February 2, 2018 12:00:04 am
It would have been too much to expect a government heading for national polls in about a year’s time to present a big-bang reformist budget. But what is disappointing is to see the Narendra Modi government coming out with a budget that significantly deviates from its earlier deficit targets.
This is a government that, after all, can be credited with not compromising on fiscal prudence, unlike the previous UPA regime. That track record has, however, now been somewhat dented, with the Centre’s fiscal deficit for 2017-18 estimated at 3.5 per cent of GDP, against the originally budgeted 3.2 per cent. For the coming fiscal, the budget estimate of 3.2 per cent is the same as last year’s and above the 3 per cent level as per the original glide path. Such fiscal slippages would have been tolerable even a year ago, when global interest rates and oil prices were low.
But in today’s scenario, with international crude prices at about $70 a barrel and central banks withdrawing the monetary stimulus measures put in place after the 2008 financial crisis, not sticking to borrowing targets can prove dangerous. This was seen on Thursday, with yields on the 10-year government bonds soaring from 7.43 per cent to 7.61 per cent — a significant jump in a single day. It would be interesting to see the response of the RBI at the next meeting of its monetary policy committee on February 7. Clearly, the impact of breaching deficit targets — and the implications on interest rates across the economy — has been underestimated.
The same lack of recognition of global realities is visible in not cutting the corporate tax rate — from 30 per cent to 25 per cent, as was promised in the 2015-16 Budget. High rates are counter-productive when other countries — notably the Trump administration in the US — have gone in for deep tax cuts to make it attractive to do business in their domestic jurisdictions.
The same goes with imposing long term capital gains on stocks and equity mutual fund units. This would have been fine, had it been accompanied by doing away with the current 20 per cent tax on distribution of dividends by companies along with making dividend incomes solely taxable at the hands of the investor. One way to interpret this is that investors in stock markets have made hay during the last couple of years and it is only fair to tax a part of their profits. Similarly, large corporates, it can be argued, can afford to pay a higher tax rate.
But this is a narrow and mechanical view. Corporates, ultimately, are drivers of economic activity, while markets are a barometer of business sentiment. For a country that has been starved of investments in the last few years, the current measures would simply be counterproductive. Yes, capital gains should be taxed, but whether this was the time to rock markets needs to be asked.
HAVING said that, the budget offers several positives as well. The proposal to have a flagship scheme providing over 10 crore poor and vulnerable families with an insurance cover of up to Rs 5 lakh for secondary and tertiary care hospitalisation is certainly welcome. The fiscal cost of subsidising the premiums on this scheme — without which no insurer would be willing to take it up — is not known. But it is something that is worth funding. The Centre should get the states on board to meet a part of the premium burden and, of course, to ensure its delivery to the targeted beneficiaries. The sheer numbers involved should make it possible to bring down the overall cost of the scheme, which is touted as the world’s largest government-funded healthcare programme.
There is a similar lack of clarity on how the Modi government plans to give 50 per cent return over production costs to farmers while fixing minimum support prices (MSP) — and how it will ensure that they get this benefit. Ideally, this should be done through a mechanism wherein the difference between the MSP and market prices is directly credited to the bank accounts of farmers.
The Madhya Pradesh government is already implementing a “Bhavantar” price deficiency scheme, which can be replicated nationally with 50:50 Central:state funding. Such a scheme should replace the existing physical procurement programme that is both fiscally more costly and also benefits only rice and wheat-growing farmers of select states. It is good that Finance Minister Arun Jaitley has left the design of a mechanism for implementing a price deficiency scheme for farmers to the Niti Aayog. It is good, also, that the government has thought it fit to push the large corporates, to start with, to go to the bond market for a part of their financing needs.
That should have a knock-on impact on banks whose balance sheets should be freed up to lend more to SMEs and smaller firms and to retail borrowers. It will also send a signal to corporate India on lenders having a greater say unlike in the past — which led to banks being burdened with a pile of bad loans.
The Economic Survey referred to the need for creative incrementalism to push growth rather than big bang reforms. Going by what was on offer on Thursday, there doesn’t seem to be much “creativity” on offer.
The overwhelming feeling is of an opportunity missed again — at a crucial time when there is synchronised global growth and many of the so-called fragile economies the FM referred to are also slowly bouncing back. Too often, governments have taken growth as a given. This government should not end up making the same mistake.
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