As the Narendra Modi government starts work in the second term, it faces an economy that is in a bad shape. The big driver of the economy, rural India, is in trouble. Add to that slowing consumption, exports not growing enough, fall in sales of automobiles and worrisome prospects on the monsoon this year. What can the new Finance Minister, Nirmala Sitharaman, do in the Union Budget to provide the much-needed boost to the economy?
To discuss this, Business Today organised a roundtable discussion. The participants included Arvind Virmani, former Chief Economic Advisor in the finance ministry and Chairman, Foundation for Economic Growth & Welfare; Dhruv M. Sawhney, Chairman & Managing Director, Triveni Engineering and Industries; Mahendra Singhi, President, Cement Manufacturers Association & Managing Director and CEO, Dalmia Cement (Bharat); Sunil Sinha, Principal Economist, India Ratings; Bidisha Ganguly, Chief Economist, CII; and Amit Rana, Partner, Tax & Regulatory, PwC. The discussion was moderated by Prosenjit Datta, Editor, Business Today. Edited excerpts:
Prosenjit Datta: What do you think are the opportunities and threats that the budget can address?
Arvind Virmani: There is a domestic angle and an external one. Annual growth has been slowing in the last two years. A subset of that is what we are going through. That is a threat, but I am not sure if it is going to be addressed much in the budget. On the external side, the threats are in terms of sanctions and trade, but it is also important to focus on opportunity.
The opportunity from this tariff war is that supply chains are clearly shifting. People who have invested in China are shifting to other countries, and India comes up pretty high. The opportunity is to make manufacturing in India real. There is the whole issue of appropriate balance of monetary and fiscal policy, continuation of expenditure reform and tax reforms issues, which are closely connected. This is the time to do it because of this great opportunity.
Bidisha Ganguly: We know there is an economic slowdown and the budget will try and address it. However, there is a huge constraint in revenues. Last year's revenues have fallen short, so I would not wish the government to step up expenditure on its own. There are ways in which they can raise money - disinvestment, monetisation of assets - and use those to keep the deficit under control. Tax reform is important for investment to pick up. The critical thing is to bring down overall tax rates. Equity is taxed very heavily. You have corporate tax and dividend distribution tax. MAT (minimum alternate tax) is also high. These discourage investment. One big boost could be given by removing all incentives and reducing the tax rate. It was being brought down for smaller companies, but I think all companies now need to see a lower tax rate with incentives removed.
Dhruv M. Sawhney: We have a unique opportunity, a strong leader who knows industry well with a five-year mandate. We should not underplay our potential. While I give a lot of credence to short term, I want to take a longer term view, and in that I think the Prime Minister and his team can look at a whole new approach.
Japan, Korea, China, and Thailand grew by being global. We have grown the other way. For a decent manufacturing company, being global is a necessity; else, it will die, especially an India-based company. I am talking about a broader scenario than the first 100 days, so the budget is one of the parts. We cannot get jobs without growth and you cannot get growth by just the domestic market. What is not needed is a subsidy regime for export. It is about selling India. We have a Ministry of External Affairs and a different department for international trade. It's time to combine these. There is no harm in realising that we have a problem.
Mahendra Singhi: The government has spoken about investing Rs 100 trillion in infrastructure. In this budget, the government can give signals on how investments would be coming. That would send the right message not only in India, but globally too. The government has to now speak about how it would support investment and growth. In steel, aluminium or cement, the process of putting up a project, which used to be three-four years earlier has gone up to four-eight years because of delays over allotment of mineral resources. The auction process takes time and then comes land acquisition. The cost of land has risen 5-10 times.
Second is how much would they be investing in different types of infrastructure. Third is to make these projects attractive. A lot of innovations have to be done in taxation. Steps like accelerated depreciation, lowering MAT and avoiding double and triple taxation would be required. Clear messages are required from the government.
I attended a pre-budget meeting with the Finance Minister. The theme was infrastructure, PPP, management of environment and avoiding use of fossil fuel. On climate change, the government committed to 175 gigawatt solar and wind power by 2022. It has to now come out with policies that will facilitate installing solar power plants. Agriculture plays a very important role and the government has to put more focus on technology.
Sunil Kumar Sinha: Some of the challenges that the previous BJP government inherited continue. The first is reviving private corporate investment. In five years the government has taken steps that enhanced the capex significantly. It was believed that this will pull private investment and the investment cycle will revive. But a different story took place. State plus central government together constitute just 12 per cent of the total investment in the economy. So, no matter at what rate government investment grows, it is unlikely to make a significant difference as far as the total investment is concerned.
The biggest investors are the private corporate sector and what is classified as the household sector, which includes the unincorporated segment of the economy. Together they constitute 75 per cent of investment. The real estate sector is down and out, so unless the problems which it faces are addressed, it is unlikely you will see household investment picking up. Capacity utilisation since 2014 has been in the 70-75 per cent range. Expecting manufacturing to take additional investment is difficult to imagine. Aggregate private corporate investment is still growing at 7-9 per cent, but this is maintenance capex. It is not incremental or brownfield capex.
Amit Rana: To realise the potential of the resources that India has will require structural reform. Unfortunately, the problem is politics. The government has a mandate for five years, but three state elections are coming up. If the government loses, then the appetite for fundamental change goes. Modi-1 did start with land reform, but could not follow through after the suit-boot ki sarkar campaign.
Datta: How can the government raise resources?
Virmani: While people have been pointing towards reduction in the investment-GDP ratio, there is no reduction in corporate investment. What they are questioning is growth. The second interesting data is the ratio of government capital expenditure to total expenditure; this was just 10 per cent in 2014. In the next two years, it rose to 12.5 per cent, but in subsequent two years it was down to 11.5 per cent. I don't know what has happened in the last year; it will be in the budget. We are beginning to slacken again. The government will not have resources unless it cuts down on consumption.
Sawhney: We mentioned that capacity utilisation is 65-70 per cent. Let's say those figures are correct. For the capital goods sector, I think they are correct. In the short term, nobody is going to put up a brownfield project. He is first going to go to 90 per cent capacity utilisation, and then he is going to go to another project, but that is in two to four years. You can get a kicker through export.
Rana: On the fiscal side, the tax to GDP ratio is a marker. It's the lowest in OECD (Organisation for Economic Co-operation and Development). The ratio for state-centre taken together is 16-17 per cent, so clearly there is headroom to grow. The question is how to get there. One option is the very large part of the economy that is untaxed even today. The government started on that in NDA-1; it has to now follow through. The entire digital effort in GST is throwing up huge amounts of data for the government. It is collecting a lot of data from annual information returns. Now the time has come for all of that to be calibrated.
Datta: Will there be a transaction kind of cess on MAT for loss-making companies? It seems to be one of the proposals being talked about.
Rana: Everything we do is to augment short-term revenue. There is not enough policy-level thinking on how revenue should be raised. Indian corporate tax rates are the second highest in the world. Saudi Arabia is 55 per cent; we are at 50 per cent including DDT. That does not make sense. If you want investment to come, those tax bases will just not make money. There is a huge room to reduce corporate tax. The government said it would reduce it to 25 per cent, but they got tepid in implementation. Investors say that if the rates are this high, why not go to other destinations. Also, disputes go on for 20-25 years. When we talk to clients, the constant refrain is to tell them a way to resolve it. You can sit across the table with the US IRS and actually settle a dispute. In India, we cannot do it. We have to get that under control and make structural changes.
Singhi: Divestment of inefficient companies can bring in a lot of money for the government to spend on infrastructure or reduce fiscal deficit.
Datta: What about agriculture's role in this?
Rana: Tax on agriculture is an oft discussed issue. The NITI Aayog made this comment in 2015. The next day, Arun Jaitley said we are not doing any of that. It's a political hot potato, but there is a need to do this not only from a revenue garnering perspective but also as a means by which revenue is actually sheltered from taxation. This government is great at communication, and it requires a concerted communication campaign to position it in a way that you know there are rich farmers. For the purpose of tax determination through agriculture, this has to be addressed.
Sawhney: As a group, we deal with 300,000 farmers every day. Let me give you the example of UP sugar. Our farmers have increased their income by 50 per cent in the last three years. It happened through technology, and infrastructure. The government has to step in through targeted infrastructure and R&D. It has to use as much R&D in how much you need to dig into the ground to improve productivity as in which type to pesticide to use. The BJP can do it in states where they are in power. Plus, there has to be some indication of how they are going to raise farmers' incomes. The government has to say that we are still going to do it even though agriculture is only 16 or 15 per cent of GDP.
Sinha: Agriculture, at the current juncture, requires a paradigm shift. The thought that if there is shortage of food grain, more and more food grain should be produced, and that agriculture will provide the solution to many of the questions, has to go away. We have to think about agriculture in a very different way. Otherwise, you will get into a problem in which UPA-2 got into and then NDA-1 got into. They raised the MSP prices to compensate the farmer.
The food export policy also needs attention. For instance, what do we do with stored food grains? We are uncompetitive; we can't sell it in the international market. Our food export policy is so flip-flop that we want to export it according to our convenience, not according to the demand-supply situation.
Virmani: I want to make two points, one about taxes and the second is tariffs. Till around 1990, the philosophy was that you have certain expenditure, you need so much taxes. The other was that you simplify tax, broaden the base, and increase voluntary compliance. We know the first philosophy failed in the 1980s. In the past 10 years, we have been going back to the 1980s philosophy. It will fail again. The revenue department laid out a time path for reforms, for the rest of the tariffs. In agriculture, there is too much dependence on quantitative restrictions (QRs). There is a need to shift from QRs to tariffs.
Sinha: With respect to resource mobilisation, there is no easy way out. The biggest source of revenue generation is growth. During 2004-08, fiscal consolidation was not due to expenditure reforms. It happened because of a higher rate of growth which led to higher revenue collection. Even now the overall framework of the budget should be to focus on how to accelerate growth. If we get that right, some problems would be addressed. Can we go for expenditure reforms? Look at the composition of expenditure. If 60-70 per cent of your expenditure is committed, there is very little headroom for expenditure reform. They have actually resorted to a lot of off-budget expenditure, which is now known as EBRs (extra budgetary resources). If you include EBR into the fiscal deficit, then it comes close to 4 per cent. Because of the rigidity of expenditure you have very little leeway and whatever additional resources you require, we will have to resort to EBRs.
Datta: The Vajpayee government had a successful disinvestment strategy, but the UPA did not. In the first five years of Modi, disinvestment was not through privatisation, but by using somebody else's bonds. The amount of land the government holds could easily be sold to raise resources.
Ganguly: We have recommended for a very long time that public sector land be used for giving to industries. Government assets can be monetised by giving their operation and maintenance to the private sector. The government will earn a steady revenue and the private sector will participate in maintaining that asset. A more medium-term view should be taken and FRBM (Fiscal Responsibility and Budget Management) targets should be looked at again. Look at the quality of the fiscal deficit, rather than just the quantity.
Singhi: India has more than 5 million hectares of wasteland. One has to explore that. What I understood is that the constraint may be of water. Bamboo grows with little water. Bamboo can generate revenue not only for the government or farmers, but for industry too. If the government can come out with a policy on how to use wasteland, it will help farmers. It can also be used for putting up solar power plants. If the cement industry wants to go for 100 per cent solar power, they can generate 20,000 megawatts of renewable energy.
Datta: How can the government cut down expenditure, be it in subsidies, PSUs or other things? Also, what does it need to do to get revenues, which would make things easier for industries?
Virmani: The simplest, most elementary way to raise revenues is to sell. Air India has now become an excuse. But you cannot sell a behemoth, because few people can buy it. You are wasting money year after year on these loss making public sector units and public sector banks.
Sinha: What we need is a roadmap. A roadmap for the next five to 10 years could say that from this rate we will bring taxes down to this figure. A clear roadmap will assure not only the corporate sector, but also the very large number of investors. This budget could lay down a roadmap for the next five years, with respect to tax rates, where it is headed, what process would be follows for disinvestment, what process will they follow in direct taxation because this is an area that has been languishing. A GST-like effort should be there in direct taxation too. If a five-year road map is set, this budget would have done a great job for the country in terms of setting the priority and vision. Along with that, you can start focussing on what is required to step up overall growth, because eventually that is what will give you the resources.
Ganguly: Dispute resolution should be there in taxation and also in infrastructure projects, where a huge amount of money is stuck due to delayed payments by different arms of the government. A simple survey that we had done among some large companies, which have invested in that space, showed that Rs 70,000 crore is just in delayed payments. And some of it is stuck in arbitration for many years. The PM should bring back the project monitoring group.