A measured fiscal booster dose

The macro context to the Union Budget was grim. Nominal growth rate which is at a forty two year low, bank credit flow which has collapsed despite ample liquidity, manufacturing and export stagnation. What the economy needs is a stronger booster dose from the government, since other sources of growth impetus are lacking. Consumer, investment and export spending have been lackluster. The Finance Minister faced the challenge of providing a big stimulus without breaching the fiscal discipline law (the Fiscal Responsibility and Budget Management Act). Fortunately the FRBM Act allows an exemption, i.e. a higher fiscal deficit by 0.5 percent of the GDP if the growth has fallen by more than 2.5 percent from the potential growth rate of the economy.

Given these constraints, the FM has done well to address growth needs of various sectors and yet remained within the 3.5 percent fiscal deficit target. Of course, there is off budget borrowing through organisations like the Food Corporation of India or National Highway Authority of India. But within the budget framework is a consumption- stimulus in the form of an income tax cut, which will mainly benefit the urban middle class. This follows the corporate income tax cut that was given just a few months ago. India’s tax rates are now on par or probably more favourable than its G20 peers. However, the tax to GDP ratio is still among the lowest. This means going ahead, we need to widen the tax net, not increase the tax rate.  The corporate sector got another booster with the abolition of Dividend Distribution Tax. This is good news to dividend paying companies like foreign MNC’s or public sector companies. This is certainly welcome.

Within the budget framework is a consumption- stimulus in the form of an income tax cut, which will mainly benefit the urban middle class. This follows the corporate income tax cut that was given just a few months ago. India’s tax rates are now on par or probably more favourable than its G20 peers. However, the tax to GDP ratio is still among the lowest. This means going ahead, we need to widen the tax net, not increase the tax rate.  The corporate sector got another booster with the abolition of Dividend Distribution Tax.

Agriculture got a capital spending injection of about 1.4 lakh crore, slightly less than last year. But along with that the FM also announced a detailed sixteen-point plan to revitalise the farming sector. These points include deregulation, warehouse financing, supply chain reforms, and basically connecting the farmer to the urban consumer. Revival of the farm sector, and rural purchasing power needs to get the highest priority. In this context it is unfortunate that we haven’t seen enhancement of the PM KISAN scheme, or the NREGA allocation. In fact, on both these schemes, there are large pending payments even from this fiscal year.

The hike in the ceiling for bank deposit insurance will assuage the fears and panic among bank depositors. But there is no extra allocation for pouring capital into public sector banks, nor is there any intent on disinvestment. In fact, while the FM was making the budget speech, her wards, i.e. banking sector employees were on a nationwide strike.  We need to urgently implement governance reforms in banking as outlined by the P J Nayak committee. We also need a massive equity capital injection into banking, which can come from disinvestment if not from fiscal resources. It was an NDA finance minister back in 2001, who had announced the intention to reduce the government’s holding in public sector banks down to 33 percent while maintaining the “public sector nature” of banking. That plan was never implemented.

However, we do see a strong determination to pursue disinvestment, with an ambitious target of over 2 lakh crore next year. This includes a partial sale of shares in the Life Insurance Corporation of India. Indeed, this disinvestment income is crucial to achieve the fiscal target set for 2021. The Union Cabinet has already cleared disinvestment in major companies like Air India, BPCL etc. The commitment to privatise is in line with the messaging that comes across in this year’s Economic Survey that was tabled in Parliament just one day before the budget. The Survey says that we need a greater role for the private sector, which is typically more efficient and productive than its public sector counterpart. In fact, the Survey celebrates wealth creation and entrepreneurship. The Union Budget could have done more in translating the vision expressed in the Survey about pro-market policies.

What was missed out in these budget proposals is no large measures for the beleaguered non-bank finance companies, nor auto sector nor real estate. Of course, for the latter, the FM has announced an equity fund to complete last mile projects in real estate, housing and construction. We are yet to see the impact of those measures announced some months ago. The real estate and construction sector is a big employment generating one, and also supports more than three hundred ancillary sub-sectors. So, revival and good health of real estate is essential for the growth of the economy. Perhaps more measures may be announced in the coming months, as was done after the interim budget presented in July.

Finally it must be acknowledged that the target of nominal GDP growth of 10 percent looks credible and achievable. So, the FM has resisted the temptation of presenting an unrealistically rosy scenario for growth next year. It is better to have a conservative assumption, and be pleasantly surprised on the upside. Who knows, if there are tailwinds like low oil prices, largescale shifting of exporting opportunities from China to India, pickup in manufacturing, then growth may exceed what is assumed in the budget. Or else we will grow at around 6 percent next year too. The dream of reaching 5 trillion dollars will become a bit more distant, but we may still get there.

(Dr. Ajit Ranade is an economist and Senior Fellow, Takshashila Institution)