Comment

Wait for the good days got longer

“Even if Raghuram Rajan shows magnanimity by reducing the policy rate, there is hardly any lending space to transmit this by the financial system.” Picture shows the RBI Governor.

“Even if Raghuram Rajan shows magnanimity by reducing the policy rate, there is hardly any lending space to transmit this by the financial system.” Picture shows the RBI Governor.  

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A government in the middle of its term could have taken bold decisions. The Budget leaves room for neither private borrowing nor public investment

Even in the best of times, formulating th >e Budget in India is a challenging task for the Finance Minister. This year, it was particularly daunting as it had to address a number of problems. The difficult global environment has caused a continuous decline in exports. Propelling the sagging manufacturing sector and combating the poor investment climate required special efforts. The successive droughts have been a cause of much distress and a dampener of rural demand. These had to be addressed while providing adequate resources for the social sector, meeting demands of the government employees for pay and pension revision and the >implementation of the ‘One Rank, One Pension’ scheme.



M. Govinda Rao
Before the Budget, there was a chorus of voices to forget the fiscal deficit and go in for higher public investment at a time when private investment has not been forthcoming. The opposing view was that the availability of credit at a reasonable rate to the private sector rested on the government leaving adequate lending space in the financial system. Besides, credibility required that the >government adhere to the fiscal targets set in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. It goes to the credit of the Finance Minister that he stuck to the fiscal consolidation path despite serious compulsions to abandon it. In fact, not only does the Budget propose to contain the fiscal deficit at 3.5 per cent of the gross domestic product (GDP), but this will be done by reducing both the revenue and primary deficits.

Little room for private play

With this, the focus is now on the Reserve Bank of India (RBI) to reduce interest rates. Unfortunately, the RBI has a difficult problem at hand. >It is not just the fiscal deficit number that matters, but the entire public sector borrowing. Although the fiscal deficit is proposed to be capped at 3.5 per cent, there is additional borrowing by the special purpose vehicles for infrastructure and that includes >Rs.31,300 crore to be mobilised by National Highways Authority of India, Power Finance Corporation, Rural Electrification Corporation, Indian Renewable Energy Development Agency and National Bank for Agriculture and Rural Development in addition to Rs.76,000 crore by the Railways as internal and extra-budgetary resources (IEBR) for investment. The household sector’s financial saving is just about 7.6 per cent, and with the Union and State governments borrowing about 6 per cent of GDP (3.5 per cent and 2.5 per cent respectively), cleaning up the balance sheets of discoms claiming another 1 per cent, and additional off-Budget borrowing for infrastructure, there is hardly any savings left to lend to the private sector. Even if RBI Governor Raghuram Rajan shows magnanimity by reducing the policy rate, there is hardly any lending space to transmit this by the financial system. As the government seeks to review the FRBM Act, it is perhaps appropriate to move over to the concept of public sector borrowing requirements in addition to focussing on setting the targets in terms of a range to meet countercyclical targets.

If indeed the government has not left much borrowing space to the private sector, it should have at least increased public investment. Unfortunately, >the capital expenditure relative to GDP for the next year is budgeted at 1.6 per cent, which is even lower than the current year (1.8 per cent). A slew of measures could have been taken to weed out unproductive revenue expenditures to augment capital expenditures. In particular, the country can ill-afford the subsidy amount of Rs.2.5 lakh crore even when oil prices are at record low levels. It is surprising that the government refuses to take a bold decision on increasing the price of urea, which has remained unchanged for over 10 years. Despite the distortion in terms of discouraging the nutrient-based intake, pilferage of cheap urea to neighbouring countries and diversion to other uses as inputs, the reluctance to increase the prices has continued. Similarly, much more >drastic surgery is needed in pruning the food subsidies, if public investment has to be augmented.

Muddied GST road map

The third major thrust one expected was to see how serious the Union government is in preparing itself to implement the much-vaunted Goods and Services Tax (GST). The Budget has lost the opportunity to reduce the number of items exempted from excise duty from more than 400. It would have helped to reduce the number of items taxed at lower rates and these include items such as breakfast cereals and packed juices, which cannot be called items of common man’s consumption in this country. There is > no move to converge on the threshold for Union excise duty, which is Rs.1.5 crore, and that of service tax, which is Rs.10 lakh. It is not clear whether when the GST is finally introduced, we will have two different thresholds. Finally, while the controversy over capping the tax rate in the GST Bill is raging, the Budget adds an additional half a per cent surcharge on the service tax to make it 15 per cent. If the GST general rate will have to be capped at 18 per cent, will the Union government vacate the space by reducing the rate to 9 per cent so that the States can levy the tax at 9 per cent? Of course that is possible, but the Budget speech is silent on the issue.

Interestingly, while the > gross tax revenue collected by the Union government in the revised estimate for 2015-16 is higher than the Budget estimate by just about Rs.10,000 crore, the increase in the net tax revenue to the Union government after devolution to the States is Rs.27,000 crore and the States on the other hand are expected to get Rs.17,000 crore less. This is because the overwhelming proportion of additional resource mobilisation was by levying cesses and surcharges which is not shareable with the States. According to the Budget estimate, the States were supposed to receive 36.2 per cent of the gross tax revenues in 2015-16, but the revised estimate shows that they will receive 34.7 per cent and in 2017-18 too, their share works out to 35 per cent. This is a time-honoured method of diluting the Finance Commissions’ recommendation and despite much talk about cooperative federalism, the practice has not been given up.

As the government is in the middle of its current term, bold decisions were feasible. Unfortunately, decision-making seems to have been overly influenced by the forthcoming State elections and, in the process, the wait for good days got longer.

(M. Govinda Rao is Emeritus Professor, National Institute of Public Finance and Policy, and Member, Executive Council, Takshashila Institution.)

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Printable version | Jan 24, 2020 4:44:34 AM | https://www.thehindu.com/opinion/op-ed/budget-2016-wait-for-the-good-days-got-longer/article8305407.ece

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