Falling short of aspirations

The economic outlook rests on government meeting investment targets and keeping promises made to stakeholders

February 03, 2020 12:02 am | Updated 01:13 am IST

There were many expectations from the Union Budget 2020: that it would reverse the falling growth rate, reduce unemployment and rekindle the animal spirits needed to revive private investment. Does the Budget really hold out the promise on these counts? To answer the question, the Budget can be judged in terms of its effect on rural demand, investment and private sentiments — all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

Skill development allocation

Of the Finance Minister’s own accord, there is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers. Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills. Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills. Still, the Finance Minister has allocated a paltry ₹3,000 crore for skill development. Skilling will require massive investment and concerted efforts. The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth. The country cannot afford to let the world’s largest workforce waste this way.

The government remains very determined to present itself as being fiscally prudent. Total expenditure is slated to go up marginally to 13.5% GDP from 13.2% of GDP for the current fiscal (revised estimates). The fiscal deficit is pegged at 3.5% of GDP. Going by the experience with the current fiscal, the deficit level is not paramount concern for the market. Due to the ‘slippage in tax collections this fiscal year combined with stepped up government expenditure, market borrowings by the government have gone up as much as 15%’. Still, yields on government securities have not gone up significantly. Neither inflation nor the current account deficit have set alarm bells ringing, as feared by the government.

On flagship welfare schemes

Indeed, there are plenty of private savings that the government can tap to boost growth and raising public investment. However, the Finance Minister has opted for a longer route. The Budget falls well short of expectations when it comes to boosting demand. Budgetary allocations for the Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are disappointing. The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year. Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded. This is unfortunate. These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services. Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.

Focus of schemes such as micro irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes. Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.

The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. But a lot will depend on whether the money actually gets invested or remains unspent as it has happened in the current fiscal year. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle — to spur job-creating growth. To pull in private investment, the public funding should be front-loaded in under-implementation projects. Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

Getting private investment

The Budget’s main growth plank is the hope for a deluge of private infrastructure investment through public-private partnership (PPP) and external sovereign wealth funds that have been given 100% tax exceptions in the Budget. But private investment depends on the cost of capital along with the certainty of returns.

Many projects have been mired in contractual disputes with government departments and various regulatory hurdles. All these factors make infrastructure investment unnecessarily risky and render these projects unattractive for investors.

Bonds and startups

The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market. However, the focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange traded funds in government bonds. These are welcome moves but are not enough’. A well-developed bond market should draw upon domestic insurance funds, pension funds and mutual funds which are capable of investing in corporate bonds across different schemes.

The other leg of the “aspirational” Budget is the startups. Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome but the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable. Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS) — an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crore for those entities that carry out less than 5% of their business transactions in cash. It is also good that the Finance Minister has extended the window for restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.

However, for many products produced by these enterprises, the tax rates are higher for inputs than the final goods. In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

It is good that the Finance Minister has recognised the need to revive the dying spirit of the private sector. Accordingly, she has assured decriminalisation of several civil offences by firms under the Companies Act. The abolition of dividend distribution tax, and the assurance that tax-related disputes will be considered with compassion might deliver the expected results provided these promises are fulfilled in letter and spirit. The same logic applies to ‘the scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity’.

Everything considered, the future of the economy will turn on whether the government walks the talk in terms of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.

Ram Singh is Professor, Delhi School of Economics

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