In the past seven months, Union finance minister Nirmala Sitharaman has announced more policies than what were included in her first budget in July 2019. It’s a different matter that most of the budget decisions were rolled back. Now, she is about to present her second budget amid rumours of a Cabinet reshuffle, a perceptible lack of confidence within India Inc, and dark clouds of a global economic crisis hovering overhead. It was also not lost on anybody that the finance minister was absent from a recent meeting convened by Prime Minister Narendra Modi with top economists ahead of the Union Budget.
Sitharaman has her task cut out—Asia’s third largest economy is struggling against headwinds of a prolonged economic slowdown that has seen thousands of job losses amid backbreaking setbacks across sectors. Against an ambitious target of making India a $5-trillion economy by 2024, the government has predicted a GDP growth of around 6 per cent in 2019-20, the slowest in 11 years. It’s a bad time to be the finance minister. But a flurry of recent and hectic decision-making has raised expectations. A corporate chieftain says this is Sitharaman’s opportunity to present a dream budget. Days before the presentation, the FM claimed that she was working to end the “trust” deficit with India Inc. Everyone seems to be talking about a few “big-ticket” announcements. Each sector expects goodies from the budget bag. However, this may not be an easy task given the current fiscal constraints and domestic and global challenges.
From the FM’s perspective, the tasks are simple. She has to put more money in the hands of consumers, as she did for India Inc when she slashed corporate tax from 30 per cent to 22 per cent a few months ago. She has to initiate steps to enhance public investment and incentivise private investments, as the regime did with the recent decision to spend Rs 102 lakh crore on infrastructure over the next five years. She needs to force banks and non-banking finance companies (NBFCs) to loosen their purse strings, as the RBI did when it consistently reduced interest rates to kickstart the sputtering economy.
The challenges are apparent. Any move to cut taxes and provide a stimulus package to help consumption will put pressure on government revenues, which may be lower than previous budget estimates. An increase in public spend will hike the fiscal deficit, and fuel retail inflation, which is the highest since 2014. The private sector is riddled with negative thoughts, and the farm sector is depressed. The financial sector is scared to lend. Sentiments, rather than action; a stable vision, rather than knee-jerk reactions, may prove to be more crucial.
Spending-led growth
It is almost sure that there will be tax relief for the middle and lower classes. These can be in the form of lower (or zero) tax on long-term capital gain, and the removal of the dividend distribution tax. The former will put more money in the pockets of millions of families, and the latter is a demand from the companies. As a government official explains, “When we increased tax exemption for up to Rs 1,50,000 in PPF in 2014, it impacted the household savings enormously. So, taxpayers can look forward to some tax relief to ease consumption and spending.”
What is urgent is the need to enhance farmers’ incomes. To double them, as the government envisages, in the next few years requires a mix of huge export incentives on agriculture products, and higher minimum support prices (MSPs) for the produce. Sources say that the formula to calculate MSP may be changed to boost incomes. They add that fertiliser subsidy may be given before the sowing season to the farmers. To help them to market their products, Budget 2020 may provide more money for 10,000 FPOs (Farmer Producer Organisations).
The sad part is that farmers have suffered despite a huge jump in allocations to the agriculture ministry—from Rs 31,063 crore (2014-15) to Rs 1,30,485 crore (2019-20). Even the hyped PM-ASHA scheme, which was meant to ensure income security for the farmers, hasn’t worked. In the past three seasons (two kharif and one rabi) most farmers received money that was less than the respective MSPs, says Kiran Kumar Vissa, national co-convenor of Alliance for Sustainable and Holistic Agriculture (ASHA), a national network of farmers organisation. The scheme wasn’t beneficial because of low expenditures and allocations.
The demand from the industry is to treat corporate and non-corporate entities similarly. Right now, while the former pay a lower 22 per cent tax, the impact on the latter, which includes proprietorship, partnership, and limited partnership, is over 30 per cent. This distinction needs to go, and it will provide a fillip to small and medium businesses. In turn, this will encourage such firms to invest more, or pay higher dividends to their shareholders, which can increase consumption. This will allow the Indian rates to be comparable to the lowest in South Asia and South-East Asia.
Investment-led growth
In December 2019, the government unveiled an ambitious plan to spend Rs 102 lakh crore on infrastructure projects by 2024-25. The amount was double the expenditure in the past six years. Public spending, i.e. by the Centre and states, was to comprise 78 per cent of this spending. However, there were no details for two months. Budget 2020 may provide hints and details, says Jayant Mhaiskar, CMD, MEP Infra. This is critical because the infra sector constitutes several components.
Elias George, partner and national head (infrastructure, government, and healthcare), KPMG India, says, “A revamp of the existing PPP (public-private partnership) paradigms, models and regulations will be crucial to revive infra investments.” George feels that more needs to be done to cut down red tape barriers and improve the logistics architecture. Lack of clarity on different PPP and other models of infrastructure projects and inconsistencies in regulations haven’t helped the sector as expected.
To kick-start private investment will be a problem area. This is due to a vitiated overall business climate. As Tata Sons’ chairman, N. Chandrasekaran, recently said, “We need supervision, we don’t need suspicion. And we have suspicion. All our rules start with suspicion.” In response to this scathing remark, the FM explained, “The government doesn’t want to see every business house with suspicion. It is not our intent. My first attempt, which continues even today, is to decriminalise everything to do with companies law or related laws.”
However, mere changes in laws and rules will not help. What is needed is a transformation in the mindset of the civil servants. As one businessman claims, “The first letter that I got when I launched a new company was a letter from the authorities on why I have not paid my taxes. This is was before I bagged my first order. This is ludicrous.” The manner in which government views business and vice versa, have to change. The finance minister echoed the sentiment when she recently stated: “The path to $5-trillion economy would be a lot easier if built on trust between the government and industry.”
The lack of trust is reflected in the foreign investment inflows. Although the government has hiked FDI limits in several sectors, foreign investors haven’t shown much excitement. Although India was among the top ten recipients of FDI in 2019, as per a UN report, more needs to be done. Budget 2020 may hike FDI limits in the insurance sector. It may ease technical FDI issues related to round tripping, i.e. take advantage of tax havens to route money out and bring it back. But these moves will prove to be controversial and contentious.
Lending-led growth
The Reserve Bank of India (RBI) reduced interest rates several times, but is now constrained by high inflation. The banks too are under pressure because of huge bad loans, and wish to lend only to safe companies and projects. No one wishes to take risks. This is seen in the manner in which they have dealt with bad loans. Most banks, including the largest one, State Bank of India, wrote them off, rather than recover them. Publicly, the banks maintain that write-offs do not imply that they gave up on recoveries. In practice, the recoveries are minimal.
Under the new insolvency code, bankers agreed to huge haircuts, i.e. accept very low percentages of unpaid loans from the new buyers of companies. Only in rare cases, did they recover sizeable percentages. Only in exceptional cases did they get more than what was owed to them. In addition, as the RBI found, several banks, including SBI, under-reported their bad loans to hoodwink the regulator, and boost profits. Clearly, their balance sheets are not as strong as they seem. The reasons are obvious: lax risk management systems, politicisation, economic slowdown, and not-so-robust judicial mechanism.
Hence, there is a need to revive the failing NBFCs. Several options are available to the FM. She can address the asset-liability mismatch in this segment, and tighten rules related to corporate governance.
She can initiate a government-driven lending avenue for the NBFCs, so that the former need to borrow less from the banks. Alternative lending modes, like chit funds, despite the controversies, can be made more attractive. All that Budget 2020 has to do is to treat chit funds’ dividends the same way as NBFCs’ interest under the GST regime.
Gayathri Parthasarathy, national head (financial services), KPMG India, offers more technical options. She says that securitisation of short-term assets like gold loans and consumer loans can impart higher and much-required liquidity. The government can treat lending by banks to the NBFCs on a par with the former’s priority sector lending portfolio. “In less developed rural areas, where NBFCs disburse loans in cash, the tax on cash withdrawals can be withdrawn, and refunds to loss-making NBFCs can be processed faster,” she adds.
Stimulus-led growth
One of the debates today is whether Budget 2020 can offer an overall stimulus package, or at least a curtailed one for several afflicted sectors like auto and housing. The latter is more likely than the former; the latter is also what the government can do at this juncture. The immediate fallout of a stimulus and public investment will be a higher fiscal deficit, which will raise inflation. Hence, while there may some fiscal slippage, says Abheek Barua, chief economist, HDFC Bank, who expects the FM will “consolidate the fiscal deficit to 3.4-3.5 per cent of GDP”.
According to him, this is indicated by the finance ministry’s decision to cap spending by the various government departments in this quarter (January-March 2021). “It is a clear indication of the official stand. It means that a major fiscal stimulus is pretty much ruled out in Budget 2020,” Barua adds. Hence, there may be no radical departure from the previous budgets. In fact, Madan Sabnavis, chief economist, CARE Ratings, says that the Centre has already done enough. “Budget 2020 can help only in a limited way,” he adds.
Economists like Sabnavis contend that the private sector and the states need to take over from here. Instead of Centre’s fiscal deficit, the states’ limits can be enhanced beyond the 3 per cent of respective state’s GDP for one year. The thrust has to also come from the private sector. Only in such a situation, explains Sabnavis, can both investment engines fire together. At this stage, some economists felt, the government can only lend support to the private firms and states. The reason is that the Centre’s finances are in dire straits.
In the first eight months of the current fiscal, the total revenue was Rs 9.83 trillion, or only 50.1 per cent of the annual target. More trouble is ahead as the estimated disinvestment receipts are likely to fall short of the target. At present, the government has managed 55-60 per cent of the estimates, according to government sources. The sale of the ailing Air India, and the cash-rich BPCL can help, but only if the government’s stakes are sold within the next two months.
Subhash Chandra Garg, former finance secretary, agrees that fiscal performance in 2019-20 was quite weak. He predicted a huge shortfall of Rs 2 lakh crore, plus or minus Rs 25,000 crore, in the annual tax collections. Apart from the slowdown, a major reason is the lacklustre performance of GST, which, according to media reports, is hampered by a proliferation of fake invoices, shell and shelf companies, and tax evasion across the whole distribution chain.
In a week’s time, one will know whether Sitharaman presents a do-or-die budget, or a do-and-die one. Her hands are tied, but this is the time to break free, and go ahead with policies that are driven by sheer economics, rather than electoral politics.
