Budgetary roadmap for a USD 5 trillion economy

At the current rate of growth, India’s GDP will be doubled in six and half years.Although the budget clearly signalled the policy stance of the reelected Modi government, including its reform agenda, it is ultimately an accounting exercise of estimating tax and non-tax revenues and expenditures and balancing them

In a first of sorts, the maiden budget of Union Finance Minister Nirmala Sitharaman and the Economic Survey for 2018-19 shared an explicitly stated vision statement. The BJP-led NDA regime has envisioned India to become a USD 5 trillion economy in five years, from the current level of USD 2.7 trillion.

The Survey, which often reflects the predilections of the chief economic advisor, unveiled a blue-skies roadmap for doubling the size of India’s economy through kick-starting a virtuous private investment cycle, like in East

Asia. The big question is whether the first budget of the NDA regime in its second term furthers investment-led growth?

Budget 2019-20’s optimism regarding the USD 5 trillion goal is that India remains the world’s fastest-growing major economy. However, the “size of the cake” – to borrow an expression of Prime Minister Narendra Modi - can double to USD 5 trillion in five years only if its nominal growth, inclusive of inflation, hits 14% according to the logic of compounding.

The challenge is to “shift gear” as nominal growth this year is only 11% according the budget’s macroeconomic framework statement, after decelerating from 11.5% in 2016-17.

At the current rate of growth, India’s GDP will be doubled in six and half years.Although the budget clearly signalled the policy stance of the reelected Modi government, including its reform agenda, it is ultimately an accounting exercise of estimating tax and non-tax revenues and expenditures and balancing them. Becoming a USD 5 trillion economy necessarily entails massive fiscal support for USD 300 billion of investments every year in roads, railway infrastructure, seaports, airports, transport, gas and inland waterways till 2024-25.

On the social infrastructure side, every family is to have a roof on its head, better health, 24/7 electricity and safe drinking water. The budget doesn’t have surpluses for these objectives.

The finance minister indeed has limited fiscal room for manoeuvre. With flagging GDP growth, there isn’t the necessary buoyancy in tax revenues to fund the required spending.

Actual collections, including from the Goods and Services Tax, took a hit of INR 1.7 trillion in 2018-19. Budgeted tax revenues are expected to rise by 25% over these levels, which is unrealistic, as nominal GDP growth plunged to 9.4% in the quarter ending March 2019.

Higher non-tax revenues are expected to meet the shortfall with partial sales of equity and monetizing land assets of stateowned enterprises and a substantial dividend from the Reserve Bank of India.

Despite less buoyant tax revenues, nonplan revenue expenditures on subsidies, wages and salaries and interest payments are high and rising.

The time-tested manner in which a significant part of these expenditures will be met in 2019-20 is of course through offbudget financing.

Food subsidies thus are typically met through the Food Corporation of India raising bonds, which do not show up in the budget numbers.

The government nevertheless has to borrow more – including from overseas with a sovereign bond issue as indicated in the budget - to meet the current expenses. With the finance minister choosing to compress the borrowing or fiscal deficit target, there are obviously not enough resources in the budget for boosting investment-led growth.

The budget and Survey therefore expect private investment, including foreign, to trigger a virtuous cycle to attain the USD 5 trillion target.

Railway infrastructure, for instance, needs massive investments of USD 60 billion every year to 2030. As current capital spending is only USD 21 to 23 billion, this gap is to be met through public-private partnerships.

To lower the cost of capital for infrastructure finance, a Credit Guarantee Enhancement Corporation is being set up. An action plan to deepen markets for corporate bonds, credit default swaps is on the anvil.

The budget also proposed to set up an expert committee to examine the feasibility of development finance institutions to provide long-term finance for infrastructure.

More foreign direct investments have been welcomed with the budget

announcing 100% FDI limits for insurance intermediaries. The government will examine further opening up civil aviation, media and easing sourcing norms for single-brand retail. There are also higher limits for foreign portfolio investors in listed companies up to permissible sectoral FDI limits – with the proviso that companies can opt to lower the threshold.

Another proposal is to allow foreign portfolio investments in debt securities issued by Infrastructure Debt Fund – NonBank Finance Companies, which in turn can be sold to domestic investors within a specified lock-in period.

The USD 5 trillion question is whether private investors will be enthused by these slew of initiatives for a virtuous cycle of rapid growth?

Yes and No.

Yes, as the budget has sought to infuse more capital in the stressed public-sector banks and non-bank finance companies to ensure more credit for investors.

It has given assurances to Start Up India on the so-called angel tax: which is a levy on equity infusion in start-ups that is higher than their fair market value, with the premium considered as income.

It has reduced the rate of corporate taxation on companies up to INR 4 billion in turnover that covers 99% of Indian companies.

No, as what they seek is beyond the budget. India Inc perceives there is a “trust

deficit” with the government. The investment environment is also sensitive to policy and regulatory uncertainty. For instance, the government’s arm-twisting India’s leading two-wheeler manufacturers to fast-forward the timeline for electric vehicles doesn’t inspire investor confidence.

Foreign and domestic investors seek improvements in the ease of doing business on the ground. India may have jumped the rankings in World Bank’s Doing Business indicators but the Survey recognizes the biggest constraint in this regard remains the ability to enforce contracts and resolve disputes.

There is a huge pendency of cases in the lower courts in the judicial system that impedes speedy justice.

Kicking off private investment-led growth for a USD 5 trillion economy in five years is at best only a work in progress.