Will FM pass the litmus test?

by January 10, 2020 0 comments

With the economy under stress, India Inc. and citizens are looking at long-term assurances from this Union Budget

The first full Union Budget by a woman, the most powerful, democratically-elected Member of Parliament in India, is just a few days away. Even though technically Nirmala Sitharaman has presented a couple of mini-Budgets since June 2019, this will be her first litmus test on a colonial remnant of the annual policy document called the Budget. Gender and gestures apart, this is a crucial Budget if India is to achieve its stated goal of a $5 trillion economy in the next few years. The slowdown in the economy begun even as the Finance Minister walked into her office last year.

Coupled with rising inflation and a deepening geopolitical crisis, the situation could easily spiral into a blazing bushfire. Oil prices have been rising by an average 10 per cent for the last two months, the US and Iran are standing eyeball to eyeball close to our western borders and the US and China are going through one of the largest decoupling exercises from the global economy on our eastern front. The ingredients are just right for an economic meltdown.

India’s dependence on crude imports as a percentage of consumption is the highest, any global rise in crude prices will push up inflation, harden gold prices further and weaken the rupee. This means the country will spend more on import while investors will continue to pull out money from India’s shores in search of safer harbours. The Indian economy has been projected to grow at its slowest pace ever in a decade at merely five per cent. Manufacturing is estimated to be in a two per cent range for 2019-20, down from nearly seven per cent last year, while the services sector is likely to be in the 6.9 per cent range, that is slower than last year. These poor growth numbers will make the Government’s task of managing the fiscal discipline tough. The Government has hoped to rein in fiscal deficit at 3.3 per cent of the Gross Domestic Product (GDP) for the ongoing fiscal year. However, the pressure on revenues is likely to widen.

This leaves a very complicated situation to tackle for the Finance Minister when she reads out the Budget provisions. She has to balance growth with fiscal discipline. As most economists will be able to point out, primary demand creators such as private consumption, investments, foreign or domestic, in long-term job-creating projects and net exports have been on the downward spiral for a year now. That leaves the Government as the primary driver of growth through investments, which creates imbalances in the fiscal discipline.

Yes, the Finance Minister has already announced a slew of measures in the last few months such as bringing down the effective rate of corporate tax to 22 per cent from 30 per cent for companies that don’t seek exemptions and 25 per cent from 35 per cent for those that do. She also put in nearly $10 billion in nationalised banks, rolled back levy on foreign funds and created special vehicles to persuade people to buy more cars and houses.

As we head into the Budget, the clamour will grow for meeting populist demands like lowering personal income tax rates for those earning below Rs 50 lakh a year while increasing it for those in the Rs 1 crore plus bracket and for providing additional tax incentives for the middle class to buy second and perhaps third homes, as this will prop up jobs and have a beneficial impact on the steel cement and infrastructure sector. The Finance Minister may as well announce some of these as incentives in February.

However, it is deeper reforms which will push the economy towards the $5 trillion mark. The stated and desired sale of the flying Maharaja, Air India along with key value-rich public sector companies is still a few quarters away. Make in India defence projects are few, electronics manufacturing is stuck in the mangrove swamp of regulatory hurdles and startups are more of money sponges than job creators.

Telecommunications, a huge demand driver, has had nearly 10 rough quarters and the Government has to step up to stop any further player exit from a fragile market. Just providing a few relaxations, installments of taxes and levies for buying lifeblood called spectrum for the telecom sector, isn’t going to help. The Government has to relook at monetisation models from spectrum if it wants to bring in the next generation 5G-driven digital economy in the next fiscal.

It has to ensure banks are healthy enough to absorb some of the bad debts as well as be prepared to lend afresh to retail, small and medium sector enterprises. Auto as a sector may be undergoing a technology shift, leading to job losses and lower demand. However, the Government has to ensure this job creating sector gets a graceful glide path to its new variant. Factories need to start producing goods, not just for India but for the world and the only path towards that, is perhaps not for a Budget speech but by diplomatic manoeuvres and removing regulatory mesh. India Inc. and citizens are looking at long-term assurances this Budget.

(Writer: Kumardeep Banerjee; Courtesy: The Pioneer)

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