick-up in private consumption, and an improvement in investment sentiment, which looks like a heavy lift.
Butani: It is clear that the government expects a huge increase in economic activity. The proposed measures relating to infrastructural reforms will indeed take time to fructify. Yet the trickle down effect will start showing soon, considering the reduction in the corporate tax rate.
Reddy: It will. Perhaps in the next 24 months or so on the back of measures that raise purchasing power and create more jobs.
Chandiok: In FY22 we could see a sharper correction than the IMF is predicting (6.5 per cent) currently. Of course, the global economy in the coming months could be a drag on this. Recession in the US has been on the cards and next year will be an interesting time to watch.
Chatterjee: The long-run growth rate has come down, and it is below 6 per cent for the first time since 2002. While the growth rate varies in every quarter and can be volatile, the trend growth rate is slow moving. It is possible that in some quarters in the next fiscal the growth rate will go above 7 per cent, particularly given the low base. The question is, will the growth rate be sustained so that eventually the trend goes up too. That is only possible if investment grows at a significantly high rate. I do not think there is any reason to believe that in the next fiscal year that will happen.
Shah: As per the 2019/20 Economic Survey, GDP growth at 6-6.5 per cent is likely for FY21. However, one has to be watchful of developments in West Asia and its resultant impact on crude prices, trade tensions and other geo-political developments.
Will the Budget lead to increased consumption or demand? How and why?
Suyash: The simpler personal tax regime announced will not add materially to consumption. In the absence of major announcements to tackle the current slowdown in the economy and address stress in the NBFC and housing industry, credit led pick-up in demand is unlikely to kick in. Therefore, it does not provide the necessary boost to the auto and real estate sectors.
Shukla: Moving up tax slabs would boost disposable incomes of approximately 42 million individuals in the lower tax slabs (incomes less than Rs 15 lakh). But given the way in which it has been done, by introducing multiple slabs and making it optional, makes it complicated. While this could, on aggregate, spur consumption of small ticket size items, it will be a function of individual's income and expenditure profile.
Importantly, there is a significant jump in customs duties on goods and appliances such as kitchenware, electrical appliances, footwear, stationery and toys to protect domestic players. But the flipside is that it could hurt household budgets and consumption.
Chatterjee: It seems the government lacks conviction - instead of moving into a new structure (of income tax), it gives a choice to continue with the old tax regime. When the FM says she does not want the common person to have to take a professional's help in tax filing, does she think that an individual can easily decide, without any help from a professional, which tax regime to go with?
Chandiok: The simplification of personal tax rates will lead to some transmission of cash in the hands of the consumer. Either way, it's good as household savings had fallen sharply from 23.6 per cent of GDP in FY12 to 17.2 per cent of GDP in FY18.
Gupta: Investment in infrastructure and employment generation have to be implemented well. That will have a far more long-term impact on consumption and growth; the forthcoming fiscal year will surely be better. It won't be an overnight growth story, but a gradual one. There is a definite feel good factor.
Will it be enough to attract foreign direct investment (FDI) and foreign portfolio investment (FPI)?
Shah: India remains an attractive destination for FDI and FPI. At a time when total outstanding debt globally in negative yield zone is close to $11 trillion out of $55 trillion, India provides an investment avenue which can yield higher returns.
Shukla: There have been several measures to induce foreign money in the economy such as removal of Dividend Distribution Tax at the company level, 100 per cent tax exemption on Sovereign Wealth Funds, concessional rate of withholding of 5 per cent extended to the interest payment made on municipal bonds, and enhancement in FPI limit in corporate bonds to 15 per cent from current at 9 per cent of outstanding stock. While all these are positive, growth differential - India's growth as compared to the rest of the world - will be one of the most critical variables in making India attractive to foreign capital.
Chatterjee: There are some areas where we may see FDI inflows like manufacturing networked products, or "assembling in India". Vietnam and Bangladesh have emerged as desirable locations for manufacturing FDI, and this Budget does nothing to make India more attractive for manufacturing vis-a-vis these countries.
Shaw: These will happen if there is huge investment opportunity. That may need some more enablers.
Butani: To woo foreign investors multiple measures have been announced. DDT has been abolished. The regime of taxing dividends at the hands of company was unfavourable for foreign investors for two reasons. First, investors were unable to take the beneficial tax rate as per the treaty of the country, and second, the credit for the tax levied on dividends was denied in the home country.
Further, to increase the investment in infrastructure, income earned by way of interest, dividend and capital gain by Sovereign Wealth Funds of foreign governments has been 100 per cent exempted. Additionally, the reduced rate of 5 per cent on interest on long-term bonds to non-residents has been extended. To increase investment in masala bonds or government security, the reduced tax rate on interest has been extended. The FPI limit in corporate bonds has been increased from 9 per cent to 15 per cent.
Reddy: It is good to start with, though we can have a bit more. It will come. The big announcement on sovereign funds will help.
Can Budget measures restart the investment cycle?
Suyash: As per the latest GDP data, investment growth is estimated to be flat at 1 per cent for fiscal 2020. A fall in consumption demand has led to lower capacity utilisation. The RBI's latest survey - Order Books, Inventories and Capacity Utilisation Survey or OBICUS - for the manufacturing sector confirms this. This, together with depressed business sentiment, means private investment decisions are being deferred. The recent cut in the corporate tax rate would further deleverage corporate balance sheets and reduce capital constraints but unless there is demand revival it will be hard for the private investment cycle to pick up. The Budget does not have enough muscle to push them quickly.
Shah: As per the RBI policy statement earlier this month, capacity utilisation was 68.9 per cent (July-September). Given this scenario, private investments are likely to be at a slower pace. The Budget alone won't aid in revival.
Chatterjee: There has to be a way to reduce aggregate uncertainty. All projects are inherently risky and investors take calculated risks. If the economy-wide uncertainty is too high, it increases the risk associated with all projects. If the aggregate risk can be reduced, it can kick-start investments all around. While the Budget has sporadically tried to address the issue, it lacks big ideas to ignite investments.
Shukla: The investment cycle has remained rather moribund due to a combination of global and domestic factors - confidence, capital as well as capacity utilisation, which have all been adverse. Unless these improve, investments will take a while.
Butani: It depends on how soon measures are implemented. If the government stands by its word of engaging intensively with measures to boost health, employment, infrastructure; speeds up projects stuck with states; and extensively relies upon technology, it should happen.
Chandiok: Extension of tax holiday in affordable housing, measures to boost tourism, 500 fishery farmer producer organisations, incentives for data centres, customs duty increases on furniture, footwear and medical devices, tax exemption for sovereign wealth funds, and of course, the Rs 100 lakh crore infrastructure spend will all boost investment. The new manufacturing policy in March 2020 and the proposed logistics policy have the potential to play a very important role in attracting FDI (particularly in relocating the supply chains) as well as domestic investment.
Shaw: In the infrastructure sector, it could. The reduced corporate tax may also help but at the end of the day, pick-up in consumption is crucial for any investment cycle to restart.
Reddy: The cycle will restart. Perhaps not instantly but it will. We need to be patient. It was a Budget critical to India's march towards a $5 trillion economy. Innovative tax reforms, focus on doubling agricultural revenue, impetus on education, entrepreneurship, nutrition, sanitation, healthcare, clean renewable energy and creating healthy and robust businesses has been the primary focus this year and they augur well for economy. It was encouraging that the PPP model was pronounced; it indicates the government's focus to include the private sector.
What do you think of the fiscal deficit level? Is it sustainable in the long term?
Roy: In last year's Budget, the government had concealed the actual fiscal position by making unrealistically high revenue projections. That is not the case now. As a result, we are seeing the possibility of a fall in net tax revenues as a percentage of GDP in 2020/21. The apparent contradiction is that expenditure-GDP ratio is increasing by 0.33 per cent in spite of fall in tax-GDP ratio. The government expects to compensate for the shortfall in tax revenues through increased disinvestment receipts. Whether a jump in disinvestment receipt like the one from Rs 65,000 crore in FY20 to Rs 210,000 crore in 2020/21 is sustainable remains a question.
Suyash: The fiscal deficit target faces some risks. Even as the nominal growth assumption seems realistic, fiscal deficit relies on ambitious targets for tax buoyancy, disinvestment receipts and telecom revenues, where there could be slippages. Together, they can upend the fiscal deficit target if there is no frontloading of divestments.
Shukla: The Budget has assumed a growth of around 16 per cent in receipts in FY21 (as compared to the revised estimate for FY20), against an assumed nominal GDP growth of 10 per cent which seems a tad aggressive. The excessive reliance on divestment and non-tax revenues makes it tougher, which can put the FY21 target of 3.5 per cent at risk, unless there are large spending cuts.
The disinvestment target of Rs 210,000 crore is quite aggressive and depends on stake sale of LIC and IDBI apart from a spillover from FY20 target of stake sale including that of Bharat Petroleum Corporation. Non-tax receipts will be the joker in the pack as they are budgeted to grow to Rs 385,000 crore (up 11.4 per cent y-o-y) in FY21 largely owing to expectation of revenues from spectrum (Rs 130,000 crore expected) sales. However, note that the one-time support from the RBI through capital transfer, Operation Twist, may be absent.
Chandiok: Clearly the 0.5 per cent slippage for structural reform is reasonable and desirable over the next couple of years. How this plays out will depend on the plans with IDBI Bank and other disinvestments, and the likes of the LIC IPO, plus how the tax to GDP ratio increases by enlargement of the tax base.
Has the Budget met the expectations that various sectors had from it?
Rosha: We believe it would help to have more guidance on the roadmap for PSU bank capitalisation and reforms. Given the low credit off-take, a more decisive stimulus to lift credit demand and some relief measures for the beleaguered real estate sector and NBFCs facing tighter liquidity would have been welcome. While these issues have received a mention in the Budget announcement, we await further guidance on it.
Reddy: I liked the focus on non-communicable diseases. There were some good elements such as encouraging local med tech industry. What exactly will be done, needs to be seen.
Can Budget 2020 raise rural incomes?
Roy: The growth in allocations to sectors like rural development, energy, and education is low. The fact is no expenditure switch has happened to address the growth slowdown.
Suyash: The only silver lining is on the rural consumption side. For example, while the PM KISAN scheme has an allocation of Rs 75,000 crore, similar to last year's Budget estimate, the revised estimate in 2019/20 is Rs 54,370 crore, which underscores constraints on the disbursal side. On the other hand, MGNREGA allocation at Rs 61,500 crore shows a 2.5 per cent increase over budgeted estimates and a 13 per cent decline over revised estimate levels. Further, PM Krishi Sinchai Yojana as well as PM Gramin Sadak Yojana have seen a 15 per cent and 2.5 per cent increase, respectively, over budgeted estimates, which should aid rural wage payments. Implementation is the key to success here.
Shukla: There is a clear reiteration of focus on the rural sector. This involves a mix of revenue and capital spending, with more emphasis on the latter, which is a good step. However, the outlay for FY21 for MGNREGA was pegged in line with previous years' at Rs 61,500 crore.
Sodhi: Doubling of artificial insemination and elimination of Foot and Mouth Disease and Brucellosis by 2025 will increase productivity and reduce the cost of production. It will bring more investments into the dairy sector. If done properly it will create 80 lakh jobs in rural India and 16 lakh jobs in urban India.
Gupta: If the schemes announced are implemented well there will definitely be an uptike in rural incomes.
Will it lead to new job creation?
Butani: To address the rise in unemployment, the government aims to create jobs by adopting a twin approach which includes educating and updating the skill set of jobseekers while providing incentives to business to create job opportunities. Education and jobs development is the third sub-pillar of 'Aspirational India'. About 150 higher education institutions will start apprenticeship embedded degree/diploma courses by March 2021. The government shall start a programme whereby urban local bodies would provide internship to fresh engineers for one year. To finance the education system, steps would be taken to enable sourcing external commercial borrowings and FDI.
The government recognises that the electronic manufacturing industry provides the most prospects. To boost domestic manufacturing and attract large investments in the electronics value chain, a new scheme focused on encouraging manufacture of mobile phones, electronic equipment and semi-conductor packaging shall be announced. This scheme with modifications shall be applicable for manufacture of medical devices as well. The government recognises that MSMEs are strong pillars for job creation. For enhancing the economic and financial sustainability, measures such as introduction of a scheme to provide subordinate debt for entrepreneurs of MSMEs will be seen as a welcome change.
Chandiok: Without doubt there are massive opportunities for job creation based on the measures that will restart the investment cycle. The lack of significant measures for the real estate sector went against popular expectations considering how much of a multiplier that sector has for the economy and jobs. We can expect significant additional announcements on this front in coming months.
Reddy: The FM has spoken about the service sector, tourism, health and skilling and all of it will work towards job creation.
Can Budget 2020 revive exports?
Shukla: India's exports, which have stagnated at 2 per cent of global trade, have to be approached holistically with review of processes, procedures and trade agreements.
Butani: The Government e-Marketplace (GeM) is a great opportunity for MSMEs by way of creating a Unified Procurement System in the country for providing a single platform for procurement of goods, services and works. The NIRVIK scheme will help achieve higher export credit disbursement, which will provide for higher insurance coverage, reduction in premium for small exporters and simplified procedure for claim settlements. The Budget also announced an unnamed scheme aimed to provide relief to exporters for the refund of duties and taxes on exported products.
These measures, which will incentivise smaller players, will also gradually lead to an overall increase in exports, provided implementation is both in letter and spirit.
Chatterjee: The Budget is not expected to have much impact on exports. There is some mention of custom duties rationalisation, but that is squarely aimed at protecting domestic industry.
What is the unfinished agenda?
Chatterjee: The key issue is addressing the systemic uncertainty. For this to happen, the government has to focus much more on economic policymaking. The government has to earn back the trust of investors within India and outside. It might have to involve and consult a wider community of professionals.
Shaw: A lot more could have been done for the pharmaceutical and healthcare sector, especially in terms of giving greater fillip to innovation, research and to boost exports.
Rosha: Given the challenges in the financial sector over the recent past, we would have hoped for some measures to address the liquidity concerns in housing finance and NBFCs. Also, while the Budget mentions PSU bank reforms and governance to make them more competitive, a clearer roadmap with regards to specific reform measures and possible privatisation would have provided clarity. Lastly, given the demand-side slowdown, a more pronounced demand stimulus would have helped boost the economy in the short term.
Shukla: The unfinished agenda remains large and challenging. First, land and labour need to be addressed urgently. Second, structural reforms such as GST and IBC need to be tweaked to make them more efficient and robust. Third, individual sectors such as automobiles, NBFCs, power, real estate and telecom need to be attended to.
Shah: Rural, SMEs and stressed real estate are areas where more measures need to be rolled out to address the challenges faced.
Reddy: A lot more could have been done for the manufacturing sector, more on Make in India.
Chandiok: Implementation is the main agenda that requires focus and intentional execution. For example, there have been many announcements to revive banking and non-bank credit, the auto sector and the real estate sector in the months leading up to the Budget - implementing those will revive the sentiment more than anything in the Budget. I am particularly pleased that the government is helping build 'trust' and the enhanced focus on that word is the ultimate test of whether India will actually become an easier place to do business.