Presenting the Union Budget for 2020-21 to Parliament, Finance Minister Nirmala Sitharaman spoke of this being the Budget to boost common people’s incomes and enhance their purchasing power. In a discussion moderated by Suresh Seshadri , Ananth Narayan (Professor of Finance, S.P. Jain Institute for Management Research) and veteran banker V. Srinivasan look at whether the proposed changes in direct taxes and other measures are likely to help spur consumption and investment in the economy. Edited excerpts:
The Economic Survey stressed wealth creation as a central theme. Do the Budget proposals address this? If so, to what extent?
Ananth Narayan: What you have to look at from this particular Budget is what does it do by way of stimulus, which is, does it actually spur consumption or investment or get some money going through into the system? And second, does it lay a road map for any kind of deeper structural reforms? If both of them come together in the right ingredients, then wealth creation, which is indicated in the Economic Survey , should follow through.
The Budget gave a lot of good background. The three themes — aspirational India, economic development, caring society — nobody can have an argument with that. But there were severe constraints when it came to actually giving any kind of a stimulus. Frankly, Finance Minister Sitharaman had very, very little space to announce any further stimulus. Really, what you have to be thankful for is that she didn’t cut down on spending. She continued with the stimulus, which has been ongoing for the last three, four Budgets now. In fact, government spending is what is holding up GDP growth.
I think what has been disappointing is the second part, on structural reforms. There are a lot of good things which have been spoken about on agriculture, irrigation, start-ups and so on. But some of the real elephants in the room [are]: the health of the financial services ecosystems — banks and NBFCs; and structural issues in sectors such as power, telecom, airline and shipping, real estate, construction. And third, most importantly, getting in foreign direct investment into manufacturing or grabbing some of the top supply chains coming out of China. On all these three structural fronts, personally, I was disappointed by the lack of direction in the Budget.
So, to answer your question, wealth creation: it’s not constricted, the government has not cut down on spending because of fiscal constraints, and there are deep fiscal constraints. On structural reforms, the Budget document itself was disappointing. The good news, of course, is that reforms don’t have to happen only in the Budget, they can happen separately as well. But as things stand, I don’t see enough being done for wealth creation or for the reigniting of the investment cycle.
Would the various direct tax changes give a boost to incomes and thereby lift consumption spending?
V. Srinivasan: India first needs to have a capex investment cycle going, create more jobs and thereby increase consumption. I think relying on consumption alone and putting money in the hands of people to consume and therefore stimulate the economy is something which can help in the short term, but in the long term can lead to some disastrous results. And clearly, the measures in the Budget have attempted to spur consumption. But I think if you look at the direct tax changes on the personal income tax side, I think it is [at] best status quo. I think more likely than not people would be in the same place where they are, not opting for the exemptions and staying with it at least as of now, till they get more clarity on how exactly these things work and for how long you’ll have the option rather than try to sort of give up on the investments and not take exemptions and live with a lower tax. That’s the thing that you really need to wait and watch. But as of now, if you look anecdotally since that’s the only social security and kitty which people build for their later years, I think it’s more likely that people will continue the exemptions. We need to wait and watch in terms of how the capex cycle comes through, which I think would possibly trigger a much more sustainable consumption cycle than trying to just put money in the hands of people and trying to stimulate the economy.
Could the new opt-in tax regime end up impacting savings? Household savings have after all been a significant contributor to another pillar of GDP, gross fixed capital formation.
Ananth Narayan: Not directly by the measures which have been announced. Sure, at the margins for certain tax slabs, it is possible that financial investments and savings, which were otherwise encouraged, might no longer make sense. But that’s a very small number in my opinion. I don’t think the changes incorporate a big change in the behaviour of savings per se. But the broader point you make is quite valid. The savings rate, the financial savings rate for households has been dropping quite sharply over the years. And this is a 10, 15 years kind of a trend, which is a sign of worry.
Frankly, when we worry about things like savings rate and growth and consumption, the starting point paradoxically has to be investment. India tends to earn more and save more when there is investment going through. We saw that, for instance, when the golden quadrilateral was being built 20 years ago; 30 years ago, when the markets were opened up and money came in, poured into various kinds of infrastructure investments.
We saw what happened 10 years ago, when we saw a lot of banking money go into infrastructure investments, which unfortunately didn’t end well, we saw again growth and consumption that time. So, savings and investments or savings and overall income is structurally I think linked to investments, which is why the structural reforms required for spurring back an investment cycle is what we were all, at least I was, looking for very eagerly. There are lots of small things happening. And I have to acknowledge that, for instance, labour laws are being changed quietly. Likewise, you know, the corporate tax rate cut is very welcome for investments. But it seems a little too little at this point in time. To get back savings, to get back healthy macroeconomic variables, I think we need the investment climate coming back again, and a lot, lot needs to be done on the structural side before that happens.
The Finance Minister has said the government is keen not to splurge to end the slowdown and will instead focus on creating public assets. As an approach, how relevant is it to the current economic logjam?
V. Srinivasan: It comes back to what we’ve been grappling with and what in the media’s and regulators’ talk is ‘transmission’. And clearly, resources are limited. Understand that both the RBI and the government are trying to sort of do all that they can to spur investment, increase the flow of money. And ‘transmission’, meaning irrespective of how much liquidity you put in, rates are not going lower, banks are not lending; the system is, to some extent, broken. So, whatever the Budget does or any sort of policy measure which is taken is hitting a wall till we sort out some of the systemic issues and try and clean the deck and then start from there. And I think that’s something which was a hope, at least in terms of, whether in the Budget or outside it, trying to make sure that if someone has to take a hit, we need to take the hit.
If the government has to step in to provide some support, at least clean the deck and then confidence will be back and people can sort of look ahead with reasonable comfort that they are not going to be blindsided by something which they didn’t expect. That phase continues and that irrespective of whether you splurge, don’t splurge, if you do whatever you’re doing, I think it’s not helping.
So, I think the biggest thing is whether it’s real estate, whether it’s NBFCs, we need to clean the deck and make sure people are comfortable with the future. When you’re not comfortable with the future outlook, and it’s sort of filled with uncertainty, I think you hold back on anything you want to do, and that’s the phase we are going through. The Budget, I was hoping, would trigger some animal spirits by bringing some certainty in terms of putting some of these things behind us. [That has] not happened. So, I think we will have to muddle along till we sort out some of the problems ourselves, or something happens which forces us to do that.
Does the Budget help keep the economy on track to reach the government’s $5 trillion goal?
Ananth Narayan: At the moment, I don’t think we are on track to reaching this $5 trillion mark by 2024. The good news, though, is that there is no reason why we can’t start to improve our growth dramatically. I think our potential remains pretty high. If we start to address some of the structural issues, I do think given our demographics, given the resources that we have, it’s quite within our reach to bring in foreign direct investment, as well as to have our own investment cycle restarted, so as to get us to higher rates of growth. But for that, we have to make a fundamental departure.
One quick point on NBFCs etc., I think where the government is stalled right now is twofold. One is they see a moral hazard and I sympathise with that. ‘Why should the government bail out private entities?’, and that’s a good point. Second, the Insolvency and Bankruptcy Code is a lovely piece of legislation. It’s starting to hopefully settle down, it will work for the future. So, therefore, their bet is things will solve themselves and ‘we should not get involved trying to bail out individuals’. I sympathise with the thinking, but I think the size of the problem is just too large. And, therefore, a one-time solution is required alongside making sure there’s accountability. And there are structural reforms so that the cycle does not repeat. Unless we take steps like this, and not just in the banks and NBFCs, but the other sectors, and the ease of doing business on manufacturing, I think the realisation of that $5 trillion potential will remain a bridge too far.
What do you think are the biggest positives of the Budget?
V. Srinivasan: Clearly, we have not moved back thanks to the Budget. Whatever investment needs to happen, whatever risk capital needs to come into the country, primarily it is coming from offshore through foreign investors because domestic investors and institutions as of now, whether banks, mutual funds and to a large extent insurance companies, lack the risk appetite in terms of putting money, risk capital to work in the current context. And the only people who are willing to do that seem to be offshore investors. So, the Budget recognises that and to some extent offers a much cleaner, easier environment, from a tax perspective, and from an incentive perspective, for foreign investors to access local markets and provide risk capital. And I think that’s one of the big positives in the Budget.
Ananth Narayan is Professor of Finance at the S. P. Jain Institute of Management and Research; V. Srinivasan is a veteran banker
