A safe, sound but inadequate budget
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Soon after finance minister Arun Jaitley finished his budget speech, came a tweet by Mamata Banerjee, the chief minister of West Bengal. She called the budget clueless, useless, baseless, missionless, actionless and heartless. Someone said that she was cashless and hence the tweet. There is more than a grain of truth to the tweet and to the retort.
The finance minister has played it too safe in all the four budgets that he had presented. The two finance ministers in the first National Democratic Alliance government, in contrast, were visionaries. He began his speech with the observation that the budget itself contained three reforms. One was its presentation on 1 February instead of the last day of the month; the second was the consolidation of the Railway budget into the general budget; and the third was the elimination of the confusing Plan and non-Plan distinctions in the budget expenditure. I can add a fourth. The budget pages in the website of the Ministry of Finance have also been streamlined. For example, ‘Budget at a Glance’ has fewer documents now (7 vs. 10 last year) and they are clearer.
The aforementioned changes are useful reforms, no doubt. But, they are symbolic rather than substantive. That has been the dominant feature of policymaking in this government over the 32 months it has been in office.
India’s economic growth is middling. It is unbalanced. Consumption and public spending contribute to growth mostly. Capital formation has slowed to a crawl. Banks are flush with cash but they are reluctant to lend. The 76th Industrial Outlook Survey of the Reserve Bank of India released last week revealed growing uncertainty among businesses after 8 November. India’s Economic Policy Uncertainty Index too had climbed steeply. One needed a bolder vision to make the country buzz again with the excitement of enhanced possibilities. The budget is missing that. In doing so, it has stuck to the script and spirit of the previous three exercises.
Before the budget was presented, I had drawn up my own markers to evaluate it. There were seventeen of them in my checklist. The budget had managed to satisfy only few of them and that too only partially. First, let us check the revenue assumptions. For starters, the revised estimates for corporation tax and tax on income are almost unchanged from the budget estimate for 2016-17. That is rather unusual. For 2017-18, the government has assumed a 9% rise in corporate tax collections and almost a 25% jump in ‘Taxes on Income’. The former is realistic and the latter does not appear to be so.
Nominal GDP in 2016-17 is expected to be slightly higher at Rs150.75 trillion vs. the budget estimate of Rs150.65 trillion. This is despite the anticipated decline in economic activity due to the currency swap announced on 8 November. However, in terms of actual growth rate, it is 10.2% over the estimated nominal GDP of Rs136.75 trillion for 2015-16, lower than the 11.0% originally projected for last year. Further, this is in line with the growth estimate presented in the Economic Survey for 2016-17.
The government continues to expect brisk growth in indirect taxes. Between customs, excise and service taxes, the expected increase in 2017-18 is 8.8% over the revised estimates for 2015-16. But, then, from 1 July, the new Goods and Services Tax (GST) will come into effect and some commentators think that the government is underestimating the complexity of implementation. After the messy execution of the currency swap exercise, such scepticism has acquired salience.
The government’s overall revenues were budgeted at Rs 19.78 trillion, but it managed to collect Rs20.14 trillion due mainly to the larger than expected excise duty collection. That was due to the lower price of crude oil that prevailed in the last two years. It collected less than the budgeted sums through spectrum auction and sale of stake in government-owned enterprises. Yet, it has pencilled in a higher amount from stake sale in the next financial year. Second, the price of crude oil has risen recently and it may rise further due to geopolitical events. The government cannot pass on the increases to consumers fully and it may have to share in the burden. That will challenge its fiscal arithmetic. But then, this government has managed to stay the course on fiscal prudence despite inheriting a daunting fiscal situation. It might yet surprise us.
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The minister said in his speech that he had restricted market borrowings to Rs3.48 trillion in the coming year, net of buyback. The original budget estimate for net market borrowing was Rs4.25 trillion in 2016-17. Net of buybacks in 2016-17, the revised estimate is Rs3.66 trillion. In any case, the convention is to compare against the original budget estimate and that is what the minister had done in proudly stating in his budget speech that the anticipated market borrowing is considerably less in 2017-18. That probably explains the buoyant capital market reaction to the budget.
In terms of following through on the currency swap initiative on tackling black money, proposed measures in the budget are a bit of a disappointment. Notwithstanding the proposals on funding political parties through formal payments, the only direct measure comes in the proposal to introduce a new law to confiscate the assets located within India of people who have fled the country. This is fine but it is adversarial in nature. Staying in an adversarial mode, the government could have considered ending investment in the country through participatory notes since the stock of such investment has come down in recent years substantially. Market dislocation would be low and the government could have plugged one long-standing avenue for round-tripping of ill-gotten money back into the country.
But, it is as important to facilitate honest and legitimate economic activity as it is to punish and dissuade illegitimate activity. Once again, the government has missed an opportunity on that score. It could have lowered tax rates and raised thresholds substantially. It lowered the applicable tax rate on income up to Rs5 lakh from 10% to 5%. But, offsetting that, it imposed a surcharge of 10% on incomes between Rs50 lakh and Rs1 crore. Overall, the anticipated combined revenue impact of these two measures is revenue loss of about Rs12,800 crore. Yet, the expected increase in taxes on incomes is of the order of 25%. That does not really add up. If the expected increase were due to the anticipated higher compliance, then it would have made sense to bet bigger on it through bolder tax rate reductions and enhanced thresholds.
The government has reduced the holding period for immovable assets to 24 months from 36 months to claim exemption from long-term capital gains taxes. That is a good move along with the inclusion of affordable housing in the category of infrastructure. However, the government missed an opportunity to level the playing field with publicly listed securities which are exempt from capital gains tax if they are held for more than twelve months. That should have been raised to twenty-four months too. One-year holding period is not long-term in capital markets.
The absence of a bold vision was evident too in the meek reduction in corporate tax rate only for companies with turnover of less than Rs50 crore. The promise of reduction in corporate tax rates along with withdrawal of exemptions made in last year’s budget speech has not been realised. Similarly, the government began to address the high employee costs borne by businesses last year. That has not been followed up this year.
The budget provides a small sum of Rs10,000 crore for recapitalizing banks. Mint columnist Tamal Bandyopadhyay recently wrote a comprehensive piece on the stalled banking reforms and recapitalization, reiterating this writer’s own articulated belief that the arrows of banking reforms have remained in the quiver. He cited the most recent financial stability report of the Reserve Bank of India to suggest that stressed assets in the banking system had not quite peaked yet. Banks need to be recapitalized substantially. Unfortunately, the budget confirms the government’s benign or malign neglect of the banking sector. Yet, it has set ambitious credit targets for the farm sector and for micro and small enterprises through the Mudra scheme. If credit targets and expenditure allocations were the yardsticks, this budget would score very well. Mudra loans are an instrument for the government to migrate enterprises into the formal sector and to scale up through performance demands on the borrowers. Such a thinking is missing in the government and hence in the budget.
Early in his speech, the minister said that the agenda of his government is to energize, transform and clean India. If so, the budget is a missed opportunity to do so, yet again. Notwithstanding a few bright spots, it is a tinkering exercise.
V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.