More Bangs, Less Bucks
WITH A PRUDENT BUDGET, THE PRIME MINISTER SIGNALLED THAT EFFORTS TO REVIVE THE ECONOMY CANNOT BE AT THE EXPENSE OF EQUITABLE GROWTH. BUT INSTEAD OF GRADUALISM, HE NEEDS A FAR BOLDER ROADMAP WITH BIG-TICKET REFORMS TO ACHIEVE HIS $5 TRILLION GOAL BY 2024
The scattershot incentives in the budget do not add up to a credible roadmap to economic recovery
NARENDRA MODI BEGAN HIS SECOND TERM as prime minister with a series of big-bang reforms. In quick succession, he took decisions on longpending major issues, including ending the special status of Jammu and Kashmir under Article 370 of the Constitution, making massive cuts in the corporate tax rate to boost business and appointing a chief of defence staff to streamline the armed forces. In December, he rammed through the controversial Citizenship (Amendment) Act (CAA) in Parliament to enable non-Muslim minorities in three neighbouring Islamic countries to apply for Indian citizenship. Modi was expected to keep up the momentum when it came to dealing with the debilitating slowdown in the economy. After all, his government was staring at an 11-year low in the growth of the country’s Gross Domestic Product (GDP). Budget 2020 was seen as the Modi government’s best chance to course-correct and bring the economy back on track before it began to irreversibly damage the government’s credibility. Yet, after Union finance minister Nirmala Sitharaman delivered her exhaustive (and exhausting) budget speech in Parliament on February 1, many specialists, including the Board of India Today Experts (see The Delivery Deficit), were clear that it came nowhere close to being a breakthrough budget. Instead, the conclusion was that while the budget had a clutch of promising initiatives across various sectors, collectively, it had fallen far short of expectations. Worse, serious doubts were raised about the government’s ability to fund its multifarious initiatives and incentives.
So, why, when he has a reputation for biting the bullet, did Modi shy away from taking the big leap needed to pull India out of its current economic morass? Why, when he and his finance minister had undertaken the widest consultation with all stakeholders in the past months, was she allowed to present what many described as a functional budget rather than laying down a credible roadmap for recovery? And are experts right in being pessimistic about the outcome of the budget?
The answer to these big questions perhaps lies in examining how Modi dealt with the options available to put the economy back on track again. Those who know him well say that the prime minister does not allow ideological persuasion, either of the Left or the Right kind, to constrain his thinking. Instead, he is guided by the concern that economic growth must be inclusive. That he will go by the situation at hand and is willing to be pragmatic and break norms if need be. That rather than make citizens even more dependent on government doles, the economic and social schemes of his government will be designed to empower them. In his first term, saddled with back-to-back droughts that caused untold distress to farmers, and charged with being a “suit-boot sarkar” by the opposition, Modi took a sharp turn to the Left and projected himself as a messiah of the poor, the downtrodden and the farmers. He adopted a form of Swadeshi Socialism in his first term that is best remembered for the slew of development schemes that provided toilets, houses for the poor, cooking gas at subsidised prices and promised that highways and rural roads would be built at a rapid pace.
The experience of handling the economy in his first term seemed to have reinforced his belief
Modi was reluctant to breach the fiscal deficit and open himself to the charge of fiscal profligacy and the economy to a ratings downgrade
that gradualism in reforms could yield far better results for growth than major shake-ups or shock treatment. That learning came the hard way after the downsides of demonetisation became evident and the fast-tracking of the Goods and Services Tax (GST) left a sordid mess in its wake. A senior official, however, clarifies, “It would be wrong to say we are averse to big-bang reforms—in the first term, apart from GST, we introduced the insolvency code for banks and permitted foreign direct investment in a host of new sectors.” Modi 2.0, on the other hand, seems to be characterised so far by a shift to the centre or a middleof-the-road approach to development. This has become imperative as the government, in a bid to revive growth and fund its massive social sector schemes, has signalled that it will open up the economy to far greater private and foreign investment and control.
To do so, Modi, soon after being re-elected prime minister, announced the ambitious goal of doubling the size of the Indian economy to $5 trillion in five years. He then launched a slew of measures to rev up the four main drivers of the country’s economic growth: individual consumption, private investment, government spending and exports. In the July 2019 budget, Rs 70,000 crore was set aside for recapitalising debt-ridden public sector banks to ease the debilitating credit squeeze in the financial sector. To boost consumption and job-creation through government spending, Modi, in his Independence Day speech, announced that his government was committed to spending a massive Rs 100 lakh crore over five years on new infrastructure projects. In September, to further encourage private investment, he put more money in the hands of businesses by announcing a hefty reduction in the corporate tax rate. But, he was disappointed when investment didn’t pick up, with most businessmen preferring to pocket the profits or pay off debts to bankers. The government also worked out ways to ease constraints sectorwise. On the export front, slowbalisation as well as rising protectionism have limited the government’s hand—it has yet to come up with a cohesive plan to boost exports.
Alongside, Modi has had to contend with pressure from Sangh Parivar organisations, particularly the Swadeshi Jagran Manch, who have resisted the opening up of the economy to foreign investment or disinvestment in public sector undertakings. They have also been pushing for tighter e-commerce regulations to prevent the Indian retail trader and kirana owner (the Parivar’s main support base) from being elbowed out. Officials in the know say that the Rashtriya Swayamsevak Sangh (RSS) brand of nationalism, with its vision of making India a great power, resonates with the Modi government. But when it comes to the demands of swadeshi votaries for making India self-sufficient in all products it consumes and shunning foreign investment, Modi treads a more pragmatic path. While he launched Make in India with much fanfare in his first term, the 2020 Economic Survey talks of ‘Assemble in India’, though limited to certain sectors such as electronics.
Budget 2020 makes several beginnings in ironing out these contradictions by offering limited railway routes and district hospitals for public-private partnership. Perhaps the most interesting turn is in the Modi government’s articulation of wealth creation. The Economic Survey advocates that markets move towards what it termed ‘ethical wealth creation’. However, as another official pointed out, Modi is clear that wealth creators should not be restricted to a clutch of industrialists, but be spread across all sections of society. Giving Mudra loans and providing incentives for the start-up and MSME sectors were initiatives that helped create their own form of wealth for a vast swathe of Indians who had so far been denied the fruits of development. Budget 2020 should, therefore, be seen as a continuum with, and evolution of, the policies Modi has followed, rather than a decisive break from them.
Given that private investment was still sluggish as was export growth, among the imperatives for Budget 2020 were to boost demand by putting more money in people’s pockets and creating more jobs through massive government spending. But officials from both the finance ministry and the Prime Minister’s Office were conscious of the tremendous resource constraints before them. With the massive shortfall in GST collection and with only a quarter of the disinvestment goals met for 2019-20, revenue receipts have been precarious. Officials reveal there was a major debate in the finance ministry and the PMO over doing away with the fiscal deficit target to boost government spending. This was something the previous chief economic advisor, Arvind Subramanian, had advocated vociferously.
Modi, though, was dead against breaching the fiscal deficit more than was permissible under the Fiscal Responsibility and Budget Management (FRBM) Act. Says a senior official, “In his heart, the prime minister believes in fiscal prudence. He is not a big spender. He does not waste public money and states that while it should be used to encourage investments and consumption, it should not be at the cost of public interest.” Modi’s other concern was that it could eventually result in high inflation and hurt the com
Modi is clear that wealth creators come from all sections of society, not just a clutch of industrialists
mon man. Not just that, the government would also have to borrow from the bond market and crowd out private sector borrowings in the process. Modi also insisted that the budget provide a glide path to bring the deficit back on track to deflect any charge of fiscal profligacy or downgrading by international rating agencies.
To boost individual consumption and private investment, the Modi government is banking on five main measures in Budget 2020. One, the tax concessions it has extended to the middle class by significantly lowering rates for specific income brackets. To encourage foreign investment, it has done away with taxing companies via the Dividend Distribution Tax. To garner funds, the government has taken its boldest move in the budget by announcing a limited IPO for the Life Insurance Corporation of India, its public sector behemoth. It has also announced an ambitious disinvestment target of Rs 2.1 lakh crore, though going by its performance last year, doubts are being raised whether it will be achieved. However, even if it falls short of its disinvestment target, officials are confident that it will be compensated by revenue earned through the resolution of income-tax disputes, that have locked up Rs 9.41 lakh crore, thanks to the budget’s promise of waiving penalties if dues are paid by March 31, 2020.
Modi does not want Budget 2020 to be judged in isolation but be seen as part of a long-term plan to make significant but necessary shifts to revive economic growth while ensuring inclusiveness and equitable sharing of wealth. He has indicated that there is a limit to government spending and wants private industry to direct its animal spirits towards the new sectors he has opened up instead of the constant whining and concession-seeking. Modi’s budget is an exhortation to individuals, particularly the young, to put their shoulder to the wheel of development. While these are good intentions, the true test will lie in the speedy and effective implementation of the major initiatives in the budget.
The main problem is that while Budget 2020 espouses a slew of reforms, its attempts to please all have ended in it displeasing many. It has come up short in alleviating pain in several key sectors such as automotive, steel, real estate and power. There are also major structural problems, whether in land, labour or capital, that the Modi government needs to address. There is need for radical surgery in the infrastructure sector, particularly in railways. As India did in the 1990s with the open skies policy for aviation, the government should free up the railways, including trains, routes, stations and maintenance, to the private sector.
One of the main reasons that exports are stagnant is that Indian industry is not competitive enough and gets the government to raise tariffs to shield it from international competition. Instead of protecting domestic industry, the Modi government should open out the economy in more sectors so that Indian businessmen learn to compete with global players. In the financial sector, experts argue that rather than merging public sector banks, it is time the government ceded control of banking to the private sector for greater market efficiency. In agriculture, the government has taken some initiatives towards contract farming in this budget. But what this sector needs is an end to the obsession with subsidies and production of grains, and instead strongly focus on an income-oriented revolution for farmers. Energy is another sector crying for big changes.
In short, the Modi government needs to come up with a far bolder roadmap and big-ticket reforms to put the economy back on the fast track if it has to achieve its $5 trillion goal by 2024. A policy of gradualism will not work, as reforms need to be done pronto. For, as John Maynard Keynes warned, “In the long run, we are all dead.”
Instead of businesses whining for more government concessions, Modi wants them to take the risks necessary to grow their sectors