CREATIVE incrementalism, as opposed to big bang reforms, has been the hallmark of the Narendra Modi government with regard to economic policymaking. That approach can be seen even in the Union Budget for 2019-20, the first after its return to power with a resounding mandate. Many would have expected this political verdict, more remarkable than the one five years ago, to provide an opportunity to announce something more than ordinary — like the budgets of 1991-92, 1997-98 and 2000-01. Moreover, the current backdrop of a deepening growth slowdown and drying up of investments would have demanded such a response to revive the animal spirits of entrepreneurs, a theme well articulated in the finance ministry’s Economic Survey. Nirmala Sitharaman’s maiden budget has disappointed on that count, as reflected in the BSE Sensex falling by 395 points or almost 1 per cent.
The budget is, however, not without positives. For one, Sitharaman has, rightly, not succumbed to the temptation of a fiscal stimulus. The Centre’s fiscal deficit has been budgeted at 3.3 per cent of GDP, below last year’s revised estimate of 3.4 per cent and in line with meeting the “glide path” target of 3 per cent by 2020-21. That, along with the bold proposal to raise a part of the government’s gross borrowings in foreign currency from external markets, led to a rally in the bond and currency (as opposed to stock) markets: Benchmark 10-year security yields fell from 6.75 to 6.69 per cent, while the rupee gained 8 paise against the dollar. Going in for sovereign bond floatations — an idea mooted first in the late Nineties — will enable the Centre to borrow more cheaply and result in less crowding out of private firms in the domestic market. Only 3.5 per cent of the Centre’s public debt is now held by external agencies. At the same time, the prospect of greater scrutiny by global investors on account of the government borrowing directly in overseas markets will impose much-needed fiscal restraint. The Reserve Bank of India’s interest rate reductions cannot have the desired impact with a profligate government; it’s good that this message has been internalised in successive budgets in the Modi regime.
There are other bright sparks, too, in the latest budget — such as the proposed monetisation of surplus land held by Central public sector undertakings/departments for affordable housing and infrastructure development through public-private partnerships; resolution of the “angel tax” issue by not subjecting start-ups to arbitrary scrutiny by assessing officers in respect of share premium valuations; a reasonably aggressive disinvestment programme of Rs 1,05,000 crore (up from last year’s Rs 90,000 crore); and a Rs 70,000-crore recapitalisation of public sector banks. The last measure comes at the right time with their credit growth just about picking up, alongside signs of a bottoming-out of non-performing assets, and non-banking finance companies (NBFC) unable to lend as before. No announcement of any 2008-like special liquidity window for NBFCs, which would have invited moral hazard, is welcome. The bailout has, instead, been limited to providing a one-time partial credit guarantee to banks for purchase of up to Rs 1,00,000 crore of high-quality diversified assets of financially-sound NBFCs. This strategy — of separating the good apples from the bad, even while strengthening the RBI’s regulatory authority over NBFCs — makes sense.
BUT where the budget fails is offering a coherent reform vision for investors. The most apt example here is agriculture. What stopped the finance minister from announcing the government’s intention to dismantle all provisions in the Essential Commodities Act and Agriculture Produce Market Committee laws that allow restrictions on sale, movement, stocking and export of farm commodities? Such controls have no meaning when consumer food inflation has been in low single-digits or even negative for the last three years and India has transformed from a structurally deficit to surplus producer in most crops. A single statement of intent would have generated confidence among agri-businesses, including large retailers and traders, keen to invest in grading, processing, warehousing, transport and port infrastructure — all of which are necessary to meet the much-talked-about goal of doubling farmers’ incomes.
A similar lack of ambition is seen vis-à-vis rationalisation of farm subsidies. For 2019-20, the budgeted figure for food, fertiliser and crop loan subsidies — plus the PM-Kisan income support scheme — adds up to a mammoth Rs 3,57,216 crore. At least half of this amount could be saved by capping sales of subsidised fertiliser (to, say, 20 bags of urea per farmer per year) and physical procurement of foodgrains to not more than 50 million tonnes. The resultant savings would be enough to make the PM-Kisan a genuine direct benefit transfer scheme, providing non-market distorting support of up to Rs 4,000 or so per acre to all farmers.
The inability to take politically tough reform decisions is striking, especially for a government enjoying a decisive majority not seen in decades. Risk-taking is an attribute normally associated with private enterprise. In times such as these, it is the government that needs to think and act like an entrepreneur. An across-the-board reduction in the corporate tax rate to 25 per cent, rather than limiting it to companies with annual turnover below Rs 400 crore, would have been timely. The current budget is proof of caution taking precedence over ambition. That would have been fine in 2015-16, not in today’s uncertain global economic environment with India Inc facing a crisis of confidence. Hopefully, this is not a lost opportunity.