Singapore: The Indian budget ticked most of the boxes on fiscal prudence and on specific initiatives, but has failed to provide the vital spark that might have kindled animal spirits in the economy, V. Anantha Nageswaran, an independent financial markets consultant based in Singapore, said in an interview. Leadership has to be bold, visionary and unorthodox, he said.

Edited excerpts:

When you look at the budget math, are not the revenue expectations highly optimistic? Won’t the government have to cut capital expenditure to meet these numbers?

When the government announces that it is assuming a nominal GDP (gross domestic product) growth of 11% in 2016-17 vs. a likely nominal GDP growth of 8.6% in 2015-16, one can say that it is an optimistic assumption. But, it is not highly optimistic. Of course, it might turn out to be too high if there is a third monsoon failure in a row—unprecedented—and if global crude oil price spikes up.

Overall, the projections for nominal growth in income tax (other than corporate income tax), corporate tax, customs and excise duties are not out of line with the average growth rate for the last seven or eight years.

The government assumes asset sale revenues of around 56,000 crore, including the strategic sale of government enterprises to the private sector. It is an obvious target for sceptics to question. But the government also has announced a big tax amnesty scheme and two dispute resolution mechanisms—one on retrospective taxes and one on indirect taxes. There is a buffer there.

Contrary to most analysts, you are of the view that the fiscal stance is not growth-friendly. Can you explain?

Let me make it clear that I am not saying this because the government had struck to fiscal prudence and had not opted to prime the fiscal pump. Far from it. Even when I wrote in my weekly column for your paper that the fiscal deficit target could be relaxed, I added a caveat that it had to be only for specific earmarked capital expenditure and one that is monitored and reported on.

Let us go back to May 2014. This government inherited a bad fiscal situation. The true budget deficit was more than 6% of GDP when it took office. Hence, to achieve a deficit ratio of 3.5% in the current fiscal is no mean achievement. But it has paid a price for it. It has achieved a pro-cyclical fiscal consolidation in the face of faltering global growth and two failed monsoons.

We can see that in excise duty collections. Against the actual excise duty receipt of 188,128 crore in 2014-15, the government now expects to collect 283,353 crore in 2015-16. It is now projected to increase to 317,860 crore in the coming fiscal. The government’s revised revenue estimate from basic and special excise duties, excluding cess on motor spirit and high-speed diesel oil, is 157,710 crore against the budget estimate of 128,087 crore. Additional excise duty on motor spirit and high-speed diesel oil is expected to fetch 73,000 crore against a budget estimate of 43,100 crore.

Now, clearly, this is a dampener for economic activity. The government did not pass on the oil price windfall to consumers, but kept most of it to itself by raising duties on petroleum products. It is no bad thing from an environmental perspective, but the price has been paid in terms of economic growth. That is one of the reasons why the nominal GDP growth target 11.5% assumed in the budget for 2015-16 has turned out to be too high.

You seem to think the government is putting too much faith on monetary stimulus. Why do you see this as a negative?

This question is a logical follow-up to the previous one. The government might have missed an opportunity to trigger medium- to long-term growth impulses by not imagining more boldly than it has.

In the short-term, too, it might be betting on the wrong horse to deliver growth. Let me explain. It has striven to deliver responsible fiscal parameters so that the Reserve Bank of India could cut rates more aggressively. It has also kept an eye on the bond market. Its positive surprises on the revenue and effective revenue deficit and its projection of market borrowing that is less than the revised market borrowing estimate for 2015-16—which, in turn, was less than the original budget estimate—all point to a bet on interest rate stimulus for growth.

India’s growth problem is now not so much a problem of high interest rates. When both lenders and borrowers have issues with their balance sheets, low rates do little to help stimulate investment—capital formation—and economic growth. That is what we are seeing in the West now, and that is what we have been seeing in India, too, in the last year and more.

You are disappointed that finance minister Arun Jaitley did not allocate enough funds for recapitalizing public sector banks.

Yes, I am disappointed that the budget allocates a meagre 25,000 crore for recapitalizing banks. That works out to around $3.66 billion when the total stressed assets could be close to $200 billion. Even if only a fraction of it eventually went bad, it would still burn a big hole in banks’ net worth. At the minimum, the government should have been bolder and provided for $10 billion. That works out to 0.5% of GDP.

Along with sufficient funds for recapitalization, one expected to see additional measures for the disposal of stressed assets, improvement in governance and accountability for the crisis. They were not forthcoming. It has announced the formation of the Banks Board Bureau. The government also announced liberalization of rules on foreign investment in asset reconstruction companies. They fall short. Asset reconstruction companies and their security receipts have barely scratched the surface of the bad debt problem in banks. In practice, securitization receipts have been another variant of “extend and pretend"—similar to restructuring non-performing loans to make them seem like performing assets.

You are also of the view that the budget lacked “boldness"—so what according to you were the courageous steps that Jaitley could have attempted?

I take a broader philosophical view of the question of boldness. Bold initiatives need not have to be spending-related. They change the discourse. They would be an important signal that the government was prepared to try to push out the curve of political possibility for policies. It did not.

In the areas where it applied its mind correctly, it has taken hesitant steps. I can list at least five: in providing an enabling regulatory architecture for educational institutions, in the area of gas discovery and exploration, in bank recapitalization, in simplifying corporate taxation and in reducing the burden on employers arising out of mandatory deductions. In all these areas, the government had the right instincts but it has not gone for the killer blow and changed the existing paradigm. For example, institutions imparting higher education can do with a dose of foreign competition. The University Grants Commission is in the way. Incentives for employment generation had to be bold because the problem is both huge and urgent.

When 9/11 happened in 2001, (then British prime minister) Tony Blair said it had shaken the kaleidoscope. This budget has not shaken India’s growth kaleidoscope.

There is lot of attention to agriculture in the budget—is it enough?

Yes, indeed. The government has sought to erase the impression that it has been insensitive to the plight of the farmers, given two failed monsoons. Earlier in the year, it announced a crop insurance scheme. In the budget, it has announced many initiatives around irrigation. That is a better way of helping the sector and farmers. The e-market initiative for a national market for agricultural produce is to be announced in April. States that abolish their APMC (agricultural produce marketing agency) Acts are eligible to participate. That is interesting.

All that being said, farming is unremunerative for small and marginal farmers who own the bulk of the farming land. They have to seek to develop their fortunes outside agriculture and, to do that, they have to start by being able to dispose of their land. The government has gone silent on making land disposal and acquisition easier after its hyperactivity in the initial months of its term in office.

What are the missing links in the budget? What are you reading between the lines?

In my opinion, the budget has missed an opportunity to reduce the fertilizer subsidy. Some attention has been paid to bond markets but no effort to improve retail participation in stock markets. India needs better economic data from the Union government and from the state governments. Successive governments have not paid attention to this crucial gap. Although the government has announced another tax amnesty scheme, one of my friends has been insisting on the abolition of high denomination notes in India as the best way to tackle black money. The government has been silent on it.

But there are several positives, too. You agree it is a prudent budget, and the friendlier tax administration is a welcome step?

Undoubtedly, yes. A lot of thought has gone into all the areas that the budget touched upon. Whether it is on the extension of presumptive taxation to professionals, tax amnesty scheme, two dispute resolution mechanisms—one each for direct and indirect taxes. The Digital Depository for academic transcripts is an excellent initiative. Also, the government bearing a portion of the mandatory deductions from wages is a good one. The budget has provided for sunset clause and review of all new schemes.

Changing the name of the Department of Disinvestment to one of Investment and Public Asset Management is, I hope, not one of semantics. One hopes that it would lead to better monetization of land and other assets with the government and public enterprises. The removal of distinction on Plan and Non-Plan Expenditure will be a great help in understanding the budget numbers.

The promised review of the FRBM (Fiscal Responsibility and Budget Management) framework is welcome. One hopes the government will look at the three FRBM documents it presents, make them distinct and present useful information on its macroeconomic and other assumptions. Overall, those documents should be used as instruments for budget and fiscal transparency and, in the process, facilitate greater accountability on the part of the government, not just for the budget numbers and ratios but also for its qualitative content and the budget process, too.

What is the big picture when you look at the budget? Does it all add up?

As I went through the budget speech and related documents, I found that the budget ticked most of the boxes on fiscal prudence and on specific initiatives that I would have liked to see in the budget. Yet, I could not avoid the impression that the budget had failed to provide a vital spark that might have kindled animal spirits in the country. I asked myself why. This is what I came up with.

The government appears to think that offering the same policy mix as the previous UPA (United Progressive Alliance) government did but in a more efficient and less corrupt manner combined with fiscal responsibility is the right approach for it politically and for the economy, too. As for growth, the government believes lower interest rates and easier business conditions would do it. Undoubtedly, this is an incremental improvement over the previous government. But is that enough? In normal and benign times, this would be sound, sensible and adequate. These are not normal times. The global environment—whether it is trade, economics or climate—is far less favourable to India than it was for other countries at a similar stage of development. Hence, incrementalism will not do. Leadership has to be bold, visionary and unorthodox. Electorally, too, the government might have left it too late for the slog overs. The asking rate might be too steep by then.

How will international investors look at the budget—what is in it for them?

I think international investors would like the budget, on balance. Most of them believe that emerging economies do not have any room for fiscal spending, and prudence is the only recourse available to them. Second, the government has shown that it is on the same page as RBI as far as fiscal policy is concerned. The governor of RBI enjoys immense credibility with the market. Hence, even if the government had resorted to a legitimate fiscal slippage, it would have had to work doubly hard to establish credibility with RBI and the market. That is not the case now.

For them, the government has promised opening up the corporate bond market, even in unlisted debt securities. Tax benefits have been extended to certain transactions in the proposed international financial centres.

Currency gains from redemption of rupee-denominated bonds of Indian companies will not be taxed on redemption.

There is a full page on the liberalization in foreign direct investment rules in the budget speech.