Budget shifts focus to Bharat

Tags: Policy

Rural hinterland at the heart of Jaitley's reforms push

Budget shifts focus to Bharat
The Budget is a valiant attempt to consolidate and rebalance. Despite temptations backed by promptings of a large section of the economists (including the chief economic adviser), the finance minister has stuck to the path of fiscal consolidation and this is a huge plus for the government’s credibility, generally a rare commodity.

In the last two years, the government’s effort had been to revive the so called 'animal spirit’ of the economy, which was largely focussed on corporate sector, foreign investors, capital markets et al. This budget has tried to rebalance it with greater emphasis on the agriculture sector.

Optically, the effort has been to move away from the perception of 'suit-boot ki sarkar' to be the 'khadi sarkar' and in that attempt the Budget also reads a lot more like the budgets of the earlier government.

A very large part of the economy, including the rural economy and agriculture, were left largely untouched. MGNREGA had been scaled down considerably, and with two consecutive failed monsoons there were signs of growing rural distress.

This year we see that a large amount of budgetary resource has been allocated to the rural areas and the agriculture sector.

This Budget puts a lot of emphasis on infrastructure, as Rs 2,21,246 crore has been earmarked for roads, ports and airports. There is a great emphasis on rural roads. The target date for completion of the pradhan mantri gram sadak yojana (PMGSY) has been advanced. This is a positive for the economy.

On the macroeconomic front, the government is greatly helped by declining commodity and crude oil prices. This year crude oil price is expected to remain around $35 to a barrel and we will continue to reap benefits in terms of lower subsidies, reduced requirement of forex to buy crude and also in terms of additional revenues from additional levies on crude oil.

But if we look at the flip side, there is no clear strategy as to how such ambitious targets would be achieved. To achieve targets for roads, for instance, land acquisition continues to be a challenge. So Rs 1,00,000 crore can be earmarked for rural roads, national highways and state highways, but if the government is unable to acquire land on time, this money will not be spent. Similarly, one may give Rs 2,00,000 crore to the panchayats, but if you look at the existing structure of the panchayats, how will they manage to spend all the funds?

Although 100 per cent rural electrification is envisaged by 2018, what about the capacity of the discoms to recover dues from the agriculture sector or from the rural areas in general? Although UDAY scheme has been announced, I am sceptical about the outcome. The government is only transferring regulatory assets -- which are reported to be of the order of Rs 3,00,000 crore -- from the balancesheets of the discoms to that of the state governments.

The ratio of states’ debt to SDP would go haywire, state fiscal deficit would deteriorate and debt sustainability will become more suspect. But there is no guarantee that the actual user charges will be recovered from the rural consumers.

The Budget sets aside Rs 25,000 crore for PSU banks’ recapitalisation. It is estimated that the PSU banks requirement for recapitalisation is to the extent of Rs 2,00,000 crore under the Basel conditions by 2019. In the budget of 2014-15, the finance minister had announced that the government would bring down its stake in PSU banks to 52 per cent over time. There has been no movement on this as yet. The total amount earmarked for recapitalisation falls far short of the requirement.

Similarly on divestment and strategic sales, the target is of Rs 35,000 crore. We have not seen much divestment in the last two years. Why do we believe that it will happen this year? The dilemma 'to be or not to be' constantly haunts secretary, disinvestment. There is no ideal time for disinvestment as the capital market is unpredictable and volatile. No public official is willing to take the risk of being accused of causing financial loss to the country. Unless the government decides to announce a disinvestment plan of offering PSU shares every month on a fixed date, agnostic to how the market is behaving, and sell most of these in retail, I have a great doubt that divestment or strategic sale target would be met.

Skill development will only work if enough jobs are created in the organised sector. One area where jobs can be created is retail because the sector is booming. But in retail, the measures announced are half-hearted like allowing the mom-n-pop shops to remain open seven days a week like the malls. The Budget says the government intends to allow e-marketing of processed foods by foreign marketing companies in India as long as the processing takes place in the country. FDI up to 100 per cent will be permitted through the FIBP route. Reform should have meant removing barriers to FDI in retail without any hindrance. I would go to the extent of saying, this government has the mandate to take bold measures to revive economy. The real reform measure would have been to remove all conditions and processes for FDI in all sectors. Only a small negative list can been drawn up where controls are deemed necessary. Retail is certainly not on that list.

Talking about 'Make in India’, a large number of measures have been announced. For instance, the turnover limit in the presumptive taxation scheme under section 44EB of the Income-Tax Act has been raised up to Rs 2 crore, to give relief to MSMEs.

New manufacturing companies will get the benefit of lower corporate tax of 25 per cent plus surcharge, instead of 30 per cent. They have also lowered corporate tax for relatively small business houses to about 29 per cent. There is a clear statement for startups and emerging entrepreneurs.

The real business takes place in the states. Central regulations can be changed and this is clear from the budget announcements. However, 'Make in India' would translate into reality when the processes are drastically simplified by the states. State governments are not changing that fast. The central government’s interface with the investors is less than that of the state governments.

Retrospective taxation introduced in 2012 has been a matter of great pain for the private sector. Where as the finance minister has consistently held that this government will not use retrospective taxation in the future, the provision is still in the statute book. Any amount of administrative direction does not take away the right of the assessing officer to start a tax case and place it before the high level committee for approval. Now if the case is as per the law, on what grounds would a committee of that nature say no.

There is further need to seriously clean up the existing tax regime in the country even though I admit that an attempt has been made to start the process in this Budget.

Talking of the subsidies, the earlier government had started removing diesel subsidy and this government has carried the process forward to other areas like LPG. Further emphasis on direct benefit transfers would send a strong signal to investors that the government is committed to rationalising and targeting subsidies towards the deserving.

For the housing sector, a lot of projects will now be able to unlock their value through the trust structures because of the removal of dividend distribution tax on Reits and InvITs. This will provide enough liquidity to the promoters to take up new projects. What the budget has missed is a mechanism, which will allow banks to sell their debts to infrastructure debt funds more easily. The infrastructure debt funds (IDFs) are designed as long-term debt instruments and are also ideal for offloading of stressed debts by the banks. The Budget has, however, provided sops for asset reconstruction companies (ARCs) which in my opinion are not the most effective instrument for deleveraging the banks quickly.

So on balance, how does the budget look? It is long on promise but can it deliver? With the global economy slowing down dangerously, the fate of this year's monsoon yet not certain, and with implementation a big challenge, there are enough headwinds to derail the budget calculations. Let us hope, at the end of the year when we look back, the budget creates the intended wind beneath the wings of the Indian economy and does not end up as a powerful testimony to rhetoric that did not become a reality.

(Arvind Mayaram is a former finance secretary who helped the finance ministry transit from P Chidambaram’s last budget, as secretary department of economic affairs under the UPA regime to Jaitley’s maiden in 2014, as finance secretary under the NDA)

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