Meeting great expectations

This is in spite of the 25 years of economic liberalisation, covering trade, expenditure, tax policies, infrastructure to mention a few.

Budget-making remains an enigma. Expectations always outstrip reality. In a sense, it is perceived to be a panacea for our economic ailments. Finance Ministers are hard put to prejudge and predict its outcome. Will it click? Will the chemistry work? This is in spite of the 25 years of economic liberalisation, covering trade, expenditure, tax policies, infrastructure to mention a few.

I have argued several times earlier that the budgetary process must be demystified. The practice of locking up staff and officers for it, notwithstanding the high-quality halwa being served to them, is anachronistic and reveals the need for real change in practices and processes. That will lend greater transparency, ensure predictability and continuity by adopting what the rest of the world does. The ‘OECD Best Practices for Budget Transparency’ report argues that “a pre-budget report serves to encourage debate on the budget aggregates and how they interact with the economy. As such, it also serves to create appropriate expectations for the budget itself.” Policymaking is a continuing process and the Budget is only one, although important, act in the annual policy cycle.

Global and domestic scenarios The international backdrop is full of uncertainties. On the external front, oil and commodity prices are likely to remain soft. While hurting many commodity-exporting economies, this has given us greater fiscal room and less painful rationalisation of subsidies for petroleum and fertilisers, high current account balance due to lower value of imports, and lower inflation. The U.S. upturn looks halting. Europe, a mixed basket, is struggling to cope with the geopolitics of unplanned and unwanted migration. The Chinese slowdown looks prolonged — uncertainties surround exchange rate behaviour, recovery pattern and the probability of a ‘soft landing’.

Fortunately, our macro fundamentals and growth trends remain robust. Inflation is subdued — the Wholesale Price Index (WPI) is negative for the 15th month in succession, while the Consumer Price Index (CPI), at 5.69 per cent, is more obstinate, largely due to weightage and high inflation in some food products, particularly lentils, and more recently vegetable, eggs, meat, and fish. Current account deficit is down to 0.7 per cent, FDI flows registered a 48 per cent increase during October 2014-April 2015, reserves are at a healthy $349.97 billion (as of September 25, 2015) and the Central Statistics Office (CSO) has projected a GDP growth of 7.6 per cent. While the methodology of GDP computations is unbiased, there are persistent doubts that the real economy does not feel a growth of 7.6 per cent in overall GDP and a higher growth in services and manufacturing. Rural demand remains weak, and stalled projects in the private sector remain high. Non-oil and non-gold imports, which are a commonly used indicator of domestic demand, are also soft. Part of the problem is, no doubt, the curious divergence between nominal and real GDP growth with negative WPI.

Some important policy options are the following. First is the issue of fiscal consolidation versus growth. The Finance Minister had presented a new fiscal road map entailing a fiscal deficit of 3.9 per cent this year and declining to 3.5 per cent in the coming year. Given that private investment is subdued and hesitant, should the fiscal road map for next year be recalibrated to, say, 3.7 per cent or 3.8 per cent? The resultant extra resources (to the tune of Rs.28,000-Rs.42,000 crore) can be used to support public outlays in infrastructure. Private investment could then piggyback on enhanced public outlays and create a multiplier effect.

Changing fiscal goalposts While these are positives, there are other concerns. It is unclear if we have the implementation capability to gainfully spend the additional resources. Are resources, then, the principal constraint in enhancing reach and quality of infrastructure? Further, a recalibration of the fiscal road map raises issues of credibility and compromising the hard-earned macro stability, given international fragility. Relaxing the fiscal target may also raise concerns about the sustainability of public debt going forward. Moreover, can the market absorb more public debt, particularly when UDAY (Ujwal DISCOM Assurance Yojana), the new programme designed to improve the financial health of power utilities, requires State governments to issue additional bonds? In a more holistic sense, of course, we can discuss an ideal fiscal road map. How are these calculated? Should they be cyclically adjusted? However, the sanctity of any accepted road map is relevant. Having accepted a fiscal map only last year, changing it now, when soft oil and commodity prices have enhanced fiscal space and notwithstanding expenditure pressures, particularly from the Seventh Pay Commission and the OROP (One Rank One Pension) payouts, can raise concerns of both investors and rating agencies. Investors also believe that a more accommodative monetary policy, by way of lower interest rate, would have greater multiplier effect. A somewhat looser fiscal policy would weaken the case for lower interest rates and rekindle inflationary expectations.

In the end of course, the hiatus between growth and fiscal policy is a false one. We need both fiscal consolidation and sustaining of the growth momentum. Enhancing non-tax revenues through a more robust disinvestment programme can reconcile this hiatus. Given stock-market volatilities, the timing of selling the family silver is important but if proceeds from disinvestment are earmarked for infrastructure, the asset-swapping could overcome this moral hazard. Of course, earmarking outgoes from the Consolidated Fund is an optical fiction. Deployment of resources is always fungible.

Fixing the banking rot Second, there is renewed public focus on our financial system. Current estimates on non-performing assets (NPAs) of banks vary widely and while Rs.3.36 lakh crore (by September 2015) is the proximate figure, the more likely number is Rs.5 lakh crore. The impending NPAs could make this higher. Clearly, impaired assets are the outcome of poor judgment, politically directed loans to favour corporates or individuals and bank managements acting in cohort. The Supreme Court has sought the names of defaulters. There is need for public accountability, both on the causes and responsibilities for the present malaise. One approach is to create a bad bank or asset reconstruction fund, where all the impaired assets are transferred and balance sheets of banks cleaned up followed by significant recapitalisation. This recapitalisation programme would be an inescapable part of the Budget and may not add to fiscal deficit based on international practices. Over the medium term, apart from the Indradhanush programme to improve bank management, professionalise and de-politicise banking, we need to revisit the issue of governance. Governance and ownership are two faces of the same coin. Revisiting the issue of public ownership, initiated by an earlier National Democratic Alliance government, needs wider public debate among various stakeholders.

GST, corporate tax and PPPs Third, on tax reforms, hopefully the GST (Goods and Services Tax) legislation can be enacted sooner than later. Its compelling economic rationale needs no reiteration. The shadows of retrospective taxation continue to hound us. Containing its damage by other means like accepting arbitration awards, not appealing against court decisions, seeking alternative dispute redressal mechanisms have failed to dispel investor uncertainties. Even at the risk of triggering some controversies over the immediate beneficiaries, it would strengthen credibility and allay subsisting investor concerns if the retrospective tax provision was repealed. Regrettably, there are no other shortcuts.

On corporate taxes, the issue of whether to reduce them to 25 per cent in one go or calibrate them over four years or accelerate the pace of calibration and getting rid of exemption is a difficult balancing act. Exemptions are sticky. We must desist from falling between two stools — continuing with the exemptions and also bringing corporate rate taxes down.

Finally, the issue of public-private partnerships. PPPs need to be reinvigorated by accepting the recommendations of the Kelkar committee. The important issue of audit by the Comptroller and Auditor General of deployment of private resources also needs to be settled more transparently, but without losing sight of the benefits of private partnership. Equally, the recommendations of TRAI (Telecom Regulatory Authority of India) for a PPP model to ensure broadband connectivity to cover all the 2,50,000 panchayats deserves priority. The digital coverage would be crucial in harnessing the benefits of JAM (Jan-Dhan Yojana, Aadhar, mobile) and anti-poverty programmes. Options like upgrading existing systems and alternative mechanisms to complete digital coverage expeditiously deserve consideration.

French politician Georges Bidault had in some seriousness described that “a good agreement is one which leaves all parties equally dissatisfied”. No Budget can satisfy all expectations, much less aspirations. It would be judged on whether the preferred options and the balancing act are credible and compelling.

(N.K. Singh is a former civil servant and Rajya Sabha MP.)