19 July 2019
Signal of intent~II
Source: By Govind Bhattacharjee: The Statesman
As the Economic Survey has stressed, the focus should be on transforming the current $2.7 trillion (Rs 190 trillion) economy into $5 trillion (Rs 350 trillion) by 2024-25. This means adding some Rs 30 lakh crore every year to the GDP, warranting a growth rate in excess of 10 per cent in real terms (more than 8 per cent as indicated), assuming that the stability of Re-Dollar exchange rate would be maintained over the next five years which again will depend on inflation, trade deficit and fiscal deficit.
Given the current shares of agriculture, industry and services in the GDP, this would mean adding about Rs 5 lakh crore annually from agriculture, Rs 10 lakh crore from manufacturing and Rs 15 lakh crore from services. To achieve these targets would require a host of structural reforms, including lowering of corporate tax rate to levels around 20 per cent prevailing in the East Asian economies, lowering of import duties which is a tax on exports, besides transformational reforms in the factor market, elimination of revenue deficits and reduction of fiscal deficit other than by way of creative accounting, creating transparent fiscal rules and establishing fiscal councils to provide credibility to our budget numbers to foreign investors.
The budget does address some of these issues, like its promise of investment of Rs 100 crore over the next five years in infrastructure, a huge jump in housing construction, especially in the rural areas (1.95 crore in rural and 81 lakh in urban areas) which will have a significant multiplier effect in income employment in various sectors. Rural infrastructure has been given a much-needed welcome push, by allocating Rs 80,000 crore on augmenting 1.25 lakh kilometres of rural roads, with the aim of setting up a national highway grid.
The focus on tax administration was one of the most welcome measures of this budget which was long-overdue. In their zeal for increasing revenue, tax administration is often ignored by Finance Ministers. To the credit of Mrs Sitharaman, the crucial bottlenecks in this regard have been identified and addressed by instituting appropriate mechanisms.
The first of these was the interchangeability of Aadhaar and PAN numbers, which will ease the problems of those not having the PAN cards for filing their income-tax returns. Also welcome was the announcement regarding the introduction of pre-filed returns to further ease the process of filing tax returns wherein the relevant tax-related information will be collected and collated from various sources such as banks, registrars (for stamp duty and registration fees for transactions in land and real estate’s), mutual fund houses, financial investment companies, etc.
The return will be readily available for download from the income tax e-filing website, while taxpayers only need to verify the details therein, pay the taxes and file the returns. But the most welcome feature was the faceless incometax assessment in the electronic mode involving no human interface which is be launched this year in a phased manner, aimed at reducing taxpayer harassment and elimination of corruption amongst the tax assessing officers.
With the Modi Government’s single-minded focus on curbing corruption in public life, as evidenced in its recent dismissal of number public servants ~ mostly from the revenue services ~ on charges of corruption, this will further bolster its credibility as far as attitude towards corruption is concerned, while cleansing the tax administration significantly. Only by the innovative use of technology, like in prefilled returns and expansion of tax base can corruption and black money be eliminated.
In this regard, the 2 per cent TDS on cash withdrawals ~ a positive step to curb black money ~ was half-hearted at best. The ceiling of Rs 1 crore on cash withdrawal in a year to attract this is way too high to make any real difference. If the Government is really serious about digitising the economy, it needs to move in this direction much more aggressively.
The level of cash in the economy now exceeds that before demonetization after which it had come down for some time, but the tempo was not maintained. To start with, a lower ceiling, of say Rs 50 lakh, could have been prescribed, while laying out a plan for progressive reduction in the ceiling over the next 3/4 years. Clearly, the Government is still shy of walking its talk of digital economy. If higher cash requirements of companies managing ATMs were the consideration, this can be resolved with suitable exemptions.
One important measure announced in the budget was the intention to tap the overseas money market for the first time for Government borrowing, with an eye to boost foreign institutional inflows. Foreign investors can only invest in Government rupee bonds, with no exchange risk involved. With borrowing in foreign currencies, the government will have to bear the attendant exchange risks which have spelled disasters for many economies worldwide with a high level of external debt. Our external debt ($543 billion in March 2019) to GDP ratio is rather small 19.7 per cent (compared to our overall Debt: GDP ratio of 68 per cent), three quarters of which can be covered by our forex reserves.
With sovereign external debt ($104 billion) constituting only 3.8 per cent of GDP, there is certainly scope for borrowing from foreign money markets that offer much lower interest rates. If investments are to be boosted, the cost of capital must be lowered, and even with India’s current ratings (Moody’s Baa2 and S&P’s BBB), India’s foreign borrowing may command interest rates lower than 3 per cent, allowing the Government to save substantially on interest costs, provided the exchange rate could be maintained which the Government thinks possible with the current low inflation and continued focus on fiscal consolidation. So far, this option has not been explored, and whether its time has come can be debated, but given the fact that the Government’s huge domestic borrowings have been crowding out private borrowings, creating pressure on interest rates that need to be eased for boosting demand and growth, the step is a welcome one in the right direction.
Allocating Rs 350 crore for the MSME sector was a sop for the sector, but it would have been better to incentivize them to expand and become nonMSMEs. Sops work only in the short term, for long term gains, one need to have a coherent strategy backed by a well formulated plan, implemented efficiently. Implementation still remains our biggest hurdle and how many of the budget proposals would be implemented efficiently remains to be seen.
The target to raise Rs 1.05 lakh crore from strategic disinvestment of the public sector perhaps will be the biggest challenge in this regard, especially in view of our recent experiences with Air India, even though the Government is agreeable to lower its stake below 51 per cent. The welfare agenda retains its hold on this budget too, like in all other previous budgets. Arguably, it was a legacy inherited from the Congress-led UPA and cannot be rolled back without incurring significant political costs for which the BJP, even with such a huge majority, seem to have little appetite. But to sustain the huge welfare expenditure, we need a real GDP growth of the magnitude of 10 per cent on which depends on India’s destiny. All that can be done in the interregnum is to ensure that leakages stop. Significant progress towards this has already been attained through the JAM and DBS initiatives. This rhythm must be accelerated.
A huge burden inherited by this government from the UPAera was the NPAs of banks and NBFCs. This has continued to torment their balance-sheets, credit, profitability and returns. The Insolvency and Bankruptcy Code has helped somewhat, but not sufficiently to restore the balance-sheets to health. The NPA crisis has softened but is still far from being resolved, despite recapitalizing the banks during the last two budgets by capital infusion of Rs 1.35 lakh crore through the recapitalisation bonds. The government has promised them another tranche of Rs 70,000 crore this year by the same route of recapitalisation bonds, which do not show up on fiscal deficits as only the interest payments on these bonds are only accounted for in the Government Accounts which again is nothing but an accounting trick. It’s time to recognise all liabilities and assets for what they are truly worth and promote fiscal consolidation with better credibility and integrity