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Looking into a Long-term Perspective ?

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By Dr Atul R. Deshpande
The budget 2019-20 is out and we have been receiving mixed reactions from various corners expressing subjective value judgements on the goodness or badness of this budget. The budget is an exercise of estimates of allocations of expenditures in view of the prioritiesed sectoral development programmes set by the government. It’s primarily a nominal exercise in terms of numbers where, at times, from a common man’s point of view, the absolute or percentage growth in allocated funds remains a point of inquiry. Or, for a common man, the more important point is the loud discussion about which goods or services have become less expensive and which have become costlier. The idea of ‘outcome- based approach’ to allocated funds on various heads of expenditure is a remote destination for analysis among common folks.

This year’s budget takes a ‘more cautious approach’ to overall sustainable growth programme along with fundamental economic reforms which are based on ‘structuralists’ approach which is more of ‘reformists’’ nature in terms of its impact and outcomes. This budget, therefore, needs to be analyzed in terms of its long-term perspective rather than in terms of its ‘short-term gains’. Having looked into this perspective, if we ask questions such as ‘is this budget pro-poor’? does it protect the interests of middle-income class’? ‘is the budget hitting hard the rich and super-rich classes’? The answer to such questions is either ‘not definite’ or ‘not so easy to answer instantaneously’. What has this budget done is it has now suggested ‘a macro-management framework’ which is fundamentally ‘revolutionary’ in nature but it strictly demands ‘deep- rooted’ economic reforms along with path-breaking changes in land and labour markets supported by a completely revised structure of the working of money and capital markets along with banking sector reforms.

Notwithstanding, all is not well. If one starts looking at the probable impact of the suggested estimates of expenditures on various existing and a few new programmes, one would realize that as there are ‘some good proposals’, there are definitely a few corners which the present budget has not looked at seriously. At the very outset, and straightforwardly, one would argue that there are three potential threats in the long-run if the proposed programmes with their present level of proposed expenditures are not implemented judiciously. One, it is quite likely that the government debt (internal and external too) might go up. Two, with proposed unproductive expenditures ( such as subsidies and defense and interest payment, implementation of 7th Pay Commission recommendations etc.) it would be more difficult to meet with the fiscal deficit ( the difference between government’s total income and expenditure) target of 3.3 percent of GDP (Gross Domestic Product). At present, the same is kept in control within 3.4 percent of GDP with plenty of statistical acrobatics. This again heavily depends on what would be GST and other tax and non-tax revenue collections in the coming future. The last one and a half-years’ experience on GST collections is not very satisfactory (barring a few months’ of an optimistic rise in GST revenue collections). Third, the present budget has some degree of potential to add fuel to the fire of inflation. Remember, we do not talk about the present level of inflation which is definitely in check (either ‘headline’ or ‘core’ inflation measured in terms of ‘consumer price index’). What are we referring here is the ‘expected rate of inflation’. India’s inflation is primarily food inflation (weights in the CPI are higher). The projection on this year’s monsoon is just satisfactory (95 %, the expected normal level is 85 to 87%). In addition to this, if government expenditure (unproductive) keeps on increasing and the proposed hike in tax on petrol and other fuels exert its influence on cost-push inflation, it would be difficult to keep prices in check. This will further aggravate the problem of fiscal consolidation. The fiscal estimate is low in relation to capital expenditure: it has been reduced to Rs 8.7 lakh crore in 2019-20 from Rs.9.2 lakh crore in the revised estimates for 2018-19. Also, an increase of Rs.3.3 lakh crore in the projected expenditure (productive) of the Centre in 2019-20 over the revised estimates of 2018-19 is insignificant when seen against the Rs.3.15 lakh crore increase in 2018-19 over the actuals of 2017-18. All this means a difficult path ahead so far as the objective of fiscal consolidation is concerned.

The budget is very optimistic in some micro details when we refer to a sectoral picture. For example, to improve the rural sector and mitigate rural distress, the focus on ‘Gaon, Garib, and Kisan’ is the correct step (its implementation is more important). In the agricultural sector, the plan to promote 10,000 FPOs (farmer producer organizations) is also a major step. The proposed plan to invest Rs 1 lakh crore over the next five years may have a substantial multiplier effect in the generation of demand and may also help private investment crowd in ( currently, private investment is crowded out in many sectors and sub-sectors). The budget is very positive for ‘aam investors’. For example, the budget suggested that promoters be asked to dilute at least 35 per cent of their shareholding, from the present 25 per cent. This suggestion may have an expansionary impact on the market which will open up lucrative investment opportunities for domestic institutions who have faced plenty of problems with retail flows in the last five years. The budget may give a boost to the affordable housing market segment. To stimulate demand in the residential market, the center has announced an additional deduction in income tax of Rs. 1.5 lakh for interest paid on housing loans for affordable housing properties (valued upto Rs 45 lakh). The past experience tells us that the impact of deduction in income tax through interest route did not have a very significant transmission effect. The auto sector has new doors open through incentives to EVs. To make EVs affordable to consumers, the government will provide an additional income-tax deduction of Rs. 1.5 lakh on the interest paid on loans taken for their purchase. This amounts to a benefit of around Rs.2.5 lakh over the loan period to the taxpayers who take loans to purchase electric vehicles. It is quite likely that private buyers who were earlier not considered for a subsidy through FAME-II, will now have a reason to seriously consider an EV with the tax exemption. Overall, the general tone of the auto sector is that it is disappointing that the FM has not recognized the distress in the auto sector and has not come out with any kind of support or stimulus. The budget has also announced some changes that would stimulate growth among start-ups. The main relief was on the front of Angel Tax. This move is especially important when the funding for early stage start-ups fell to $139 million in FY 19 compared to $166 million in FY18. The number of deals related to early-stage start-ups also dried up in FY 19. In this year’s budget, with a view to tackling the problem of growing unemployment, the government has announced 15 key takeaways for the MSME sector. The major announcement includes an allocation of Rs 50 crore for 2% interest subvention for all GST registered MSMEs on fresh or incremental loans and the launch of a dedicated payment platform for MSMEs. There are other positive announcements which might help MSMEs take care of its growth potential. Earlier ‘59-minute loan scheme’ for MSMEs did not result in substantial help to MSMEs. Now, the expectation is whatever new schemes announced should not follow the unsuccessful path of ‘59-minute loan scheme’. Although there are some specific announcements in the higher education sector, the total government expenditure on education for FY 2019-20 is estimated at Rs 94,854 crore. Out of this, only Rs 38,317 crore is allotted for the Department of Higher Education. This allocation is certainly on a lower side when compared with the gigantic task of implementing a new ‘National Education Policy’. A few more positives from the budget include programmes such as RBI’s drive to open banks’ liquidity tap for NBFCs and HBCs, an announcement to provide basics of pipe water and housing, CPSE and ETFs to be brought under 80 – C tax benefit, a decision to give digital payments a royal push, government’s proposal to inject Rs.70, 000 crore into public sector banks to bolster capital, a 100% FDI in insurance, measures proposed to pull NBFCs back to safety, corporate tax relief for small enterprises ( turnover less than Rs. 400 crore), an announcement to raise FDI caps in aviation and single brand retail sector, power and cooking gas for every family, a drive towards more of private funding etc. Nonetheless, there are sectors which are not paid adequate attention. For example, medicines and health care, farm income and related agricultural reforms which directly or indirectly help farm income go up.

To cut this long story short, the success of this budget in terms of actual realization of the outcomes of proposed programmes depends very much on overall fiscal consolidation, spectacular growth in private investment (especially, investment in infrastructure, growth in credit leading to adequate rise in demand and deep- rooted and long-awaited labour market and other economic reforms. Uncertainties through global slowdown and recessionary trend will also exert their impact on what India proposes as its plan of development through budget. No doubt, the budget gives you a static picture. The dynamics of its portrait depends very much on how effectively the government transforms the programmes into actual outcomes. This budget aims at having key ingredients for a self-sustaining virtuous cycle ( departing from the traditional Anglo-Saxon thinking) and it also intends to harness insights from ‘behavioural economics’ ( inspired by Nobel Laureate Robert Thaler) to create an aspirational agenda for social change( for example ‘Beti Bacho Beti Padhao’ will become ‘Beti Aapaki Dhan Lakshmi Aur Vijay Lakshmi). This transformation requires a ‘long-term perspective’ of analyzing a change. Let us wait and watch.

About the Author:
Dr Atul R. Deshpande is Professor and Director, KLS IMER, Belagavi and has 30+ years of experience of teaching, research and consultancy.

Atul R. DeshpandeE-mail ID: [email protected] or [email protected]



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