Insights into Editorial: Searching for reform signals
There were high expectations from the Budget to provide a clear road map for much-needed reforms, given that the government received an unprecedented electoral mandate.
The GDP growth in the last quarter of 2018-19 was the slowest in the last five years, and considering that the capacity utilisation in manufacturing has already peaked, reviving the investment climate is critical to accelerate economic growth.
The unemployment rate, which is 6.1%, is the highest in four decades. With the Economic Survey making a pitch for creating a virtuous cycle of saving and investment, there was hope that there would be far-reaching announcements in the Budget.
Will the Budget lead to greater investment in the economy?
The government has said it will invest heavily in infrastructure and in the digital economy.
The Budget does talk of proposed investments of Rs 100 lakh crore over the next five years in infrastructure, which could be in roads and few other sectors.
But more clarity on that could perhaps come later after the government finalises the structure of long-term financing and a new long-term development financial institution to fund such projects.
On the face of it, there does not seem to be any major trigger or incentive for firms to commit more capital.
Revive the investment climate:
The revival of the economy requires the revival of the investment climate. A recent OECD study has shown that corporate taxes in India are very high amounting to almost 48% when the dividend distribution tax and surcharges are taken account of.
The Budget in 2015-16 promised to bring the basic rate down to 25%. This was implemented for companies with a ₹250 crore turnover in the 2018 Budget; the present Budget increases it to ₹400 crore.
Although these companies cover 90% of the number of companies, their tax payment is less than 10-15%.
If large investments have to be attracted, then the reduction should have been general and the scaffolding approach can only disincentivise the companies to grow bigger and better. This only discourages the companies from becoming larger.
While the Economic Survey is eloquent about the need to transform the ‘dwarfs into giants’, the various measures taken in the Budget to incentivise the MSMEs amount to reiterating that ‘small is beautiful’.
Disinvestment policy is key to revive Investments:
A major source of additional revenue projected in the Budget is by having an active disinvestment policy. Disinvestment is expected to generate ₹1,05,000 crore, which is almost ₹15,000 crore higher than what was taken in the interim Budget.
The Budget speech also speaks about an active disinvestment policy beginning with Air India.
Another source of revenue which is expected to increase is the dividend. This amounts to ₹1,63,528 crore, which is ₹21,457 crore more than what was estimated in the interim Budget. Much of this will be from the Reserve Bank of India (RBI).
To improve and reform Labour laws to Increase the Investment Environment:
The most important reform measure in the Budget is the proposal to streamline multiple labour laws into a set of four labour codes.
Although the details are not yet available, it is hoped that the government will embark on the much-needed reforms in this area. This is a contentious issue that has been long debated.
The Economic Survey too has referred to the need to make the factor markets less distorting and the disincentives these laws create in ensuring optimal sizes.
Hopefully, the government will address this in the interest of increasing employment and exports of labour-intensive goods.
Balancing the books of Revenue and Capital Expenditure:
Finance Minister has a difficult job of balancing the books, particularly when the revenues are not buoyant and demands for expenditure are high.
- From that perspective, it is noteworthy that she has tried to show her commitment to the process of fiscal consolidation by keeping the fiscal deficit budgeted at 3.3%.
- The revenue is lower by ₹55,463 crore compared to the interim Budget estimate but this is offset by non-tax revenue estimated to be higher by ₹40,532 crore.
- Thus, there are not many significant departures from the estimates of revenue and expenditure presented in the interim Budget.
- The gross income tax revenue is estimated to be lower than the interim Budget by ₹90,000 crore, mainly on account of lower GST (₹97,857 crore) and individual income tax (₹51,000 crore).
- Despite taking lower estimates, the revenue estimates look far too optimistic in comparison with the pre-actuals given by the Controller General of Accounts.
- To realise the Budget estimates, the increase over the actual tax collected in 2018-19 in gross tax revenue will have to be 21.2%, net tax revenue must rise by 25.3%, and the non-tax revenue will have to increase by 27.2%.
The reform front:
- There are very few measures that can steer the economy to acceleration, leave alone changing gear to achieve the aspirational goal of achieving 8% growth to reach a $5 trillion economy by 2024.
- The objective of ‘Make in India’ should be to make the economy competitive and not to dish out higher cost, inferior products to domestic consumers.
- However, By selective increases in customs duty and by varying the rates based on whether the item is an intermediate good, capital good and final consumer good, the Budget has caused the effective rate of protection on many items to be much higher than the nominal rates. This can create unintended distortions. This is clearly retrograde.
- One of the major initiatives needed at the present juncture is to reform the banking system.
- The Budget allocates ₹70,000 crore for the recapitalisation of public sector banks, but is silent on the urgently needed structural reforms including governance reforms.
- Nor are there any concrete measures to deal with the Non-Banking Financial Companies crisis apart from empowering the RBI to undertake the regulatory function.
- Not that everything has to be done in the Budget, but events have shown that there is a need to improve both the legal framework and governance system.
- Consolidation of public sector banks cannot serve the purpose of changing the structure of incentives and accountability.
What is the impact on the middle class?
In keeping with the goal of housing for all, the finance minister announced measures to boost both the demand and supply of affordable housing in India.
To boost demand, the Budget provided an additional deduction of Rs 1.5 lakh for interest paid on loans for an affordable house that is valued up to Rs 45 lakh. This implies that a person purchasing an affordable house can now avail of an enhanced interest deduction of Rs 3.5 lakh.
The Budget has also proposed that public infrastructure and affordable housing be taken up on land parcels held by the Centre. This could help boost the supply of affordable housing.
On the other hand, the finance minister announced higher taxes on petrol and diesel. Consequently, consumers will have to pay roughly Rs 2.50 per litre of petrol and diesel.
In a way, yes, with the government’s decision to borrow from the international debt markets for the first time.
That’s a move which has been in the making for a couple of decades but on which successive governments could never move ahead.
The government also appears to be sliding into a protectionist mode, going by the increase in customs duty on everything from cashew kernels to PVC, newsprint and even auto parts.
While some of it may be well-intentioned to promote domestic manufacturing, this sends out a retrograde signal on the reforms front.