Budget or Budge’it?
Prior to the election, the previous government was carrying a baggage of allegations of fake statistics, cooked-up GDP numbers and fire and fury from ex-bureaucrats questioning the institutional integrity in India. Seemingly the current government (2.0) is continuing to shoulder the rucksack post elections with few columnists going international about how China’s numbers are more credible than that of India’s (sic). Today’s Indian budget session carries more significance in a way, being the first budget after all the populist compulsions ended and the dawn of a Maximum mandate. It was expected to be bold and capitalist. Midway through the budget, eminent intellectuals on the news panels started asking for budgetary allocations while it was brushed away by the FM during her speech and instead handed over annexures in the end. There was a certain level of exuberance throughout the benches of the ruling coalition with little or no disruption from the opposition except for the ₹1 fuel surcharge (sure that was the easiest one to decipher for most of them).
The one that’s been doing rounds and I have been wanting to write about has been the ambitious $5T target by 2024. Irrespective of the rationale and the possibility of achieving that, it implies a Nominal growth rate of about 8–9% per Annum. If this is achievable (however questionable the new method of calculating the GDP started by UPA 2 is), there are always people like me who go out and celebrate the addition of every “T” and boast about it whereever we travel gloabally. But the question is if it directly impacts the Real GDP per-capita growth. The fact of the matter is, when the nominal growth is closer to the Real GDP per-capita growth of the nation, the average Indian gets to spend proportionately more money making India a self-sufficient and self-reliant domestic demand center with more capital inflow and also crouch the mushrooming Trumps around the world. I read an opinion column in Livemint yesterday penned by Vivek Dehejia and Rupa Subramanya. The column hits the nail right on its head and questions the the significance (viability aside) of such a benchmark. The column depicts the Real GDP per-capita growth and the Nominal GDP growth and their attempt at converting the former to latter with a couple of adjustments, ultimately pointing fingers towards the exchange rate anomaly driving the thought behind $5T target.
So when FM Nirmala Sitharaman began her speech with the $5T aspiration, it was nothing less than the congress bashing pre-election budget speech for me. But, then began a rather bold budget speech wherein the Financial system took precedence of otherwise conventional politically sensitive sectoral statistics.
Instead of simply decoding positives and negatives, I decided to reflect on what mattered the most for me in today’s budget and in that context the reformative and rhetorical attempts made by the FM and the government.
Since more than a week, I decided to focus mainly on analyzing the NBFC crisis, Capital inflows, Disinvestment plan and the Tax regime which if not addressed immediately can spiral the economy out of control. To begin with the current NBFC crisis was not at all addressed, but a slew of corrective measures have been put forth like bringing NBFC and HFC’s under the purview of RBI, DRR for private issuances and short term Partial credit guarantees but failed to address how it plans to avoid prevailing ILFS, DHFL and Essel kind of scenarios which is what matters for domestic and foreign investors who abandoned NBFC’s as an investment strategy since ILFS fiasco. The frenetic attempts made by NBFC’s to borrow more and stay relevant are being diluted with little or no demand for the bonds issued by them. I think the one point that was addressed quite well (though vaguely) includes encouraging Capital inflows. The angelic government announced doing away with Angel tax, normalizing capital inflow norms for FDI and FPI and the promise to examine and increase FDI in multiple sectors, relaxation of KYC norms for Foreign investors and integration of NRI portfolio investment scheme with FPI route. What remains to be seen is whether we can drive investments purely due to domestic reforms or on the mercy of US Federal Reserve.
The biggest disappointment remained that of the disinvestment target. The target is nominal for the standards of the one-liner “Minimum Government, Maximum Governance” that the current government wants to champion. There is no plan put forth for the Air India disinvestment. Clearly re-approaching the market with the same old plan isn’t going to work. Air India is that cancerous lump that the government has to cut-off at the earliest possible so as to save tax payers money which can fund something more useful (Read my previous post on Air India in this blog). The targeted reduction of the combined government ownership to 51% in PSU’s announced today will take eternity at the current pace and the government clearly needs to hire private Investment bankers on retainership basis to oversee this exercise swiftly and professionally. Also, there has been no mention about a clear road-map to tread towards minority.
While taxes have more or less remained untouched, the biggest disappointment emanates from the fact that we are still far from achieving a single slab GST. The FM clearly acknowledged in today’s speech about the teething problem they faced. They will continue to face this till there is no uniformity unless ofcourse they want it to remain government’s Piano notes prior to upcoming state elections. The favorite pastime of successive Indian governments has been meddling with taxes on the Rich. The further addition of surcharge (2%-7%) on individuals earning more than ₹2 Cr over and above the 2% surcharge announced on the rich earning more than ₹1Cr back in 2015 is a dampener. This is definitely not helpful in retaining any talent onshore and government will again have to run behind the rich NRI’s for onshore portfolio investments at a later date via different schemes. The so-called tax the rich scenario worked well in developed markets like US and Europe, while in a high growth country like India, the concept of socialism is just an intent for public image more than a real practice and is also a disastrous dis-incentivization for hard working population. With this addition, the overall super rich tax cumulatively equals 41% which is more than what super rich in the US are billed annually. Eventually, the government has to rethink its strategy on incrementally taxing the rich that has the potential to create jobs and increase consumption domestically. Though the 25% tax slab for companies with a topline of upto ₹400Cr is a welcome announcement, it still remains just an eye-wash as the promise to reduce corporate tax to 25% across the spectrum was made back in 2014–15. My personal favorite remains the governments decision to start borrowing externally. It will provide sufficient leg-room for most of its schemes without burdening businesses and common public with incremental taxes.
I am itching to say that creating some fiscal room at this point isn’t really a toxic decision, but again discipline trumps expansionism in conservative societies like India. Maybe we ought to grab those annexures and read the finer print.