Missing the Big Picture
BUDGET 2020 PLAYS IT TOO SAFE. THERE ARE NO NASTY SURPRISES, BUT NOR IS THERE A CREDIBLE ROADMAP TO ECONOMIC RECOVERY
THERE IS SOMETHING unique about the budgets presented by the Modi government’s finance ministers. They are mainly expressions of long-term intent, as opposed to policy statements with a bearing on the near-term prospects of individuals or businesses. The government’s record shows that major policy changes—such as implementation of the GST, the new Insolvency and Bankruptcy Code or the corporate tax cuts—will not come on high-visibility occasions such as budget day. In that sense, aside from the alternative income tax regime—which, on the face of it, puts more money in the hands of an upwardly mobile middle class (annual income below Rs 15 lakh) —Budget 2020 was something of a non-event. To be sure, some sectors got attention. For instance, finance minister Nirmala Sitharaman outlined 16 measures for the agriculture sector, reiterating the government’s aim of “doubling farmers’ incomes by 2022”. However, as agriculture economist Ashok Gulati puts it: “That requires an almost 15 per cent per annum growth in their real incomes over the next three years. Can this even be achieved? I wonder at the lack of understanding of the issues and the challenges involved.” (See BITE, page 44.)
When india today, in its pre-budget issue, described Budget 2020 as a ‘do or die’ moment, we were not overstating its importance. This was the first full budget of a new decade, presented in the midst of an economic crisis. Advance estimates show that India’s growth could slip to an 11-year low of 5 per cent for fiscal 2020, down from 6.1 per cent in fiscal 2019. Investments and consumption have been sliding. “The economy is going into a downward spiral,” says Vinayak Chatterjee, chairman of Feedback Infra, an infrastructure services company. “It requires a major intervention to convert this vicious spiral into a virtuous cycle of growth and investment.”
Broadly speaking, governments have three major tools with which to intervene in the economy—monetary policy, fiscal policy and structural reforms. Of those, monetary policy has gone as far as it could, with results both modest and slow. Through 2019, the Reserve Bank of India (RBI) cut the repo rate by a cumulative 135 basis points (1.35 per cent), but loan rates did not follow suit. It was now up to the government to seize the budget moment and turn policy levers in a way that put more money in the hands of people, in the hope that it would encourage them to spend, and show private investors a
“We should not be seen as a profligate economy. This is a well-balanced budget”
Atanu Chakraborty, Economic Affairs Secretary, Government of India
path to profit. But the broad consensus among economists and industrialists is that this risk-averse budget may have passed up that opportunity. There is also a pervading sense that the government failed to address the massive crisis of confidence dragging the economy down.
If the broad brush strokes of the budget are conservative, it does, on the positive side, have some measures to pep up agriculture and infrastructure. The government has also signalled an intention to rein in tax terrorism via its legacy dispute settlement scheme and a taxpayers’ charter that defines the obligations of the tax department and the rights of taxpayers. Its decision to increase the insurance on deposits from Rs 1 lakh to Rs 5 lakh offers better protection to depositors, while its incentives for start-ups with turnovers less than Rs 100 crore should have a positive impact on new business formation. Similarly, the new income tax regime is a well-intentioned measure targeted at a specific segment. However, these measures may be too piecemeal for an economy struggling along at 5 per cent growth, especially given the government’s stated ambition of almost doubling its size to $5 trillion by 2024.
A major challenge facing the government is the lack of resources. Revenue collections have failed to meet targets: net tax revenues fell short by Rs 1.45 lakh crore, while disinvestment revenues fell short by Rs 40,000 crore. GST revenues alone were Rs 51,000 crore below target. This problem is compounded by the fact that the finance minister has to keep the fiscal deficit within the limits imposed by the FRBM Act, which mandates that the fiscal slippage in a year must be under 0.5 percentage points. As a result, allocations to some social schemes were cut significantly.
Experts have also expressed concerns about the methods the government has adopted to bridge the fiscal gap. For example, borrowings against the National Small Savings Fund have nearly doubled, while deferred payments to public sector enterprises such as the Food Corporation of India (FCI) force these institutions to borrow from the market, raising the actual deficit higher than the budget suggests. On the latter point, Maitreesh Ghatak, a professor at the London School of Economics, says the unpaid bill to FCI is about Rs 2 lakh crore, while the fiscal deficit is Rs 7.6 lakh crore—taking that into account would bring the actual deficit closer to 5 per cent of GDP.
A central question is if the budget stimulates demand
“There is a gap of Rs 4-5 lakh crore in infrastructure financing. Investors have not seen a credible plan”
Vinayak Chatterjee, Chairman, Feedback Infra
enough to encourage industry to invest in new capacity. Adi Godrej, chairman of the Godrej Group, says the provisions in the budget were not sufficient to turn around the economy. “The income tax cuts could have been done without taking out exemptions,” he says. Economists agree. “The income tax tweaks may succeed to a very limited extent,” says Madan Sabnavis, chief economist at Care Ratings. “It may mostly benefit those with low incomes. If others decide to stick to the old regime, the status quo will continue.”
Similarly, Chatterjee argues that the infrastructure push announced in late December may not bring about the desired result. “The Rs 102 lakh crore infrastructure push will generate economic activity on the ground but the impact will be staggered and slow,” he says. “Also, there is a gap of Rs 4-5 lakh crore in the infrastructure financing plan. Investors have not seen a credible financing plan.” He also says the budget could have taken a much bolder approach. “We have been arguing for a development financial institution,” he points out: “The budget could have taken a stand on the Kelkar Committee recommendation that public-private partnerships in infrastructure be brought back.”
On a related note, the government has also attempted some structural measures to improve business and consumer confidence. One is the ‘vivad se vishwas (from dispute to trust)’ scheme to resolve the roughly 483,000 direct-tax disputes pending in various appellate forums. Under this scheme, taxpayers will get a complete waiver of interest and penalties on disputed taxes if they pay up by March 31, 2020. Related steps include a promise to decriminalise non-compliance with some provisions of the Companies Act, including non-filing of returns. However, even in these cases, it is the execution of such measures—not their announcement—that matters. The government’s move to do away with the dividend distribution tax has a similarly nebulous effect. Though it leaves companies with more cash in hand—especially those that pay high dividends, such as TCS or Hindustan Unilever—it imposes a larger tax burden on shareholders, who will now be responsible for taxes due on dividends. In either case, this cannot be seen as immediately spurring demand.
Some provisions kicked up so much dust that the government had a tough time clarifying them. Non-resident Indians were alarmed to learn that those of them who
“The income tax cuts could have been done without taking out exemptions”
Adi Godrej, Chairman, Godrej Group
were not paying taxes in other countries would henceforth be taxed in India. But a day later, the government clarified that it was only the income earned in India that would be taxed.
Ajit Ranade, chief economist at the Aditya Birla Group, says that while fiscal realities are grim with no real room for “big-bang” measures, the budget did not lay out the macro context and acknowledge the difficulty that the economy is going through. However, the key architects of the budget defend its lack of big-bang initiatives. Economic affairs secretary Atanu Chakraborty says: “We should not be seen as a profligate economy. We have been realistic and this is a well-balanced budget.” Though the government appears confident, this was not a perspective shared by markets on budget day. FM Sitharaman, in her address on February 1, said that the budget would “boost incomes and enhance purchasing power”, going on to add: “Only through higher growth can we achieve that and have our youth gainfully and meaningfully employed.” However, the Sensex crashed the same day, closing almost 1,000 points down—its steepest fall in over a decade.
Banking and finance secretary Rajiv Kumar argues that the budget has brought about a structural change that will create a more robust financial system. “We have corrected the mess in the banking sector. If you are dealing with depositors’ money, you have to be responsible. So, cooperative banks need to go through banking regulation... this is all part of cleaning up the banking system,” he says. In the financial sector, the news is mixed. While credit outflow might be picking up—the government says 76 housing finance corporations increased their cumulative market exposure by Rs 82,121 crore in a two-month period till November 19—previously announced initiatives seem to have faltered. For instance, an NBFC securitisation package announced last year has yet to be released. And though a Rs 25,000 crore real estate fund was announced last year, the State Bank of India, the country’s largest lender, has announced that it cannot disburse the money.
Nonetheless, Jayant Sinha, chair of the standing committee on finance, says that this budget “has something for everyone—farmers, industry, taxpayers. It provides for tax cuts and infrastructure spending whilst maintaining fiscal discipline”. This, perhaps, highlights another problem. In an attempt to please everyone, the FM has spread the government’s already meagre resources too thin. Another major problem is that the budget makes some very optimistic assumptions, such as the government being able to garner Rs 2.1 lakh crore through disinvestment. The actual record makes this figure look like a desperate hope, and chances are even-to-high that the government will miss the disinvestment target this year. This is a significant problem because the government’s total expenditure in this budget is about
Rs 30 lakh crore, while net revenues are about Rs 16 lakh crore. The balance depends on proceeds from disinvestment, non-tax revenue, dividends and profits from public sector companies, all of which are, at best, uncertain.
What is evident is that this budget represents a missed opportunity to present a clear roadmap for the economy, and that the government’s battered finances severely limit what it will be able to do to get the economy going again. Perhaps the country has to get accustomed to what will be a new normal in terms of growth, at least in the short term.
“We have corrected the mess in banking. If you are dealing with depositors’ money, you have to be responsible”
Rajiv Kumar, Banking and Finance Secretary Government of India
“The budget provides for tax cuts and infrastructure spending while maintaining fiscal discipline”
Jayant Sinha, Chairperson, Standing Committee for Finance
DESPITE THE GOVERNMENT’S high-decibel ‘Make in India’ campaign, manufacturing has languished in the country. This isn’t good news as the sector is a big job provider. The finance minister did announce a few schemes, among them one to make India a hub for electronic manufacturing, an announcement in line with the Economic Survey’s ‘Assemble in India’ pitch. A National Technical Textiles Mission was also announced. With an outlay of Rs 1,480 crore, it is expected to boost textiles and help India regain its competitiveness. But these proposals are too little to generate jobs in the sector or attract big-ticket investments.
Experts, however, say budgetary announcements alone cannot boost manufacturing. States have a big role in supporting manufacturing, says R.C. Bhargava, chairman of Maruti Suzuki. “States have to look at lowering the cost of manufacturing through incentives such as tax holidays,” he says. Moreover, demand has to pick up if manufacturers have to set up new capacities. A product like a car has a huge multiplier effect in job creation. But it continues to be taxed heavily.
What about the lower income tax rate the government has announced? “The Rs 40,000 crore worth of income tax sops are a small per cent of the overall consumption expenditure. It is not a gamechanger,” says Bhargava. What is needed is a reduction in the cost of manufacturing goods.
The textile sector hailed the abolition of the anti-dumping duty on purified terephthalic acid or PTA, a key raw material in the polyester industry, imported from countries such as China, Indonesia, Taiwan and Malaysia. Despite shortage, PTA attracted anti-dumping duty of $27-160 per tonne, depending on the exporting country. Its removal will make India more competitive, says Ashwin Chandran, chairman, Southern India Mills’ Association.
$27160 ANTI-DUMPING DUTY PER TONNE ON PTA ABOLISHED
BY LINKING AGRICULTURE IN BUDGET 2020 to ‘aspirational India’ and introducing new concepts like ‘Krishi Udaan’, ‘Kisan Rail’ and ‘Bharat Net’, finance minister Nirmala Sitharaman has attempted to tie the destiny of the hapless Indian farmer to the hallowed notion of market liberalisation. The 16-point action plan for reviving agriculture in Budget 2020 has some good tidings for farmers. With an allocation of Rs 2.83 lakh crore and a renewed focus on contract farming, land leasing, livestock and marketing, and state support for fisheries, milk production, apiary and livestock, the budget aims to make the Indian farmer competitive. Yet, critics argue, with no increase in PM-Kisan pay-out to farmers—the popular election announcement of Rs 6,000 to each farmer in 2019—the agricultural budget falls short. Cuts in MNREGA, PM-AASHA (an umbrella scheme to plug holes in procurement and MSP) and a drastic reduction in fertiliser subsidy, the big promise of doubling farm incomes in five years seems difficult. Moreover, while allocation for agriculture might have increased, incomes and rural wages have dropped.
Sitharaman announced support for key reforms in the state government domain. “We will encourage states which implement the following laws—Model Agricultural Land Leasing Act (2016), Model Agricultural Produce and Livestock Marketing Act (2017) and Model Farming and Services (Promotion and Facilitation) Act, 2018,” she said. Ashok Dalwai, secretary, agriculture, and chairperson of the doubling of farm incomes (DFI) committee, says, “The announcements are in total sync with the DFI report.
Income generation has to go beyond field crops. All four subsets of agriculture— horticulture, livestock, fisheries and field crops—have been covered here.”
But will market reforms alone lead to income generation for farmers? Unlikely, says agriculture expert Devinder Sharma. “The Budget expectation was for more money in the hands of farmers, which would in turn create more rural demand. More rural demand would lead to more consumption, driving up the GDP. That was the surest way to emerge out of a slowdown,” he argues.
As for the MNREGA cuts—critics say they are to the tune of 13 percentage points in budget 2020 compared to 2019—an ex-agriculture secretary says, “Critics mistakenly compared revised estimates (RE) of FY19 to budget estimates (BE) of this year. The experience of the past six years show that REs have always been higher than BEs. If there is a demand for work, the NDA government has always increased the expenditure on MNREGA and other related programmes for the rural poor.”
Meanwhile, to combat the water crisis, the Jal Shakti Abhiyan (water conservation campaign) will focus on 100 waterstressed districts in rain-fed states across the country (313 blocks have been termed ‘critical’ in states like Tamil Nadu, Rajasthan, Uttar Pradesh and others, while 1,186 blocks are ‘over-exploited’).
On the crucial issue of doubling farm incomes by 2024, chairman of the Bharat Krishak Samaj, Ajay Vir Jakhar, says linking aspiration to agriculture may sound novel, but the truth is today “agriculture is nobody’s aspiration. All farmers aspire for non-farm jobs”. Even allocation has not increased in real terms since it has merely kept pace with inflation, he adds. He also points to other contradictions like expanding PM-KUSUM while the money made available for solar panels has been reduced in the budget. So is there any chance of doubling of farm incomes? “No, the budgetary allocations do not match the intent. The truth is the bureaucracy is misleading the finance ministry... the steps needed to double farm incomes are simply not there,” says Jakhar.
THE UNION BUDGET HAS SOUGHT TO GIVE A major impetus to infrastructure on the back of “accelerated development of highways”, with the road transport & highways ministry being allocated Rs 91,823.2 crore, as against Rs 83,016 crore in the previous fiscal. The allocation is the biggest among all infrastructure verticals. Finance minister Nirmala Sitharaman said in her budget speech that the 1,250 km Delhi-Mumbai Expressway, a critical component of the Bharatmala Pariyojana, will be completed by the end of 2023. She announced five other cross-country expressways as well. Most experts, though, believe this will be difficult to achieve without private investment, which could partly be determined by the pace of ongoing projects. Several projects in the Bharatmala Pariyojana are witnessing delays owing to cost overruns of up to 55 per cent.
In railways, private investors have been offered 150 routes to ply trains under the PPP (public-private partnership) model. While railways will handle maintenance, operations and safety, the private operators can take rakes on lease and provide attractive on-board services. Humsafar Express (Indore-Varanasi) will be the third rail service to go private. Over a dozen companies, including MNCs Alstom Transport, Bombardier, Siemens AG and Macquarie, have shown interest, but railways minister Piyush Goyal is treading cautiously, given the potential opposition from labour and trade unions.
The railways will have a capital outlay of Rs 2,33,008 crore, of which Rs 72,216 crore will be budgetary support. The biggest expenditure will be the electrification of 27,000 km of tracks.
The budgetary allocation for water resources has been increased from Rs 7,518 crore to Rs 8,960 crore. Renewable
energy, especially solar, is another sector where the government wants more private investment. India added 7,592 MW of renewable energy in April-December 2019; another 34,160 MW is in the pipeline. The budget proposes building solar power capacity alongside railway tracks as well.
Infrastructure has been allocated Rs 9,71,694 crore, of which Rs 4,32,424 crore is in the form of budgetary support. “This is insufficient,” says Vijay Chhibber, former secretary, road transport & highways. The National Infrastructure Pipeline (NIP) outlines projects worth Rs 102 lakh crore over the next five years. According to the Economic Survey, highways will need investments to the tune of Rs 19.63 lakh crore by 2024-25. NIP projects will be Centre- and state-funded (39 per cent each). The remaining 22 per cent is expected from private investment, with a target to increase this to 30 per cent in the next five years.
As road transport minister Nitin Gadkari looks to scale up highway construction, he will need to take along opposition-ruled states to get quicker land and environmental clearances. The finance ministry expects him to develop 2,500 km of access control highways, 9,000 km of economic corridors, 2,000 km of coastal and land port roads and 2,000 km of strategic highways.
In 2015, Gadkari’s ministry mooted the hybrid annuity model, wherein projects were guaranteed 40 per cent payments from the National Highways Authority of India on annuity basis on completion of milestones. The concessionaires were expected to arrange the remaining funds through credit. But the non-performing assets-laden banks refused to back the projects. “The contracts are too skewed towards the project proponents (NHAI),” feels Jagannarayan Padmanabhan, director, transport and logistics, Crisil Infrastructure Advisory. Adds Chhibber: “Growth cannot be accelerated through budget allocations. Private capital needs to flow in.”
On January 12, Gadkari had met RBI governor Shaktikanta Das to seek policy tweaks to allow banks to fund infrastructure projects for 30 years, instead of the current 20. In the budget, Sitharaman stayed away from seed funding of development finance institutions (DFIs), but gave sovereign wealth funds full tax exemption on interest, dividend and capital gains income from investments in infrastructure. It remains to be seen if such funds can provide cheaper and longterm credit for infrastructure projects. ■
9,000 KILOMETRES OF ECONOMIC CORRIDOR HAVE BEEN ENVISAGED IN THE BUDGET
150 RAILWAY ROUTES HAVE BEEN OPENED UP FOR PRIVATE PLAYERS UNDER THE PPP MODEL
THE FEBRUARY 1 BUDGET HIGHLIGHTED what will be the defence ministry’s biggest worry in the years ahead—for the first time, expenditure on defence pensions overtook purchases of military hardware like fighter jets, warships and battle tanks. The defence budget is split into three major heads— revenue, capital and defence pensions. These are what the military spends on maintaining its existing forces, buying new hardware and paying pensions, respectively. The total defence budget grew by a 9.37 per cent this year, barely enough to buy new military hardware after paying annual instalments for previous equipment purchases. Defence pensions, on the other hand, grew 13 per cent, from Rs 1.17 lakh crore to Rs 1.33 lakh crore, making it the second-largest component of the Rs 4.71 lakh crore defence budget. India currently has approximately 2.6 million defence pensioners and adds about 55,000 to that number each year. To put this in perspective, India’s pension budget is nearly twice Pakistan’s entire military budget.
The defence budget is unlikely to grow, going by what the government has indicated. Defence already accounts for 15.49 per cent of central government spending and is the government’s largest expenditure after debt servicing. Any major increase in military spending in a depressed economy risks wrecking the fiscal deficit. Nonetheless, the armed forces have asked for an increased budget allocation. They argue that military
9.4% THE INCREASE IN THE TOTAL DEFENCE ALLOCATION IN BUDGET 2020
13% THE INCREASE IN DEFENCE PENSIONS IN THE 2020 BUDGET
India’s $19 billion pension budget is nearly twice Pakistan’s entire military budget
spending (minus pensions) as a percentage of GDP is below 2 per cent, the lowest defence budget-to-GDP ratio since the 1962 border war with China. The government says this argument is specious because the pension bill is a significant expenditure, and including it puts the defence budget at over 2.2 per cent of GDP. Either way, this year’s $66.9 billion defence budget makes India the world’s third largest defence spender, behind the US ($717 billion) and China ($177 billion). However, the choice before the government is stark. It cannot afford to spend both on modernising the military and paying for pensions. The hardware-intensive air force and navy make up the bulk of the $100 billion defence hardware purchases projected over the next decade. Reduced allocations make it more difficult for them to replace their ageing arsenals—for instance, the air battle over Naushera on February 27, 2019, in which a MiG-21 was shot down, highlighted the chinks in the Indian Air Force’s (IAF’s) armour. The IAF says it needs new warplanes and beyond-visual range missiles. Nonetheless, its allocation declined by Rs 1,200 crore this year. The navy, which has in the recent past seen the steepest cuts—from nearly 18 per cent of the defence budget in 2014 to 14 per cent last year—saw a modest increase this year of over Rs 500 crore in its capital budget. This is sufficient to buy just two offshore patrol vessels. “Defence pensions have grown exponentially, from less than 10 per cent of the defence services expenditure up to the late 1980s to over 40 per cent in 202021,” says Laxman Behera, research fellow at the Institute of Defence Studies and Analyses (IDSA), the ministry of defence’s New Delhi-based think tank. “Unless the pension bill is contained, there is no future for modernisation.” However, recent initiatives, like the One Rank One Pension (OROP) scheme, announced in 2016, have in fact increased the pensions burden. OROP promises to pay all retiring soldiers the same pension irrespective of the date of retirement. A five-year revision of pensions was to have taken place last year, but has been deferred. The government is clearly buying time while it looks for solutions. There were none in this budget. Military officials say cutting pensions is difficult since it is one perk that makes military service attractive. The army compulsorily retires a bulk of its soldiers after they reach 35 years of age, so that the service maintains a youthful profile. Multi-pronged moves will be required to address this issue. Reducing the mammoth pension bill is one of the tasks given to the recently appointed Chief of Defence Staff General Bipin Rawat. The armed forces, including the 1.3 million-strong Indian army, is considering extending the tenure of its soldiers until the age of 58 to reduce its pension bill. Such measures are yet to kick in. Unless the government hits the panic button, India runs the risk of turning into a military welfare state with its armed forces incapable of being instruments of hard power.