Opinion The gaps in the speech
The budget ignored drivers of inflation,and micro reforms.
The finance minister rose to present the budget against a backdrop of a deficit in governance and lack of public accountability. He also added that there were structural supply-side constraints that were holding back growth in agriculture and which needed to be addressed if the country was to get back on to a more sustainable growth path. In addition,the major macroeconomic issues facing the country have been high inflation,particularly in food,and now high interest rates.
However,the budget he presented did nothing to fundamentally address these issues. At a macro level,GDP is expected to grow by 9 per cent next year after 8.4 per cent this year,but it is not entirely clear where that will come from; agriculture has already benefited from a good monsoon and the base effect this year. Industrial growth and services will really have to ramp up,against a backdrop of mounting inflationary expectations and increasingly high interest rates. While the savings rate may support this assumption,whether we can maintain our capital productivity in light of the heightened friction in the economy is highly questionable.
Distressingly,the fiscal numbers achieved for the current year,despite the 3G auction revenue are 5.1 per cent. Take out the auction benefits and it is clear that the target would have been underachieved. In addition,the target for the next financial year is 4.6 per cent,leaving a net borrowing target of Rs 3,43,000 crore,or roughly $85 billion. While this is less than last year,given the already constrained liquidity in the system on the back of RBI monetary actions to curb inflation,this could be a challenge and will definitely lead to the crowding out of private-sector resources. The finance minister has sought to address this issue by encouraging the flow of foreign funds into the corporate debt market by increasing the limit from $5 billion to $25 billion. The finance minister has also sought to encourage the flow of foreign institutional money into mutual funds. But other than this,and raising the limit for the issuance of tax-free bonds,there is little for infrastructure as a sector. Housing,power,roads,communication,urban infrastructure do not find any real incentives.
The finance minister spent considerable time on the introduction of the Direct Tax Code (DTC) and the Goods and Services Tax (GST) and a host of other financial legislations. While all this is critically important for industry and the country as a whole,it did not really add anything new to the debate about what can be done to structurally reduce inflation and interest rates. On the direct tax front,the marginal increase in the exemption limit will add a small amount to the taxpayers pocket but there were no other real goodies. At the aggregate level,the finance minister decreased direct tax revenues by Rs 11,000 crore while increasing indirect taxes by Rs 7,000 crore and widened the service tax net to garner another Rs 4,000 crore. Net net,therefore,there is no real accretion to the government on account of tax receipts. The FM has budgeted a divestment target of Rs 40,000 crore against last years achievement of Rs 22,000 crore. This looks ambitious,given the current state of the capital markets and given that we have seen net FII outflows since January. Remember we only achieved Rs 22,000 crore when we had FII inflows to the tune of $29 billion.
From a capital markets standpoint,again the good news was that there was no bad news. Given the political scenario,markets had been sensitised to expect a sharp rise in welfare spending and a higher deficit and borrowing number. When that did not materialise,markets reacted with a brief relief rally.
Unfortunately,on the micro-reforms front,which is ultimately what contributes to the macro numbers,there were no helpful steps. On control of inflation,the finance minister did speak about mega food parks and encouraging some supply-chain activities such as increasing storage of foodgrains but left out an overhaul of the Agriculture Produce Marketing Act or steps in that regard,as it is a state subject. The likely mention of openness to foreign capital in the sector was left out. In fact,FDI did not find mention really anywhere in the budget whether in the area of insurance,retail,defence,media or education. Presumably,the finance minister believes that foreign portfolio flows are more suitable or less politically contentious than longer-term funds.
The area that disappointed was the social sector. There is a 17 per cent increase in allocations to all welfare schemes but given that nominal GDP growth is at the same level,there is no real increase in allocations. While education received an increase of 24 per cent,healthcare got an increase of 17 per cent.
In all of this,the finance minister stayed true to his conservative image. There was nothing path-breaking in this budget no visionary or bold strokes with which to excite,and certainly nothing specific to deal with the big issues of the day most importantly inflation,which will gnaw away at the vitals of our growth aspirations. It is also not entirely clear how the finance minister will stay true to the 4.6 per cent fiscal deficit target given the overshoot of last year,in which the 20 per cent increase in nominal GDP worked so much in his favour. An invocation to Indra certainly will not do the trick.
The writer is chairman of SaVant Advisers,Mumbai
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