S. Mahendra Dev – Vice Chancellor, Indira Gandhi Institute of Development Research, Mumbai writes a special column for The Deccan Mirror.
The Indian economy has been slowing down in the last few years. The GDP growth declined from 7.0% in 2017-18 to 6.1% in 2018-19 and is expected to be 5% in 2019-20. It was only 4.5% in Q2 of 2019-20. Investment rate, consumption, and export growth rates decelerated over time. Gross fixed capital formation as a percent of GDP declined from 34.2% in 2011-12 to 29.0% in 2018-19. Gross domestic savings as a percent of GDP also fell from 34.6% to 30.1% during the same period. Exports have been stagnant around $300 billion since 2011-12.
What are the reasons for the decline in investment rates and GDP growth in the last few years? High non-performing assets of banks (NPAs), low credit growth, global factors particularly for trade, non-banking financial companies (NBFCs) problems, low agriculture, and rural incomes were responsible for the slowdown. The construction sector also showed a slowdown. Over regulation was also responsible for banking and financial sector crisis. One should distinguish between genuine business decline due to economic slowdown and wilful defaulters. But, crony capitalism continued even under the present government.
Against the above background, we examine the overall budget and way forward to improve growth and well-being.
Revenues and Expenditures
Revenues and Expenditures Any budget of a country relates to mobilizing revenues and spending money on various development and non-development activities. The revised estimates (RE) of the total revenues (tax+non-tax revenues) in 2019-20 were short of Rs. 1.13 trillion compared to budget estimates (BE) of the same year. Tax revenue was lower by Rs. 1.44 trillion in RE than BE of 2019-20. But if we take gross tax revenue (combined State+Centre), the deficit was nearly Rs.3 trillion (about 1.46% of GDP). For the year 2010-21, the gross tax revenue is projected to rise by 12%. The budget projects 10% nominal GDP growth for the year 2020-21. Tax revenue projection of 12% seems to be ambitious, given the 10% nominal GDP.
The total expenditure was 13.2% of GDP in 2019-20 and projected to rise to 13.5% in 2020-21. This indicates that the government has not increased the expenditure as a stimulus to the economy. Capital expenditure is projected to increase by 18.1% in 2020-21. Capital expenditure as percent of GDP rose from 1.71% in 2019-20 to 1.83% in 2020-21. Much more capital is needed to improve the investment rate and GDP.
Fiscal deficit
Last year, the budget had indicated 3.3% of GDP fiscal deficit in BE of 2019-90. In this budget, the fiscal deficit increased to 3.8% in RE of 2019-90. The government used the escape clause of using 0.5% more under the FRBM Act. For 2020-21, the fiscal deficit is projected to be 3.5% of GDP. The government did the right thing by raising the fiscal deficit. But, if you include off-budget expenditures, the fiscal deficit would be nearly 4.64% of GDP in 2019-20 and 4.3% in 2020-21. If we add deficit of state governments and expenditure of public sector undertakings, the public sector borrowing comes to 9% of GDP. All household financial savings are used for this deficit. The budget says medium-term fiscal consolidation would be maintained. Net market borrowings for the year 2019-20 would be Rs.4.99 lakh crores, and for the year 2020-21, it would be Rs.5.36 lakh crores. A good part of the borrowings for the financial year would go towards capital expenditure.
Disinvestment
The government has ambitious plans for disinvestment for the year 2020-21. Disinvestment target was 1.05 lakh crores in 2019-20 and the government is hoping to get It wants to raise revenue from disinvestment from Rs.65,000 crores in 2019-20 to Rs. 2.1 trillion in 2020-21. This indeed is an ambitious plan. The government now proposes to see part of its holding in LIC by way of an initial public offer.
Tax proposals
The budget says that in continuation of reforms already taken so far, the objective of the tax proposals is to introduce further reforms in this budget to stimulate growth, simplify the tax structure, bring ease of compliance and reduce litigations. It reduced tax rates for personal income tax for the persons having up to Rs.15 lakhs. But taxpayers above Rs.15 lakhs income will have to pay the same tax rate of 30% that existed earlier. There are two options for the income taxpayers: one is to opt for the old tax structure; the second one is to opt for the new one without exemptions. Chartered accountants will be busy helping the taxpayers.
On the corporate side, companies will no longer be required to pay the Dividend Distribution Tax (DDT). However, ‘the dividend will be taxed only in the hands of the recipient’s applicable rate.’ Stock markets initially reacted negatively as they expected removal of long term gainful tax. Another important announcement is granting 100% tax exemption for investment by the Sovereign Wealth Fund of foreign governments in the priority sectors. Start-ups also got some boost as the budget proposes to ease the burden of taxation on the ESOP (employee stock option plan) of the employees by deferring the tax payment by five years or till they leave the company or when they sell the shares whichever is the earliest. There are also proposals on concessional rates for cooperatives, MSME, affordable housing, and charity institutions. A taxpayer’s charter will also be introduced in order to have trust between taxpayers and the administration.
On indirect taxes, Aadhaar-based verification for GST compliance is introduced. In order to have a check on imports, customs duties are proposed to be raised on some items. This is not a good proposal. This is like an import substitution policy of the pre-reform era. One has to increase the competitiveness of the Indian industry to compete with imported goods.
Three Themes
Part A of the budget contains three main themes:
(a) Aspirational India which includes agriculture and rural development, health, education, and better jobs;
(b) Economic Development covers industry, commerce and investment and
(c) Caring Society focuses on women & child welfare, culture and tourism and environment and climate change. We will examine some of the budget proposals here.
Agriculture and Rural Development
The 16 action points for agriculture, irrigation, and rural development presented by the Finance Minister are in the right direction. These proposals cover model laws on marketing, solar power generation, warehousing, cold storage, horticulture sector, integrated farming systems, livestock, blue economy, self-help groups, etc. But, these proposals may not be enough to revive Indian agriculture and rural areas. The success of these proposals also depends on how they are going to be implemented in the future.
The budget indicates that Centre would encourage those State governments who undertake the implementation of model laws already issued by the central government. The farmers want freedom. The economic survey talks about the need for removal of the Essential Commodities Act (ECA) as a frequent and unpredictable imposition of blanket stock limits on commodities neither brings down prices nor reduces price volatility. Similarly, banning exports hurts farmers the most. There is a need for a long term consistent policy on exports and futures markets. The budget is silent on ECA and push to agricultural exports. It also did not mention food and fertilizer subsidies. The budget allocates Rs. 71,000 crores for fertilizer subsidies and 1,16,000 crores for food subsidies. We also have off-budget allocations on these two subsidies. It is better to introduce a direct benefit transfer system in fertilizers.
Linking pump sets to solar energy and scheme to enable farmers to set up solar power generation capacity on their fallow/barren lands are good measures. It also helps with the goal of doubling farm incomes. It seems China is using this mechanism to increase agricultural income in a big way. India can also explore having solar power generation by farmers even on normal lands without disturbing crop production. Focus on warehousing, cold supply chains, adopting a cluster basis for horticulture are good measures to augment incomes.
The farmers should get remunerative prices for their production. Economic Survey mentions ‘Thalinomocs’ and says prices of Thali have declined. This helped both rural and urban consumers. It may be noted that farmers are getting lower incomes due to low food prices. Probably the economic survey has not recognized this point.
The immediate need is to put more money in the hands of agriculture and rural households to improve their purchasing power. It should have increased allocations to MGNREGA, PM-Kisan, and rural infrastructure to raise incomes in rural areas. There was a reduction in the allocation to MGNREGA from Rs.71000 crores (RE) in 2019-20 to Rs.61500 crores (BE) in 2020-21. The allocation to PM-Kisan in 2020-21 (BE) is Rs.75,000 crores. Probably states are not able to disburse due to the absence of land records. Of course, these are short term cyclical measures, and these should be accompanied by structural reforms for higher growth in agriculture and rural development.
Some of the measures and allocations on Aspirational India, Economic Development, and Caring Society will also help agricultural and rural families. Big investments are needed for rural infrastructure.
The 16 action points for agriculture are somewhat better than last year’s budget announcements. But, one expected bold measure in the context of agriculture and rural distress. The budget mentions state governments only in the case of Centre’s model laws on marketing and land leasing act. Agriculture is a state subject. The central government has to work closely with states in reviving agriculture and the rural sector with the goals of achieving higher growth, inclusiveness, and sustainability.
Health and Sanitation
Budget allocates of Rs.69000 crore for the health sector. Rs.12,300 crore for Swachh Bharat this year. Health expenditure is still lower in India as compared to other countries. There is also a proposal to set up hospitals in Tier-II and Tier-III cities with the private sector using PPP. Expanded Jan Ashadhi scheme for all hospitals under Ayushman Bharat 2025.
Education
Education – Rs.99,300 crore for the education sector in 2021 and about Rs.3000 crore for skill development. Skill development needs much more focus, as this is important for the future of India. Urban local bodies will provide internships to young engineers for a year. Degree level full-fledged online education programmes by institutions ranked in the top 100 in NIRF rankings, especially to benefit underprivileged students, will be introduced. A national policy university of Asia and Africa will be established to promote ‘study in India’ programme.
Infrastructure
The government launched in December 2019 the National Infrastructure Pipeline of Rs.103 lakh crore. It consists of more than 6500 projects across sectors. The new projects will include housing, safe drinking water, access to clean and affordable energy, healthcare for all, world-class educational institutes, modern railway stations, airports, bus terminals, metro and railway transportation, logistics and warehousing, irrigation projects, etc. It is supposed to create jobs and improve the ease of living for each citizen in the country.
The budget proposes to provide Rs.1.7 lakh crore for transport infrastructure in 2021. National Logistics Policy will be released soon. Chennai-Bengaluru Expressway will be started. It aims to achieve electrification of 27,000 km of lines and plans to have a larger solar power capacity for Indian Railways. The government also proposes a Bengaluru suburban rail project at the cost of Rs.18,600 crore. The government will monetize 12 lots of national highways by 2024. 100 more airports will be developed by 2024 to support UDAN.
New Economy
Technological revolution will define the growth of any economy and country. The government wants to encourage a new economy with innovations based on artificial intelligence, internet-of-things (IoT), 3D printing, drones, DNA data storage, quantum computing, etc. Rural areas will be provided with digital connectivity. The budget provides Rs.6000 crore to the Bharatnet programme in 2020-21. It also provides an outlay of Rs.8000 crores for the National Mission on Quantum technologies and applications.
Women & Child and social welfare
Under caring society, the budget provides substantial allocations for women&child and social welfare in 2020-21. These are – Rs.35600 crores for nutrition-related programmes; Rs.28,600 crores for programmes that are specific to women; Rs.85,000 crores for Scheduled castes and other backward classes; Rs.53,700 crores for Scheduled Tribes.
A close look at the numbers shows that some sectors/programmes had more than 10% rise, such as agriculture, social welfare, and urban areas. Some others, like health, education, rural areas, and transport, have a rise of less than 10% in allocations. For some programmes like MGNREGA, National Health Mission, and Ayushman Bharat, the allocations declined.
Banking and Financial Markets
Deposit insurance cover for a depositor in banks has been increased from Rs. 1lakh to Rs.5 lakh per depositor. This is somewhat better than earlier for the depositors.
Government plans to amend the Companies Act to decriminalise civil offences. This will give some assurance to the corporate sector. The restructuring of the debt window for MSMEs has been increased from March 2020 to March 2021. For encouraging export markets, for mid-sized companies, a scheme of Rs.1000 crore will be anchored by EXIM Bank together with SIDBI. This will be for selected sectors such as pharmaceuticals, auto components and others. In financial markets, the limit of FPI in corporate bonds, currently at 9% of outstanding stock, will be increased to 15% of the outstanding stock of corporate bonds.
The Way Forward
The budget 2020-21 has a little bit for everybody but does not have bold measures. When the economy is going down, we need to undertake both cyclical and structural measures. Government expenditure has to be increased to stimulate the economy. But, the government does not have too much revenue to go for a big stimulus package. It has to raise funds through disinvestment and asset monetisation. For the revival of growth, private investment is the key. Some of the measures taken in the budget will help in reviving private investment.
Among other things, we need to focus on three structural issues: Physical infrastructure development, raising human capital, and revival of the rural economy for the long-term growth of 7 to 8 percent and attaining a $5 trillion economy by 2024.
Infrastructure development
Generally, it is said that we need three things for higher growth. These are – infrastructure, infrastructure, and infrastructure. This will help both cyclical and structural factors. Late IG Patel indicated in the early 2000s that we should aim only for 6% GDP growth until we improve infrastructure. I hope we have not come back to the IG Patel growth rate of 6% or below in the medium term. A lot of progress has been made in all infrastructure sectors. However, almost all indicators score poorly if one looks at India’s urban and rural infrastructure, particularly compared with Southeast Asian countries and China.
However, in the present context, some kind of pump-priming from the government is necessary to take care of both cyclical and structural factors. This can be done without compromising much on fiscal deficit targets. Disinvestment, reducing non-merit subsidies, removing exemptions, increasing the tax base, shifting from revenue to capital expenditures, etc. are some of the measures for raising government investment. The government seems to be fast-tracking public capex and encouraged public sector enterprises (PSEs) to invest more and trying to clear the pending bills for the corporate sector and MSMEs. Announcement of Rs.103 lakh crores over five years for infrastructure by the government is an important measure. However, details on how to get finance, the roles of public and private investment, the contract structures like PPPs are not clear. Vijay Kelkar committee’s recommendation on PPPs would be useful. The private sector role is equally important. Spending on infrastructure will have multiplier effects in the overall economy, including stimulating private investment, aggregate demand, and jobs. In fact, the construction sector was an important source of job creation during 2004-05 to 2011-12. This sector has to be revived in order to create growth and employment.
Human capital
The second structural issue is raising human capital for higher growth. Health and educational achievements are essential for human capital. Yet the country’s progress on both these aspects leaves much to be desired. We also have great quality dichotomy in both these sectors. There are islands of excellence that can compete internationally in education while vast majority of them churn masses of children with poor learning achievement and unemployable graduates. One has to fix this dichotomy in health and education. Few years back, the Deputy Prime Minister of Singapore cautioned about school education in India. He says, “schools are the biggest crisis in India today and have been for a long time. Schools are the biggest gap between India and East Asia. And it is a crisis that cannot be justified”. Skill deficiency of workers is well known. Niti Ayog says that only 2.3% of Indian workers have formal skill training compared to 70% to 80% in other countries. Promotion of technology and knowledge economy will add to growth. One can’t have a ‘demographic dividend’ for growth with low human capital. In order to have structural change from agriculture to non-agriculture and from unorganized to organised, education and skill development are needed. Women’s labour participation rates have been low and declining. Raising women’s human capital and participation rates can improve economic growth. We may also not achieve high human capital and productivity, with 40% of our children suffering from malnutrition.
Focus on agriculture
We can’t expect demand to increase as 70% of our population staying in rural areas and are having stagnant incomes and wages. There is a need for revival of rural economy with infrastructure investment and structural reforms. Agricultural marketing reforms should be a priority. For better price discovery, agriculture has to go beyond farming and develop value chains comprising farming, wholesaling, warehousing, logistics, processing and retailing. Agricultural exports should be promoted with various policies. Similarly rural infrastructure and water management are other priorities. Stimulus and structural reforms can raise farmers’ prices and wages and rise in demand for manufacturing and services.
Physical infrastructure development, raising human capital, and stimulus and reforms in rural economy are needed to achieve a sustainable 7 percent to 8 percent growth. The Centre has to work closely with states similar to the GST council for achieving higher growth. This budget has made a small beginning in this direction. But stimulus and structural reforms can be announced outside the budget. Let us hope we will have many more reforms in the years to come.