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Budget: tectonic shift in objectives

The government has made its choiceenable rather than allocate

Ecologist Garrett Hardin said, “We can never do merely one thing". In today’s world, a small decision taken by the government can have manifold ramifications. Choices have to be carefully evaluated for secondary, tertiary and more downstream effects. The Budget makes many choices, which if carried through, may result in a tectonic shift in India’s economic policy.

Allocate capital or enable capital investment? Due to easy access to capital and high Statutory Liquidity Ratio (SLR) requirements for banks, the government appropriated large amounts of domestic savings, which it allocated to various segments of the economy. The argument for the government being the ‘chief allocator’ is based on its ability to raise capital cheaply. The argument against is that it’s an inefficient user of capital.

The government has made its choice—enable rather than allocate. It is nudging institutions to raise resources from outside the budgetary allocations. As a result, demands on the central government, and its liability, should reduce, bringing down its cost of capital. Simultaneously, such institutions will then become accountable to their capital providers. Good financial behaviour will result in lower cost of capital for them. And any risk of failure would be borne by their investors rather than by taxpayers.

Promote consumption or investment? India, unlike China, has a large part of its economy driven by consumption demand. But with our low per capita income, over-spending must be discouraged. Savings and investments should be encouraged, which will eventually result in the nation’s prosperity. The government has made its preference clear. By taxing services (most of them are on consumption) and raising taxes on liquid fuels, and diverting such money into infrastructure, it is motivating saving rather than spending. These savings will translate into investments, and thus, lower the reliance of the economy on foreign savings (or imports).

Favour the rich or the poor? It is no secret that most policies around the world are tilted towards the rich. Take the case of electromagnetic spectrum used for telecommunications. This is a natural resource, co-owned by all citizens equally. When it is leased to a commercial entity, it is consumed most by the heaviest users—the well-off. If this transfer happens at a low cost, there will be a massive economic transfer from the poor to the rich. Hence, it’s imperative that the government—the resource’s trustee—gets maximum value for such a transfer. Building, say, hospitals from the proceeds of such a transfer is clearly more important than streaming a video cheaply on a phone.

The government has chosen to tax dividends to the wealthy, which is admirable. It has also increased taxes on cars. Cars for private use are probably some of the most underutilised machines. Personal cars are barely used for 2-4 hours a day and probably at less than half their carrying capacity. When not in use, they occupy valuable real estate–parking lots. By raising taxes on such goods, the government is probably sending a message that soon owning cars could be a luxury.

On the other hand, the plan to provide 15 million households LPG connections for just 2,000 crore ($300 million) is a rational choice. It will improve citizens’ health, save health care costs, cut pollution, and preserve local ecology. This is what investor Charlie Munger calls a “lollapalooza" effect.

Compare this with subsidising a dirty fuel like kerosene, which ensures a lifetime of misery for the rural household.

Again, compare this with 25,000 crore ($3.7 billion) infusion of capital into public sector banks. It has been more than four decades since banks were nationalised and yet the umbilical cord seems intact. Isn’t it time to cut it and let the banks fend for themselves? Social objectives of banking can always be met by regulations obviating the need for government ownership of banks.

Favour a cleaner or a dirtier environment? Fossil fuels historically were not taxed enough. By raising taxes on fossil fuels and spending more on renewable energy, the government’s choice is apparent. Take, for example, the hike in the clean levy for coal. Even at $6 (400) per tonne, the equivalent amount is barely 1.5 cents (90 paise) per litre of petrol (in equivalent energy terms), compared with total taxes of nearly 50 cents (34) per litre of petrol. Of course, one can’t run a car using coal, but when one can—using an electric vehicle—it is hard to assume that this difference will not reduce.

Deficit or surplus? This choice looks strange, when the raging debate now is about the size of the deficit and not the mathematical sign preceding that number.

Over the past few years, government debt is growing at a rate of over 11% a year. By using deficits to fund growth, we are sure to increase the size of future obligations. How many of us would like to lead a better life today by mortgaging the future earnings of our children?

Every time the government borrows money, it makes a promise to pay it back with interest in the future. Every time a government employee is recruited, a promise is made for her pension. These promises—interest costs and pensions—made in the past are expected to cost 4.1% of gross domestic product (GDP) next year; fiscal deficit though is aimed at 3.5% of GDP. This would mean we are expected to run a surplus as far as current government activities go. We may be paying the price for our previous generation’s extravagance, but we definitely would not want to continue with such behaviour.

What are the other choices available with the government to generate a fiscal surplus? First, all economic services, including railways, should fend for themselves. Second, all available government assets in the form of natural resources or corporate entities need to be monetised and the funds generated be used to retire public debt. Third, all bureaucratic efforts should be solely directed towards improving economic growth because the correlation of government revenues to economic growth is higher than its expenses. Ease of doing business also vastly improves ‘capital efficiency’, thereby requiring lesser capital per unit of economic growth.

As the phrase goes, we should stretch our legs only as far as the blanket goes. The Budget is now encouraging us to work harder, spend lesser and save more. This should mark the beginning of the transition towards India becoming a healthier, cleaner and more prosperous country.

Huzaifa Husain, head, equities-India, PineBridge Investments.

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