The growth figures released in
first advance estimates are not very promising. The economists across the world
are divided into two camps over India’s policy options. One camp represented by
Dr. Raghuram Rajan, Dr. Arvind Subramanian and Statistician Pronab Sen are
calling for fiscal slippage and necessary data corrections. Whereas others
represented by Dr. Arvind Pangaria and Dr. D. Subba Rao is calling for the government to continue with its track record of the fiscal tightening. Both sides
have some solid sets of arguments. Therefore it would be interesting to see what
trajectory the Modi government would be following. Before jumping to the analysis
of both options, let us take a look at the current state of the economy.
Current state of Economy:
As per the 1st Advance
estimates figures of national income released by NSSO, India’s GDP is dipping
to 11 year low of 5%. In GVA terms, it stands at 4.9% vis-à-vis 6.6% in FY
18-19. This is a huge fall for a country aspiring for double-digit growth and
$5 trillion economy. Manufacturing has seen a downfall from 6.9% in FY18-19 to
2% in FY 20E putting a question mark on “Make in India and Start-up India initiatives”.
Among all the eight components of GDP measurement, only mining has shown an upward trend which could be attributed to the base effect.
On the consumption side, private
consumption which represents 57% of total consumption weight is estimated to
fall to 5.8% (FY 20E) against 8.1% (FY 18-19).
On the expenditure front, Gross fixed capital formation which indicates
productive expenditure in the economy is likely to plunge to 1% from 10%.
Consumer goods segment is meagerly inching forward at 1% whereas FMCG
production has seen downfall the first time in the last 50 years. Automobiles, car sale
is hovering in negative territory indicating bad times ahead. The unemployment rate
is highest in the last 45 years i.e. 7.7%. As per officials, the government is staring
at a possible tax shortfall of 2 lakh crore. Exports and import buckets have
shrunk in the last financial year on account of the global slowdown. Former CEA Arvind Subramanian is calling this
an expansion of the twin balance sheet problem which is now slowly devouring MSME
and NBFC after sending shockwaves across the banking and corporate sector.
International agencies like the IMF
have revised India’s growth rate projections to below 4.8%. Some experts have
even blamed India for a global slowdown. The world economy is struggling with
challenges like Corona Virus, Iran-USA tussle, and Brexit hangover. Overall, these are very challenging times for
any finance minister to prepare an annual financial statement of the country.
Government’s initial response was of denial and anger but off late it has
accepted the growth slowdown and taking numerous mid-year corrective measures
which are detailed in later sections?
The numbers from December month
have shown an uptick in a few segments but India is facing the bigger issue of “Data
problem”. Previous year budget numbers and survey estimates of GDP had a
difference of approximate 1.5 Lakh crore. Many economists have criticized the
government for suppressing actual fiscal deficit numbers by scale of 1.5-2
percentage points in the form of off-budget expenses. The conflicting data from
NSSO and NSA make it difficult for the creation of any evidence-based policy and creates
space for whimsical decision making which shakes investor confidence.
Measures for revival of growth
Generally, the finance minister has
four levers for boosting growth namely consumption, expenditure, export, and
investment. In the current situation, on the consumption front, the private
consumption which accounts for 60% of the GDP has witnessed a downfall to 5.7%.
Households savings has fallen in the last few years and household debt level has
increased from 18% to 30%.
Similarly, on expenditure front, the government planned to increased expenditure from 9.2% to 10.5% however,
reduction in corporate tax coupled with over-optimistic revenue collection
targets have subdued the government expending spree. The government guidelines
about the restriction on overall budget expenditure in last month and last quarter of
fiscal year at 10% and 25% send signals on government continued adherence to
fiscal tightening path.
Reserve Bank of India (RBI) cut
its key lending rate by a total of 135 basis points in 2019 however Investment remains
low on the account of low domestic and global consumption. The credit upgrade
to credit downgrade ratio whose higher value indicates better corporate sentiments
has declined from 1.33 to 0.80 units. Banks
are afraid of lending. The NPA’s in public sector banks are touching a high of
12-14% and the crisis has spilled over to the non-banking sector. Moreover, the
credit uptake for MSME has been very low.
The fourth leg i.e. Exports seems
entrapped in the $300-$400 Billion buckets for the last 10 years much behind the anticipated target of $900 Billion as envisaged in foreign trade policy 2015.
The global slowdown, Iran-US tensions and consequent rise in the oil prices do
not omen well for the Indian economy in the coming quarters. Schemes like Remission of Duties or Taxes on
Export Product (RoDTEP) was announced but it is yet to take off. Another big
area of worry is increasing out-remittance from our economy which further weakens
our balance of payment situation.
Despite all the negative
indicators and initial denials, the Government has taken measures like corporate
tax cuts, the announcement of an increase in the investment up to Rs. 50 Lakh crore National
Infrastructure pipeline, financial aid package for the real estate sector, 100% FDI
in single-brand retail, Banks merger, as well as automatic GST refund for
businesses. As a result, there are some olive shoots visible as can be seen in improved
Goods and services tax (GST) collections, Car sales and Manufacturing PMI in the month of December.
This budget is government’s big chance
to revive investor sentiment, boost consumer spending, increase its own
productive expenditure and revive the dying exports by focusing on its
competitiveness and most importantly fix the data discrepancy forever by making
corrections and accepting past mistakes.
Path ahead
For a finance minister, the above
wish list is easier said than done. All the options come associated with huge
cost. The primary questions with which the government is dealing at this moment
are whether to stick to the fiscal deficit target or not, how to generate more
employment in the economy, how to revive investor’s sentiment and what kind of
long term changes need to be done in the economic framework to put India back
on track.
One way for the government to
kill two birds with one arrow is to adopt the expansionary fiscal policy. The expansion
in the fiscal space should, however, ensure a boost to the consumption capacity of the lower
class and lower middle class. This could be possible by way of increased
expenditure on MNREGS a scheme or promoting direct benefit transfer or
transferring a bigger chunk of money through PM Kisan Yojana and farm loan waiver.
Experience shows that measures to increase the consumption capacity of middle
and upper-middle-class results in greater savings and greater investment in Gold
instead of higher consumption. Once the consumption revives, demand will pick
up, investors who are sitting on four to five lakh crore of money and currently
running the business on sub-optimal capacity (around 70%) would be forthcoming
in increasing production capacity of their business cycle. Hence such expansion
would not only boost consumption, revive investor sentiment, but also generate
more employment. Moreover, the government can use this fiscal stimulus measure
to correct its data discrepancy. The
downside is crowding out of market, increased debt level and decrease in
government revenue.
In contrast, if the government
goes for contractionary fiscal policy then it faces the challenge of limited
options to revive the consumer sentiments. Any further fiscal tightening amid
revenue shortfall means government would be tough on tax exemptions and
benefits. This would negatively impact the investors and exporters who are hoping
for tax benefits from the government. The real question at this stage is what
should be the fiscal slippage band and what sort of taxation and other measures the government should bring taking into account the long-term view of the economy? Keeping
in view of dire state of economy and tricky situation of policy levers, here
are some of the suggestions for the government.
Suggestions
Firstly, the Government should go for
uniformity and regularity in the tax rates. Indirect taxes should be reduced ensuring
that benefits are passed to the end customer. Direct taxes should be kept the
same. However, LTCG and STCG distinction should go away and the government should
uniformly charge any capital gains through a TDS like a mechanism. This will
ensure greater compliance. The recent figures from the income tax department show
that nearly 5 lakh people did not declare the LTCG to the tune of 90 thousand
crores in their tax returns. Therefore, time has come to get rid of this anomaly
and make the process smooth. This money could be deducted directly from the beneficiary’s
bank account. Economist like Abhijeet Banerjee has called for re-introduction
of wealth tax however, it may spoil investor sentiments.
Secondly, reform the data
architecture. Make one single agency responsible for all kind of data
collection, storage and analysis. The most suitable agency for this purpose is
ministry of Finance. The task of data collection could be outsourced to third
party agencies. Storage and analysis could be government’s prerogative. At any
point, government should be able to pull any relevant data without a lag of
more than 3 months. Only then we can establish and formulate an evidence-based
policy.
Thirdly, we need to understand that state
government machinery remains an Achilles heel in our approach of effective
governance. The success of models like Make in India or Smart cities etc. is
largely contingent on the ecosystem created by the state government machinery.
Therefore, government should establish some kind of conditionalities for state
government reforms like IMF did for us in 1992. For instance, all the state
government loss making discoms should be privatized on urgent basis. This is
essential to revive power sector which is very big contributor of large NPAs.
Fourthly, government should
invest heavily in infrastructure sector by way of national infrastructure pipeline
project. Countries like Germany, France invested heavily in school and
healthcare when they were at their lowest point of economic growth. This is
right time for India to invest in its social infrastructure.
Fifth, Central government should
focus on finishing the pending projects. Instead of starting too many new
things, government should increase allocation in the ongoing projects. This
will have lesser gestation period to reflect on the growth numbers. Privatizing
many loss-making PSU is one component of this pendency list.
Sixthly, economic growth is cousin
brother of social stability. Hence, it is necessary for the government to
ensure a peaceful environment for attracting investors.
Seventh, Government should establish
a real-time financial reporting center so that tax theft could be avoided and a
robust financial system architecture could be put in place. The government may
envisage bringing securities transaction tax and property tax. There should be
an automatic system for cross verification of the reported data.
Eight, online transactions should
be encouraged and all kind of intermediary cost should be funded by the
government for next 10 years. The component of cash should be reduced to below
50% in the next 3 years. This way the entire financial system would be more
streamlined and the impact of black money would be reduced in the system.
Ninth, policy certainty is
essential for investor sentiment and economic growth. The government should ensure
coherent taxation and sectoral policies by issuing a white paper for next 3
years fiscal strategy and action timeline. Lower tariffs and targeted policy
interventions to protect and hand hold domestic industry are expected.
In addition, slew of sector
specific measures like continuation of railways reform, farmer education, benefits
for Start-up India, reformed version of UDAY, providing new options for financing
the infrastructure in the wake of balance sheet problem of NBFC and Banks,
pension reforms, skill training reforms by establishing 24*7 residential
societies, redefining bureaucracy by training them for sector-specific issues
and deploying them for hand-holding specific industries, ensuring contract
enforcement, creating national population register, bringing law on population
control, agriculture reforms and urban governance reforms are important. Government
needs to find strict ways to ensure that money is invested in India and helps
in development of the local economy. Tax evasion identification through data analytics
and subsequent tax recovery could provide a cushion against fiscal slippage.
This budget should not be a mere statement
of annual finances. Rather it should be a vision of India’s strategy of
achieving the target of a five trillion-dollar economy. The clock is ticking fast
and this budget will decide whether India is going to be MODIfied or not in the
time to come.
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