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Union Budget 2019: Time To Transform The Dwarfs Into Giants

M. Govinda Rao, Member, 14th Finance Commission; Ajit Ranade, President & Chief Economist, Aditya Birla Group; Yoginder K. Alagh, former Union minister; Arun Kumar, former JNU economist; and Abhijit Sen, former member of the erstwhile Planning Commission, debate on the finer points of the Union Budget presented by Finance Minister Nirmala Sitharaman. Edited excerpts

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Do you think the Union Budget provides a roadmap for making India a $5-trillion economy by 2024?
M. Govinda Rao (MGR):  
The roadmap for achieving the $5-trillion economy can’t be given in the Budgets entirely. The Budgets are signalling instruments and the actual major reforms have to be implemented during the course of the year. Unfortunately, even as a signalling device, this Budget has not been successful. The most important issue now is to revive the investment climate and there is not much in the Budget to address this.

Ajit Ranade (AR):
It is an ambitious and audacious goal. But it will need faster growth than what we saw in the past five years. The Budget does highlight a big push in infrastructure, which will enable higher growth in the medium to long term. But clearly the bigger immediate contribution is going to be required from the private sector. And that needs more reforms, and specific enabling measures. The roadmap should also be broken up into short-term milestones, and set up into sectorial targets. For instance, export targets in textiles and clothing, in agro-processing. The roadmap will also need the government to privatise in a bigger way.

Yoginder Alagh (YA): The $5-trillion economy is a statement of intentions. Like doubling of agricultural incomes, good intentions, but requires work on a strongly normative scenario of growth. This will need a strong planning agency. The Planning Commission had been abolished and the successor Niti Aayog does not have allocation powers and limited access to the ministries for internal data. It can be debated if there is at least a working paper on it.

Arun Kumar (AK):  No. I don’t  see the push that is required at the moment. The growth rate of the economy for the latest quarter is 5.8 per cent. And it is slowing further. So if we slow down to about 5.3 per cent or thereabouts, then towards the end of five years, the growth rate would have to be about 10.5 per cent per annum. At this point when even 5.8 per cent looks difficult, 10 per cent looks almost impossible. So, I don’t think we will be able to get to the $5-trillion economy even in nominal terms, forget in real terms by 2024.

Abhijit Sen (AS): Well, there is a roadmap it talks about. It doesn’t say anything beyond that.

Do you think the Centre continues with its welfare state responsibility without any real reforms?
MGR: 
In a democratic polity where a large number of people are poor, welfarism cannot be avoided. However, there has to be a reasonable balance to address the issues of the long-term growth and short-term appeasement. Of course, there are not too many new welfare schemes in the Budget but the existing schemes and their expansion account for significant allocations.
AR: Social sector spending certainly has high priority for the government. Areas like health and education are getting higher share of the Budget. Higher social spending is possible with higher economic growth and more robust tax revenues. That’s why welfare policies have to go together with growth-enabling reform measures. The FM chose not to announce any big-bang reforms, but did indicate that labour reforms are coming, and that public sector enterprises will be sold off. She even mentioned possible Air India privatisation. The cleanup of the financial sector is ongoing, and there’s fresh infusion of capital into banking, which should help restore health in credit markets.

YA: Welfare programmes have been announced in many cases without budgetary allocations. Like MNREGA allocations are reduced. But SHGS groups have been treated well.

AK: It has not allotted enough resources for the various schemes in the Budget. If you don’t allot enough resources then you don’t achieve the goals set out. While many new schemes are being announced the allocation is roughly the same as that in the interim budget. So funding all the additional schemes becomes an issue.

AS: As far as the talk about the reforms are concerned, they are all up in the air, the things which are there in the budget speech.

Do you see a strategic plan in the Budget to create jobs?
MGR: 
The Economic Survey is right in stating that it is important to transform the dwarfs into giants. They do not generate much employment nor do their account for significant volume of output. However, the Budget continues the old story that small is beautiful, which means there is not much in the Budget to generate employment. However, the statement that the multiple labour laws will be classified into four codes is important.  It is important to rationalise the labour laws to impart flexibility and give a fillip to labour intensive manufacturing and exports.

AR: There were no specific employment-specific subsidies or incentives announced. But measures like reducing corporate tax on companies with turnover of less than Rs 400 crore should help. Additional 10,000 farmer producer companies are going to be promoted. That is connected with agro-processing, which is labour intensive. There was a mention of Industrialisation 4.0, i.e. Artificial Intelligence, Machine Learning, 3D printing, etc. If that signals greater skill building in professions and jobs of the future that is certainly welcome. We need much more focus on conventional labour-intensive sectors like real estate and construction, agro-processing, textiles and clothing, leather and tourism.

YA: No, there is no plan for a demand revival. Government investment is falling and the Economic Survey’s statement on bottoming out has been criticised. Private investment would respond if this was so. The impact of the delayed monsoon on farm, employment is ignored.

AK: If the rate of growth doesn’t pick up, then even the creation of jobs becomes difficult and the problem is beginning with the unorganised sector. The unorganised sectors are the ones that have declined. A strategy to boost the unorganised and organised sectors is not visible in the Budget.

AS: None. Partly because the Budget doesn’t care much to deliver.

There is no concrete measure announced in the Budget that will spur private investment. What could have been done differently?
MGR: The most important issue is to clean up the balance sheets of banks and corporates. Recapitalisation of public sector banks to the tune of Rs 70,000 crore helps. However, the most important reform needed there is to reform the governance of the banks on the lines recommended by the Nayak Committee.   Another issue that should be addressed is the corporate tax rates. An OECD study shows that Indian tax rates on the corporates are high when the corporate income tax, dividend distribution tax and cesses and surcharges are taken into account. There is also the question of discrimination against foreign companies. If we want investments, we should have uniform tax rates. Finally, why do we still continue with a positive list of sectors where FDI is allowed? It is time we open up all sectors with a small negative list.

AR: Private investment growth has been stagnant for several reasons, such as demand slowdown, policy uncertainty, strong rupee encouraging cheap imports, continuing trouble with GST, and refund for exporters, the spectre of inspector raj, and the multiplicity of permissions required to start a business. The FM could have addressed all these more specifically.

Entrepreneurs find themselves spending more time on tax and other compliance rather than on the core area of their competence. That must change. She could have also focused on the several dimensions of ease of doing business such as contract enforcement and dispute resolution, and ease of getting permits and clearances. We also need a relook and revamp of the public-private partnership model that was used in infrastructure projects.

YA: Such a detailed reversal policy for the falling private investment to GDP ratio in every quarter is not there. Some steps like raising corporate tax exemption rates for some medium-size companies (Rs 400 crore exemption) are not enough to reverse the trend.

AK: Private sector investment is down because it has large unutilised capacity. Unless the growth rate increases capacity utilisation will not improve and investment will stagnate. And if Indian private investment doesn’t become buoyant, then one cannot expect FDI to increase substantially. The government has cut back its own capex in the Budget. Capex this time is Rs 8.5 lakh crore, whereas on an average we need to have Rs 20 lakh crore per annum to reach the Rs 100-lakh crore target.

AS: Well private investment has its own specifics, either the exports are going to grow faster or the demand in the economy will be substantially increased.
 
Although the Budget has allocated money for the recapitalisation of banks, does it address the structural reforms required for the banking sector and NBFCs?
MGR: It doesn’t addressed the structural reforms. The government states that its business is not to be in business. It speaks about minimum government and maximum governance. Distancing the banks from the political system is critical. In the case of NBFCs, assigning the regulatory task to the RBI is important. But much needs to be done to improve governance.

AR: The four Rs identified for the banking sector reform are recognition, recapitalisation, resolution and reform. Of these, the fourth R is still lacking. Maybe the announcement of an apex holding company for all public sector banks is an idea whose time has come. Banks need greater autonomy and flexibility in their recruitment and lending activities. Of course, some merger and consolidation is happening, and eight weak banks have been merged with stronger banks. But we are still to see tangible results. The NBFCs have few bad apples, which need to be removed. An asset quality review of all major NBFCs is needed. And some innovative measures like purchase of NBFC paper through state-owned banks can be explored.

YA: Urjit Patel’s basic argument that RBI has supervisory inspection powers but executive control over PSBs is by the Banking Division of the finance ministry is correct. A section of the financial press has again confused the issue and the RBI Governor, a former finance secretary has, in fact, asked for such powers.Private sector banks and NBFCs are also under the regulatory control of the Banking Division and it is impossible for banks not to be ‘nudged’ by the political and administrative establishment.

AK: The recapitalisation of the banks is a good move, this will improve their capacity to lend. And if the economy is to revive, then the banks have to lend more. Unless the NBFCs as a whole do well, the unorganised, small, and real estate sectors will not get enough loans and these sectors will not revive. So, the financial sector reforms are a mixed bag as far as I can see.

While measures have been announced on agriculture, do you think that major issues like a regressive subsidy regime, badly-regulated markets and procurement infrastructure have been ignored?
MGR: Agriculture is a state subject. The Centre can only fiddle with it in the periphery. The subsidy regime is perverse and needs a thorough review. Much needs to be done to increase investments in storage, marketing and processing. A lot of initiative will have to come from the states.  

AR: We need to recognise that solution to the distress in agriculture lies mostly outside agriculture. Unless job opportunities open up big time in industry and services, farming households are unable to escape low- productivity agriculture. The problems in agriculture are manifold, from shackles in input and output markets, poor link with marketing and value chain from farm to fork, and distortions by “middlemen”. Higher MSP and input subsidies as well as loan waivers are curative and compensatory mechanism, and don’t really substitute what farmers need — genuine economic freedom and unshackling from a myriad of regulations and controls. For instance, we need to deregulate agro exports, or allow greater direct linkage between private corporate buyers and farmer producer companies.

YA: There are some good steps like emphasis on fisheries with an allocation.There are announcements of rural housing and so on. But first, there is no recognition of the delayed monsoon and drinking water and the need of resources for delayed sowing in the Deccan peninsula. Also, there are no figures indicated in the long-term statements on agricultural infrastructure. Since there is no planned budget, it is not possible to see the allocations for assistance to the states on farm, market and rural infastructure. Announcements of imports of pulses, for example, from countries that give high subsidies creates more problems. Some of the reform statements are well taken but even the MP Deficiency Scheme, I found in a recent  audit, relied on Artiyas. We will need time to cover the last mile.

AK: The biggest problem in agriculture has been the enforcement of the minimum support price for the crops. The minimum support price should be as per the Swaminathan Committee recommendation i.e., 50 per cent above full cost. That is not being announced.  The next issue is, how will the MSP be enforced? So the major reform required for the agriculture sector is missing. Next, investment in agriculture has to be increased and that is not visible in the Budget. So I think agriculture, which needed a big push, is marginalised. The PM Kisan Samman Nidhi Yojna takes up a bulk of the allocations so that very little is left for additional investment and R&D in agriculture.

AS: They are not being ignored in the sense that they are talking about so many farmer produce organisations they are going to set up. All old things, nothing new in that. But they are atleast talking about it.
 
How do you view the government’s move to borrow from foreign shores to finance expenditure?
MGR: 
This is an important measure and a move towards greater capital account convertibility. The problem is that when the government leaves no borrowing space for the private sector by completely exhausting the household sector’s financial saving, the private sector is faced with liquidity crunch and are faced with high-real interest rates. Even when the RBI reduces the policy rate, there is no transmission because there is no savings left after the government borrows. In this environment, enabling the foreign participants to purchase government bonds will help to ease the situation to some extent. Of course, there is the exchange rate risk but the government thinks that at the present juncture, this option is viable.

AR: This in not advisable. I can think of at least four negatives: a) it exposes the Centre’s debt to currency volatility, which can be quite severe; b) the gyrations in international bond price of GoI bond can cause interest rate volatility in India (both currency and high interest rate volatility is seen in many countries, which floated dollar bonds); c) it lets GoI “off the hook” since it can escape internal discipline of GoI bond market and the pressure on interest rates; d) foreign dollar bond investors will simply cannibalise demand for rupee denominated GoI bonds, where FPIs invest quite heavily. Thus, incremental fund inflow could be small if not zero.

YA: I hope it will not crowd out the incentives for NRI investments. It is a slippery path and needs caution.

AK: I think that is a dangerous step and that is why the government in the past has not gone for such borrowing. Currently, the external environment is uncertain. If the oil prices rise because of the turmoil in oil producing countries, then the rupee will devalue. Even if the rupee devalues by 5-6 per cent per annum, then the rate of interest will come out to be high. So I think this is not the appropriate time to go for foreign borrowings.

AS: Risky. It may or may not work. And in any case, there are exchange rates, which I don’t know how they are going to deal with.

What more should have been done to make India competitive vis-à-vis Asian countries in direct taxes – something that former FM Arun Jaitley wanted?
MGR: Competitiveness is possible if the companies are allowed to compete. The protectionist stance taken by the government in the last three years is clearly counter-productive. In fact, the Indian economy gained much by reducing the tariff wall since 1991 and increasing it in the name of ‘Make in India’ is retrograde. Reducing the taxes to 25 per cent will help. But more important initiatives will have to come from creating competitive standards of infrastructure and focused interventions on the ease of doing business not only in Mumbai and Delhi, which the World Bank takes in its analysis, but throughout the country.

AR: We certainly need to move toward lower corporate taxes, in line with other emerging market economies, and our East and South-East Asian peers. Taxes like dividend distribution and MAT have become burdensome. The approach has to be to widen the tax net for individuals and keep corporate taxation moderate. Tax is one of the components of ease of doing business, and high taxation contributes to non-competitiveness as well as possible tax evasion. We need lower taxes, less exemptions and less coercion and tax terrorism.

YA: Difficult question to answer particularly if the GST is reformed with one or two rates and good PSUs are not to be sold. A balance will need to be struck with the GST rate. The transparency in direct taxes and exemptions will be appreciated. Simpler forms will be another initiative. Cutting down inessential consumption is another path.

AK: The idea that was suggested was that our tax rates should be similar to the rates in other competing countries so that the capital doesn’t go out. India is in a different situation. If our rate of growth is low, then we cannot expect foreign capital to come in big amounts. What we need to do is boost our own economy. We are unlike the South-East Asian economies. We need to look at our own economy and see how we can boost our own growth and help our own farmers and create employment. These are different concerns. We need to raise resources and spend them in the economy. That will not happen if we adopt the rates prevailing in the South East Asian economy etc. If you look at the CAG report last year, resources were short by Rs 1.6 lakh crore, so expenditures were cut by Rs 1.6 lakh crore. Now if you cut expenditures to maintain the fiscal deficit, then the rate of growth will fall.

AS: I don’t think at this stage you can do anything more than what they are doing. May be they could have gone to the full tax, which they now claim to be 99.7 per cent. But I think the real problem they do have is a revenue problem. So they can’t give up on revenue just like that.

As Anand Mahindra said, the FM was expected to hit boundaries; she instead chose to take singles. Do you agree? 
MGR: The objective is to achieve an unbeatable total.  Here, she not only hit singles but the country is the loser!

AR: Perhaps this is what was indicated almost five years ago in the first Economic Survey of NDA-2 that most reforms in India are incremental, gradual and calibrated. Big-bang reforms are not possible in a complex and diversified policy structure with many competing interests, when the government enjoys absolute majority in the lower house, and which has been voted in with a thumping unprecedented majority. There are fiscal compulsions, i.e. committed expenditures, and options for diversifying or increasing revenues are limited. Hence, it forces the government to go in a gradual way. It is just as well since it gives continuity, stability and predictability to the reform process.

YA: I do. Too many small things. Some just good political brownies. Less if bigger strategic pushes.

AK: I think not even singles. The FM was playing defensive strokes.  It is a very inadequately funded Budget. It has a grand design (by) announcing a lot of things. But if you don’t fund them, then you are not going to achieve anything big. The opportunity was there to present a bold budget that could take care of the farmers’ crisis, the employment situation, which is deteriorating, the rate of growth which is constantly falling, the industrial sector that is not doing too well and the demand shortage. This is visible in the automobile and FMCG sectors. There is a need to boost demand in the economy but this has not been done.

AS: I don’t even know where they were expected to hit boundaries. The Budget is odd because it’s not showing anything about the present. It talked a lot about the past five years. It talked about the big vision of India becoming a $5-trillion economy in the future. There is nothing about the present.

If you were the FM, what measures would you have undertaken differently in the Budget to make India a $5-trillion economy?
MGR: I would have undertaken banking reforms, announced clear roadmap for phasing out labour laws, reformed the tax system to broaden the base and reduced the rate and evolved a simple tax system rather than creating scaffolds through cesses and surcharges, presented a clear roadmap for strategic disinvestment and privatisation and tried to get an inventory of land with various governmental agencies and explored monetising them and using the proceeds to augment infrastructure. I would initiate legal and judicial reforms in consultation with the Supreme Court.  Of course, there are many more things to do but everything need not be done in the Budget.

AR: I would have addressed the problem of decreasing household financial savings in the economy, which supports investment and growth. For instance, I would like to aggressively promote demat gold i.e. sovereign gold bonds, to wean away the addiction to the yellow metal. I would lay great emphasis on exporting sectors like agriculture products, textiles and clothing, leather industry, tourism.  This calls for a slightly undervalued currency. I would encourage the setting up of large special economic zones adjacent to large cities to build skills in areas like para-medical (nursing), vocational education, hospitality and even foreign languages. These would cater to both domestic and international demand. I would also put in place a system which clears overdue payments from the government to both large and small vendors and suppliers. I would like to aggressively promote agro-processing, industry-agriculture linkage, and also investment in retail.

YA: A relief package for the drought was needed with a  drinking water and farm irrigation plan to incorporate it in. The farmer would have responded to that with his resources. Centrally sponsored schemes with rule-based assistance have been replaced with different schemes. I would have forced Niti Aayog to give the outlines of this plan. I would have a plan for investment revival. Raising the tax rates on a simpler tax structure. I would have raised investment in infrastructure, health, education and private investment would have responded by December.
AK: I would firstly not talk of a $5-trillion economy. I would be talking about it in rupee terms; doubling the size in dollar terms means real growth. To achieve the goal in nominal terms, steps are required to boost the unorganised sector. Without that, momentum for growth would not be generated. To boost the unorganised sector, the GST has to be revamped as I have been suggesting and credit has to be made available to this sector. To increase the purchasing power in the rural areas, we need to increase farmers’ income. Further, to increase employment we need to increase spending on education and health. One should try to aim at 6 per cent of GDP on public education, 3 per cent of GDP on public health because these are the employment generating sectors. These sectors provide employment to the educated, which are suffering from unemployment. All this will generate a lot of demand and give a spur to the economy. Once the capacity utilisation improves, then the organised sector will also start investing more.
AS: First of all, I would not put much weight on the $5-trillion economy. The issue is: can we get the economy to function better than it is doing on growth, on revenue, and therefore on the ability of the government to do other things to create jobs or look at the agricultural situation? So it is growth, revenue.


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