SN Misra
Nirmala Sitharaman unfurled an ambitious infrastructure buildup schedule of $1500 billion (2019-2024), to make India a $5 trillion economy. In terms of its leitmotif it steals a march over the five Budgets in Narendra Mod’s first term as Prime Minister.
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However, in terms of details and supporting structures it disappoints. Decisions like increasing surcharge on direct taxes, raising tariffs and increasing taxes on petrol and diesel will not propel investment and will help in fulfilling her visions of ramping investment through private sector initiative.
The Budget was preceded by an Economic Survey, which focused on changing India’s policy orientation from consumption driven growth to investment and export driven growth. Chief Economic Advisor tried to find pathways to transform ‘dwarfs’ in the industrial sector to ‘infants’ (industry with more than 100 workers).
During Modi’s first tenure, non performing assets (NPAs) came down from 12 per cent to 11 per cent. Insolvency Bankruptcy Code (IBC) made definitive dents. The FDI inflow was around $64.37 billion crore (2018-19), an increase of 6 per cent over the previous year, when global FDI flows slid by 13per cent (UNCTAD’s World Investment Report 2019).
However, the sector which suffered most was agriculture, where growth plummeted from 5per cent (2017-18) to 2.9 per cent. Industrial growth too dropped from 7.7per cent to 6.9 per cent during that period. As a result, degree of unemployment is high. The Budget has, therefore, rightly harped on investment in infrastructure as the most important facet of public policy.
Deepak Parekh Committee (2007) highlighted the need to rev up investment from 32 per cent (2009) to 39 per cent by 2012 in order to achieve a growth rate of 9 per cent. Infra investment as percentage of GDP was suggested to be upped from 4.7 per cent to 8 per cent.
Sitharaman suggested for a significant increase; i.e. 5 lakh crore investment per year as against 1.5 lakh crore now for the railways. But what is really germane to the issue is how such large infra initiatives are going to be funded and how to salvage the PPP mode out of the quagmire it has sunk into.
She wants to tap the foreign market by issuing sovereign bond. This proposal has drawn sharp criticism from economists who believe that this will usher in profligacy. Some like Arvind Panagariya believes that it is a welcome move, as the cost of foreign capital will be considerably lower (around 3per cent) as against 8-9per cent within India.
While the Budget gives a grandiose vision for ramping up infra footprint of India, allocation to capital expenditure remains low, at 12 per cent of CGE. No measures to boost private investment like reduction of tax rates or increasing the depreciation allowance for new investment were announced.
The OECD Report (2019) has brought out how India’s overall corporate tax rate is around 48.3 per cent as against 25 per cent for EMEs. While the Emerging Markets and G-20 countries have brought down their tax rates by around 5per cent (2000-2018), India, has witnessed an increase of +0..2per cent compared to 2000. This goes against the aim to speed up economic liberalization and privatization.
Donald Trump dropped corporate tax rate for 35 per cent to 21 per cent, bringing in unprecedented improvement in growth of US economy and curtailing unemployment to nearly 3.7 per cent. The Finance Minister, instead of reducing tax rate for all corporate for 30 per cent to 25 per cent, as was proposed by Mr. Jaitley during (2015-16) Budget, increased the surcharge and tax the FPIs.
Swirling doubts about GDP data integrity were expressed raised by Arvind Subramanian, the previous CEA. The Finance Minister compounded this apprehension by not reporting the fall in revenue receipts of (GST) of around Rs. 1 lakh crore. Revenue receipts have been shown as 9.18 per cent, whereas the Economic Survey has shown it as 8.2 per cent. Such an over projection has artificially brought down the deficit figures to 3.4 per cent, as against a realistic figure of 4.1 per cent. This will go against the FRBM target of 3per cent by 2020-21.
The government is possibly trying to stem the rot by ramping up strategic disinvestment of PSUs and getting more dividends out of the RBI. While the Bimal Jalan Committee is yet to give its report on the ideal RBI equity threshold, the government is dipping into RBI coffers in cohort with a pliant RBI governor. This will dilute independence of the RBI.
The Budget also failed to address the need to increase public investment in merit goods sector like quality primary education, health, sanitation and skilling. Instead of increasing the overall allocation of 5 per cent of GDP in these social sectors to 10 per cent, the Budget has made token increases. Sitharaman has opened her innings as Finance Minister with high intent and low credibility.
The author teaches development economics
