Mumbai: In an economy where the private sector is replacing the government as the biggest investor, the relevance of the Union budget may be waning, but the annual exercise is not going to become redundant anytime soon, said panellists at the Mint Clarity Through Debate discussion in Mumbai on Thursday.
The panel comprised K.P. Krishnan, secretary, Prime Minister’s economic advisory council; Ravi Narain, managing director (MD) and chief executive (CEO), National Stock Exchange Ltd (NSE); Ajit Ranade, chief economist, Aditya Birla Group; Anil Singhvi, chairman and managing director (CMD), ICAN Advisors Pvt. Ltd; and R. Sukumar, editor, Mint. Haseeb Drabu, an economist and former chairman of Jammu and Kashmir Bank, moderated the discussion. Edited excerpts:
Haseeb Drabu: ...once upon a time the government was the single largest investor and the single largest spender in the country. Today it is neither. Today, private corporate investments plus household investment is five times that of government investment. So why should the budget be relevant for parts of the economy? The structure of markets today is vastly different than it was in the 1970-80s. Post-reform, the regulators have taken control of the market. Today, the way the market operates, the dominance of foreign institutional investors again takes it outside of control of the government. There was a time when finance ministers would talk of stock markets in Bombay in the same way as Khan Market of Delhi. I remember the finance minister actually mentioning this and a gentleman who was the finance minister once in 1993 said he wouldn’t lose a night’s sleep on what’s happening in the stock markets and it was seen as a casino. But today, it is the finance minister who is waiting to get an approval of his budget and an approval from the markets. So, things have changed. So, the question we pose to this floor is: How can we make this budget relevant to the new economy and to the new markets situation?
Ajit Ranade: ...Just to correct one little point that you made, that the government used to be the single largest investor in the economy, and you implied that it is not (so) now. Government is still the largest investor in the economy. Keyword is single. Because there is no other single entity that is as large an investor. I think what you are implying is that the private sector contribution to capital formation has perhaps gone up much more than what it used to be. Government spending as a percentage of GDP (gross domestic product) is almost 30%—it’s a large component. Of course, that includes state governments and other forms of governments. The central government alone, which is what the budget is all about, accounts for about 15% of the GDP. That’s what the finance minister is going to announce on the 28th (of February). He is going to announce his plan to spend 15% of the GDP. By no stretch of imagination we should think that this is an irrelevant event...
In many ways, the interest component of the spending is a large component. One-third of the 15% of the GDP is interest spending. There is completely no flexibility on that. Hence, you ask why is the market more interested. Because that component is now going to be dictated by market sentiments—for example, bond prices... To some extent the stock market will also react, for example, (to) tax policies, certain tax holidays whether they will be extended, the extension of the stimulus, roll-back of the stimulus... The other big thing about the budget is that perhaps (it is) the once-in-a-year opportunity to give a state-of-the-economy speech. It’s also an opportunity to articulate what is the thinking on many things. You might say that labour reforms, FDI (foreign direct investment) are not necessarily announcements that should come in the budget. This is the time everybody is watching, and by everybody I mean not just in India, but outside India. Markets are extra-sensitive to FII (foreign institutional investor) actions and, therefore, foreigners are also watching this speech. So, this is the opportunity to articulate and this is once in a year.
Anil Singhvi: Well, I think over a period of time, most finance ministers have really worked very hard to make the budget a non-event, and it’s more of a media event than a finance minister event. Having said that, I still think that there are some policy announcements that government keeps for 28 February, so the relevance is still there from that perspective. Because, if you look at it, people find the first 45 minutes or 30 minutes, depends on who is making the speech, very boring. The last 20 minutes is like a Bollywood Hindi film. That is the most important part of the budget, which is when you have some direct or indirect taxes, some policy measurement, importantly enough if you look at the last three-four years. One is you have the Direct Tax Code, and second is the Companies Bill.
Ravi Narain: ...expectations over the years have been dampened, in terms of some huge things happening and so on the expectations that lead up to the budget... The issue for us becomes to the extent to which there are things that are expected from the budget within immediate impact. Some years back, we saw budget having “x” kind of an impact and there were some quick decisions on what happens to dividend tax, for example, and the market as always reacts in a very impromptu and off-the-cuff manner in a different direction. The ability of the market to respond to those kind of changes varies enormously, depending on the stance of the budget. But in some ways, over the years, as total proportions of private sector investments increased, whatever may be the single largest spender and investor and so on. We would presume that over the years, the budget would become an exercise of taking stock of where we are and where we (are) trying to go over a period. So, in some ways, the way that the expenditures and the investments are beginning to be looked at over a medium time frame, three-year-old time frame and so on. If one can begin to look at the major policy stance over the medium term and the entry to integrate that into each year’s budget, then people will get a very interesting notion of the broad facilitator role that the government will play beyond the role of its direct expenditure and investments.
K.P. Krishnan: ...(in the) last 20 years or so, the growth that we have seen is clearly driven by much greater private sector investment. But I think underlying this there are two trends that I want to take out as examples to bring out the relevance of the whole budget exercise... (a) for want of a better word, I would call it globalization—the fact that India is much more plugged into the rest of the world, to the global economy and to the global finance; (b) the importance of financial market and within that, in particular, equity markets. In these two spaces, let me give you example of what budgets have done, and focus on the precise questions that you have asked... Now take the first one, namely, the globalization part. This whole business of allowing access of Indian corporates to markets in the rest of the world, practically all of what you saw in the ADR (American depositary receipt), GDR (global depository receipt) policies. First, starting 2001-02, limiting to fungibility of ADRs and GDRs, ADRs to be listed abroad. FII investment limit in Indian companies increasing dramatically (in) 2001-02, and then the level playing field in terms of other right type of collateral of FIIs, whole hosts of announcements culminating in what I would think the biggest of them all, the announcement of the MIFC (Mumbai as an International Financial Centre) report, in terms of recognizing the fact that there is an India now which is far more plugged into the sort of the globe.
This is one set of examples. The other set of examples in the market side, all of these market infrastructure institution governance, namely, separation of ownership management, operation of exchanges, was the budget speech idea... The policy question by definition will have to be handled by a political process, but I think what the government did in the last two budget speeches is very important in terms of pushing a lot of this turf out of the budget. One, to handle all of these inter-regulatory conflict issues or (to) bring about financial sector reforms in a more coordinated way, you announce the set up of a financial stability and development council with an explicit mandate of handling this. And two, to handle all of the legal issue, you also announce in the last budget the set up of a Financial Sector Legislative Reforms Commission, which will rewrite laws so that you don’t have to make piecemeal announcements in the budget. So the trend, I think, clearly is to recognize a lot more needs to be done by regulators and by other agencies. But the policy framework needs to be spelt out keeping in mind the macro changes that have occurred in India...
R. Sukumar: I would want to take an issue with something Krishnan said. A lot of what you said is procedural, like regulators working with each other and setting up of these committees. I think, we should separate the procedural bit from the big-picture policy bit that everyone is talking about. From the last two budgets, we have got a clear picture of the procedural issues on how does one sort it out in case of a conflict and this is a mechanism, so on. But when it comes to an overarching policy theme, there is none.
In the last two budgets, I think it was pretty hard-pressed to put a finger to this is what it is. Earlier budgets were fine because there were (a) lot of these small small things that one could do that would affect the man on the street. It would affect the prices of petrol, affected the prices of cigarettes and affected the prices of a million other commodities, including television sets and other things, over the period of time that’s gone. And I agree with what Ravi and Ajit said on it’s a great opportunity to use it to make a statement, because the eyes of the world (are) on you, everyone’s looking at it. Over the last few years, we have been making statements and speeches that give procedural clarity, but there is no big picture.