The Union Budget will be bold and different. It has to be, because it’s a do-or-die situation for the Government which has to course correct all that ails the economy
Expectations ride high on Finance Minister (FM) Nirmala Sitharaman’s second Union Budget to revive the feel-good factor, which has been missing since negative news flow continued to dominate national and international headlines. At a time when the country seeks to increase investments from FDI and the local industry, the Government needs to pull every lever that can restore business confidence and make India the preferred investment destination. The 2020 Budget will be bold, it will be different. It will be a win-all one. It has to be, because it’s a “do-or-die” situation for the Government which has to course correct all that ails the economy. Undoubtedly, these are challenging times for any FM to present a Budget, as achieving the goal of a $5 trillion economy by 2024 necessitates doubling the growth rate to 12 per cent year on year for the next five years, which currently seems a distant dream.
What is unmistakable is that never before has any Prime Minister immersed himself so deeply in the pre-Budget exercise to get a first-hand sense of ground realities from India Inc, economists and policymakers. And, never before has an FM presented virtually four mini-Budgets in quick succession after her maiden Budget last year in an attempt to recalibrate if Government interventions are producing the desired outcomes to achieve whatever it takes to set the economic wheels in motion.
Fixing the economy and employment generation is the top priority of policymakers, as the window to capitalise on our demographic dividends is a finite one. Time is running out, as the labour force in the middle and lower levels is ill-equipped for absorption into Industry 4.0, which will worsen the problem of unemployment unless we make quantum leaps on our Human Development Index.
Thus far, the economy has been propped up by Government spending, which is only an interim solution till the private industry does not participate in job creation and expansion. World over, Governments are following a similar template for revival by marginally exceeding fiscal prudence by a percentage point in order to satisfy rating agencies. Since the global economic crisis of 2008, exceeding fiscal deficit targets has become the “new normal”, as a decade of easy money has accumulated a record $250 trillion debt, which is a cumulative of sovereign, corporate and household leverage. Central bankers, from the European Central Bank to the IMF, have encouraged Government spending in the hope of reaping economic dividends, regardless of mounting debt to GDP ratios. Globally, we are living through the Age of Uncertainty, beset by more variables than constants than we ever faced in the last 50 years. This is the third slowdown India is facing since 1991, and if we look back at the commentary post the Lhman-led global collapse in 2008, sentiments were even more dismal than they are today. Though the financial sector continues to face massive NPA problems, this is not just an India-centric problem but a worldwide phenomenon. A flashback to what got us here in the first place is that nothing jeopardised the already beleaguered and broken Indian banking sector more than the collapse of IL&FS in 2018 and DHFL in 2019. This was truly India’s unacknowledged Lehman moment, as IL&FS alone accounts for defaults of about Rs 91,000 crore owed to banks, institutional investors and mutual funds. While there is enough liquidity available with banks, they are not lending to long-gestation projects in infrastructure, housing or heavy industry such as steel and cement, which has a cascading effect in delaying their completion. The solution lies in creating a separate Development Finance Institution to boost long-term lending for projects like railways, ports, power and so on, as also a faster resolution of the insolvency process that would boost credit flows.
Expectations are that the Budget would lay the road map for a consolidated action plan to jumpstart the multiple propellers of growth by incentivising both the supply and the demand side. Starting with agriculture, housing, construction, automobiles and telecom, to the unorganised sector and MSMEs, all of which await a bailout plan. MSMEs contribute 45 per cent towards manufacturing output and over 28 per cent towards the GDP, while creating employment for over 11 crore people. The Centre has done well in earmarking Rs 100 lakh crore for infrastructure by 2025, provided a Rs 25,000 crore fund to revive the realty sector and allocated Rs 75,000 crore for improving farm productivity. Yet, the agri-crisis remains unresolved, as prices of fertiliser, diesel and electricity keep rising and prices of rice, wheat and sugar continue falling due to a surplus, making crop diversification and agro-based industries a priority.
Coming to the corporate sector, recent tax cuts have made Indian corporate tax rates competitively benchmarked to international rates. But as the industry has prioritised on using the cuts to de-leverage — and already has an average of 30 per cent excess capacity — the spinoffs from lower corporate taxes will take longer to play out and they will first wait for demand to pick up before loosening purse strings. The economy relies on seven major vectors of growth for revenue that goes towards nation-building and job-creation: Direct tax collections, Government spending, private industry, domestic demand, disinvestment proceeds, exports and FDI infusion. Typically, during periods of global buoyancy, countries pursue an Export-Led Growth strategy. Conversely, during periods of recession or de-globalisation, the Domestic Demand- Led Growth strategy dominates in order to keep the local economy insulated from global shocks. It is the contraction in domestic driven demand that has this time failed to keep the economy afloat. It is estimated that 70 per cent of economic growth comes from consumption, the rest from investment. Exports have been the other laggard as any comprehensive plan cannot make up the numbers if our share in world exports languishes at 1.7 per cent amid a period of bleak global trade. Consequently, tax collections have been below target in a contracting economy, leaving the Government limited avenues to raise additional resources.
Also, the Government is very likely to again miss the FY 20 disinvestment target, as divestment beyond 0.5 per cent of the GDP cannot be absorbed by the markets. Expediting disinvestment of Air India, Bharat Petroleum, Cement Corporation and Shipping Corporation is not easy as there is not enough appetite from retail or corporate investors to hasten this process. Though India has improved on six out of 10 parameters in the Ease of Doing Business and despite opening up multiple sectors to foreign investment in 2018-19, the foreign investment to GDP ratio has also taken a hit, falling to a decade’s low of 1.1 per cent from a high of 3.6 per cent in 2014-15. Foreign investments are vital for India’s growth, and despite the PM’s powerful pitch to attract investments, there is a mismatch on the ground, when the likes of Amazon or the largest foreign investor like Vodafone are locked in adversarial positions with the courts or the Government.
Perception, as they say, is more important than reality, so intent for creating an enabling business environment must be followed through with leniency and amicable dispute resolution by courts, regulators and line-ministries. Disputes also have a domino effect on job losses and banks that lent to the businesses, sending negative signals to oversees investors.
All said and done, the worst could well be behind us, as we are nearing the phase of capitulation. So the only way from here is up, which offers FIIs very favourable risk-reward ratios to resume investments as we bottom out. Seasoned investors know that investing in totally risk-free assets yields negative returns when adjusted to inflation. So FII money will ultimately flow back into emerging markets like India, which has strong fundamentals, a stable currency, vibrant demographics and high foreign exchange reserves. We will get to $5 trillion, albeit it may take longer than 2024 to achieve the goal. Regardless of the temporary slowdown, India’s weightage will continue to increase in playing a leading role in restructuring the global economic order, once we regain momentum. But for now, Sitharaman will have to add a lot of sweeteners to this Budget and conform to Chanakya’s prescription that, “the king should collect taxes from the taxpayers like a bee collects honey from a flower, without disturbing its petals.”
(The writer is an author, columnist, Chairperson of the National Committee for Financial Inclusion at Niti Aayog)
