HERE WE look at seven things the government can do through Budget 2020 to get the Indian economy back on track.
India’s private consumption expenditure growth slowed dramatically in 2019-20. It is thus important to revive private consumption first. Only once there is a slight revival in private consumption will companies think of investing and expanding, simply because at the end of the day companies produce goods or offer services that people consume. Also, private consumption constitutes nearly 60% of India’s economy.
In September last year, the government cut the income tax rates for corporates. While lower tax rates for corporates are required to enable them to compete on the export front with other countries in Asia, what was required in the short term was a cut in personal income tax rates.
While a personal income tax rate cut will help the middle class, something also needs to be done for those at the bottom of the pyramid. The allocations to the Mahatma Gandhi National Rural Employment Guarantee Scheme need to be increased. Of course, this is not the most efficient scheme going around, given the leakages it has. Nevertheless, there is no other way of putting money in the hands of the poor quickly than this scheme. This should help in the revival of the fast moving consumer goods sector. The total allocation to the scheme in 2019-20 is Rs 60,000 crore lower than the Rs 61,084 crore that was spent in 2018-19. This needs to go up substantially, to around Rs 1,00,000 lakh crore so that more people are able to participate in the scheme in 2020-21.
In the first two points I have talked about cutting taxes and spending more money. Dear reader, you might think this goes against what I said in the last piece that simply spending more money is not the solution. But what I also said is that a lot depends on how the government decides to finance this expenditure.
If the government can earn adequate money to finance this expenditure, then spending more really can’t be a problem. How does the government earn more money? Over the years, the government has been selling shares in public sector enterprises it owns to earn money. This year the disinvestment target had been set at Rs 1.05 lakh crore, but by the end of November 2019, only Rs 18,099 crore or 17 percent of the target had been earned.
Over the years, the government has been selling shares in public sector enterprises it owns to earn money. This year the disinvestment target had been set at Rs 1.05 lakh crore, but by the end of November 2019, only Rs 18,099 crore or 17% of the target had been earned.
Along with having a financial target for disinvestment, it is important that the government comes up with a disinvestment calendar, which clearly specifies the names of companies it plans to sell (partly or fully) and the tentative deadlines. This will bring some order in the overall scheme of disinvestment.
Also, it is important that the government carry out genuine disinvestment (what it calls strategic disinvestment) where it sells companies to the private sector and not just get one public sector enterprise to buy another and move money around from one pocket of the government to another. This is also where it’s likely to earn a premium over the current price of the stock of the company.
Typically, attention towards disinvestment is paid only in the second half of the year. This attitude needs to change and disinvestment should be on the agenda of the government from April 1, as soon as the financial year starts.
There is a need for the government to start selling land that it owns through PSUs or otherwise. One example I have offered year on year is that of the Bicycle Corporation of India, based out of Worli in Mumbai, close to where I live. The government doesn’t need to continue owning a bicycle company, which doesn’t make bicycles anymore, but it continues to own land bang in the middle of Mumbai.
Another great example is that of the Heavy Engineering Corporation on the outskirts of Ranchi, the city I grew up in. The amount of the land that the company owns is a small city in itself. And given that the city of Ranchi has a land shortage owing to the ChHotanagpur Tenancy Act, it is even more important that this land is sold and the shortage is dealt with.
It’s not just important to earn more money for the government, it is also essential to prioritise what it should actually be spending money on. Between April 2014 and mid-September 2019, the government spent Rs 3.13 lakh crore recapitalising public sector banks and keeping them going. In fact, the bulk of this money was spent after April 2017. Between April 2017 and March 2020, a total of Rs 2.66 lakh crore would have been spent on recapitalising these banks.
Every rupee that has gone towards recapitalising public sector banks could have gone somewhere else. While one understands that it may be important for the government to keep owning bigger banks like the State Bank of India, Bank of Baroda Bank, Punjab National Bank, Canara Bank, the same argument cannot be made for smaller banks like the Indian Overseas Bank, Central Bank of India and United Bank of India. Some of these smaller banks have sucked up a lot of money from the government over the years.
Thousands of crores of rupees have been spent to keep these banks going over the years. Along the way, these banks have lost business to private sector banks in a big way. While the government resists privatisation of the banks it owns, the banking sector is getting privatised on its own, like the telecom sector and the airline sector before it.
7) It has been two and a half years since the Goods and Service Tax was put in place. It’s time for a rapid overhaul of this tax. In 2018-19, the central government had hoped to earn Rs 6.04 lakh crore through the central GST. This was later revised down to Rs 5.04 lakh crore. The total amount finally collected was Rs 4.58 lakh crore, around a fourth lower than the amount that was originally envisaged.
In 2019-20, the central GST target was originally set at Rs 6.10 lakh crore in the interim budget presented in February 2019. Good sense then prevailed and the number was revised to a much lower Rs 5.26 lakh crore when the actual budget was presented in July 2019.
In the first eight months of the financial year, April to November, Rs 3.28 lakh crore has been collected as central GST, at an average of around Rs 41,000 crore per month. The average needed to meet the target stands at around Rs 43,800 crore per month.
Economic protectionism has been making a slow comeback over the last few years. The government seems to think that protecting Indian industry from foreign competition is a good idea, to get the economy back on track.
The question is: why are people buying foreign products? Well, no one is forcing them to do that. But they still are simply buying because they see more value for money in buying products produced overseas. Now, if customs duty is increased on these products, the people will be forced to buy domestic products, which will be more expensive than the foreign products.
When people spend more on buying something, they are likely to cut down on buying something else, given that they earn only so much. So, if one business will benefit, other businesses will bear the cost of this so-called benefit.
Remember, in economics, there is no such thing as a free lunch. Hence, the sales of other businesses will fall, and they will fire people to stay competitive. So, net-net, no new jobs are likely to be created. This is the unseen effect nobody either thinks about or talks about.
While the benefits of protectionism are seen, the drawbacks are not as obvious. Let’s take the example of steel. A few years ago, the government fixed a minimum import price for steel in order to discourage companies from buying cheap Chinese steel. This benefited the Indian steel companies which were under a lot of debt as well.
But this meant that consumers of steel — everyone from car manufacturers to builders — had to pay more, having been forced to buy steel from Indian companies. Of course, they were not going to pay for this from their own pocket. The price was passed on to the end-consumer. You and I paid for the benefit of steel companies. Of course, this cost was not as obvious in comparison to the benefit
The point in the context of the budget is that the finance minister should resist from increasing customs duty on imported products in this budget. While it may benefit a few companies and sectors in the short-term, it is going to hurt the broader economy in the long-term.
Almost all countries that have gone from being a developing country to becoming a developed country have done so on the basis of an export revolution. Indian exports, on the other hand, have been falling over the years.
There are lots of things that need to be set right for Indian companies to be able to compete on the exports front. Everything from land laws to labour laws to tax laws needs an overhauling — not just corporate income tax. Interest rates need to come down as well. These factors are all well-known and have been written about over the years, so I’ll skip them. Other than these factors, there is one other thing that matters and that is the ability to compete globally.
The value of infrastructure projects being dropped has burgeoned over the years. Typically, the reasons vary from problems in land acquisition owing to unclear land records, difficulties involved in physical possession of land, rehabilitation and resettlement issues, evacuation and logistics constraints, environmental and other clearances, and so and so forth.
It is important for the government to figure out why these projects have been dropped and if some of them can be revived. This should be given top priority.
The banking sector has been in trouble over the years. Having said that, between mid-2015 and March 2019, the Reserve Bank of India (RBI) got its act right and forced banks to declare bad loans as bad loans.
All this started with the RBI carrying out an asset quality review of banks in mid-2015, forcing them to recognise bad loans as bad loans. In fact, until then, banks were using various tricks, and were happy to postpone the recognition of bad loans as bad loans.
In the recent past, with different sectors like telecom, real estate, and power getting into trouble, there has been talk about the bad loans of banks deteriorating further. At the same time, the non-banking finance companies have not been in the best of shape. A few of them like IL&FS and Dewan Housing Finance Ltd. have gone bust.
Given this, it is important that the RBI carry out another round of asset quality review, especially in case of NBFCs, where there isn’t much information publicly available.
To cut a long story short, we have had more than a few surprises on the financial front in the last couple of years, and it’s best to identify any more problems in advance.
The goods and services tax (GST) is the big elephant in the room. In the last piece, I had discussed how it was important to address the operational issues that are making GST difficult to handle for individuals as well as companies.
Along with that, there is the more important issue of multiple rates and how it has made things difficult. Eighty percent of the countries that have introduced GST after 1995 have done so through a single rate system. As Vijay Kelkar and Ajay Shah write in In Service of the Republic: “A simple single-rate GST is easier to implement, as opposed to a complex GST system with multiple rates.”
We did exactly the opposite. There were multiple reasons, one of which was because all state governments had to be taken together on this. As TCA Ranganathan and TCA Srinivasa Raghavan write in All the Wrong Turns:: “The story of GST in India is a good example of how trying to please everybody leaves almost everybody dissatisfied.”
Also, there was a single-minded focus on revenue neutrality, that is, trying to earn an almost similar amount of revenue through GST, as the earlier system. The problem here, as Kelkar and Shah put it was: “The emphasis on revenue neutrality in the GST, in the short run, was a mistake. Government is an important buyer of goods and services, and a low-single-rate GST would yield cost savings for all levels of government.” Over and above this, like in any Indian system, the ultimate system design was fairly complicated.
Now, two-and-a-half years after GST was launched, the time is actually right to move towards a simpler single rate GST, without exceptions. This will be easier to implement and, at the same time, the government will collect more tax.
The size of agriculture, forestry and fishing in the Indian economy has been falling over the years. In 2000-01 this stood at 21.6%. In 2019-20, this is expected to fall to 14.9%. Having said that, agriculture still employs a bulk of India’s workforce. In 2019, 43.2 percent of India’s workforce was still employed in agriculture.
So, 43.2% of India’s workforce will produce less than 15%% of the country’s economic output this year. This suggests that there is a huge disguised unemployment in agriculture, which means that the sector employs many more people than actually required. Hence people need to be moved away from agriculture to other professions.
What also does not help is the fact that Indian agriculture is not very productive due to a whole host of problems, including small plot sizes (which have been divided across generations).
This is not to say that the proportion of the workforce dependent on agriculture hasn’t come down over the years. It has. In 2000, 59.6% of the population was dependent on agriculture. It has come down to 43.2% since then. Nevertheless, the sector still has huge disguised unemployment.
One way to tackle this is to move people employed in agriculture away from it. This cannot be done forcefully. It can only be done if low-skilled and semi-skilled jobs are created in other sectors, in particular, construction and real estate. The history of economic development shows that this is how people are moved away from agriculture. The trouble is that the real estate sector in India is down in the dumps.
The only way the sector can revive is if home prices fall. But that hasn’t happened. One reason for this lies in the fact that state governments and state-level politicians are too addicted to the money — both legal and illegal — they earn from real estate.
Another area where the government needs to rapidly relook at its policy is the purchase of rice and wheat directly from farmers through the Food Corporation of India and other state procurement agencies. As of January 1, 2020, the FCI had stocks of 565 lakh tonnes of rice and wheat (237 lakh tonnes of rice and 328 lakh tonnes of wheat).
As per the stocking norms, as of January 1, the FCI should have had 214 lakh tonnes of rice and wheat, including the operational reserve as well as the strategic reserve.
The current reserves of the FCI are a whopping 164% more than the norm. This, of course, means that the government (through the FCI) has ended up spending a lot of money on rice and wheat, which will rot in the godowns of the FCI after some time.
Of course, this is a reflection of the poor agriculture marketing system in the country, which no government seems to want to tackle.
But imagine the wastage that is happening. Also, farmers are producing more rice and wheat than is required and not enough of vegetables, pulses, oil-seeds. (This is not the fault of farmers in any way. Human beings respond to incentives. If the incentive is to overproduce rice and wheat, then that’s exactly what will happen). This is one area waiting for the right things to be done. The budget is the right time to start reforming the mess that prevails in this area.
The final suggestion for the government is that it do no harm. Recently, the commerce minister Piyush Goyal made a rather flippant remark suggesting that Amazon getting $1 billion into India wasn’t really a big deal because the company was basically funding its losses. Well, the fact of the matter is that the company is choosing to fund the losses and not shut down and leave India.
It needs to be mentioned here that any country wanting to do well on the export front, other than being competitive, also needs to be a part of global supply chains being built by multinational companies. As the World Trade Report for 2013 points out: “A central feature of this…age of globalisation is the rise of multinational corporations and the explosion of foreign direct investment…Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers – underlining the growing importance of global supply chains.”
A global supply chain is not going to be built by the local neighbourhood kirana shop owner. For that India needs companies like Amazon. And given that India remains a capital starved economy, we should be welcoming this funding of losses.
This is the seen effect of protectionism, or the effect of trying to protect domestic industry by making imports expensive through higher customs duties, insisting on a minimum import price, and so on. But there is an unseen effect as well. Let’s try and understand that.
The question is: why are people buying foreign products? Well, no one is forcing them to do that. But they still are simply buying because they see more value for money in buying products produced overseas. Now, if customs duty is increased on these products, the people will be forced to buy domestic products, which will be more expensive than the foreign products.
When people spend more on buying something, they are likely to cut down on buying something else, given that they earn only so much. So, if one business will benefit, other businesses will bear the cost of this so-called benefit.
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