Friday, February 3, 2023

Hits and Misses

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There were great expectations from this budget, but these seem to have fallen woefully short. It didn’t set the markets on fire, didn’t spur the manufacturing sector and didn’t curtail subsidies

By Shantanu Guha Ray

A run Jaitley’s second Union budget was a mixed bag. While it had loads of routine, there were two landmarks too. These will need to be achieved by the NDA government to ensure that its billion-dollar “Make In India” dream is a success.

Weeks before February 28, 2015, India’s $290 billion budget had raised genuine hopes of reshaping economic policies and supercharging growth in Asia’s third-biggest economy. But now that it has been presented in parliament, the budget needs some serious re-examining. Pray why? Jaitley, to-wards the start of his 90-minute address, had declared incremental change was not going to take India anywhere. “We have to think in terms of a quantum jump.” His words were in sync with those of Prime Minister Narendra Modi, whose BJP-led NDA had pledged greater spending to upgrade infrastructure and improve the efficiency of social-welfare programs.

But did it actually happen? Let’s count the marbles: In addition to $11 billion for roads, rails and other infrastructure, the finance minister (FM) announced an 11 percent increase in military spending, reduced corporate tax rate and tighter rules to curb the stashing of wealth overseas.
In addition, Jaitley rolled out new pension, insurance and social security programs. He looked happy in an interview with the state-owned Lok Sabha TV and said: “We have done truly ground-breaking work.”

The finance minister was also happy that he (read the government) had increased the share of total tax revenue being transferred to state governments and created a sovereign-wealth fund to invest in infrastructure.


But economists argued that these were a far cry from the slashing of expensive subsidies and rapid privatization of state-run banks and industrial companies that Indians had hoped to see. Also lacking were plans to end electricity shortages and simplify national and state sales taxes.
NDA’s gradualist approach did not shake the markets, ostensibly because the budget did not ignite India’s manufacturing sector, nor did it improve the business environment. The Sensex dipped slightly during the day but closed up 0.5 percent.

Additional spending could help cement India’s position as a leading growth driver among emerging markets as China’s economy slows, but that the FM avoided taking stronger steps to curtail subsidies in his budget was linked by many to the BJP’s pathetic loss in the Delhi elections.
“The government’s silence on subsidies is indeed baffling,” said economist Devika Mehndiratta of the Australia and New Zealand Banking Group. She found support from Sanjay Jha, the India head of Dale Carnegie Foundation and also a senior spokesperson of the Congress. He said the budget offered nothing spectacular. “They have tinkered incrementally in some areas, they have not gone the whole nine yards.”

But Jaitley said he would not take criticisms lightly. He told his interviewers that “big-bang reforms” could not be pushed in one go because the “Indian economy is a super giant which moves surely but slowly. Even our worst critics would admit that we have moved rapidly.”


The lack of radical moves in the budget isn’t likely to wreck the aura of inevitability that currently surrounds the Indian economy. The economy could grow between 8.1 and 8.5 percent in the coming fiscal year, the fastest among the biggest emerging markets and based on a revised method for calculating gross domestic product.

But nine months after Modi took office, there are doubts about his government’s ability to tackle some of India’s most-entrenched problems, starting with a long history of government overspending.

Consider the case of the new accident insurance, pension and social security plans which will broaden the safety net at a lower cost to the government than subsidies. On paper, it looks like a very powerful, self-help program that is market-driven as opposed to government-delivered social welfare. The programs broaden access to financial services, which have, so far, provided 125 million with bank acco-unts. The Modi government wants anti-poverty aid to be paid directly as cash into poor families’ bank accounts rather than as subsidies distributed to food, fuel and fertilizer retailers.

MUMBAI, AUG 5 -- The Reserve Bank of India (RBI) Governor Raghuram Rajan speaks during a news conference after the bi-monthly monetary policy review in Mumbai August 5, 2014. India's central bank kept its key policy repo rate unchanged on Tuesday as widely expected, but warned about inflationary risks should a shortfall in monsoon rains spark a surge in food prices.  REUTERS/UNI PHOTO - 9R


RBI Governor Raghuram Rajan’s assessment will be a crucial feedback






Jaitley’s Hits

Pushing for startups and MSMEs: The FM has recognized the need to support startups and pushed innovation. Now, startups and MSMEs will have both funds and  talent, creating new avenues for growth and employment.

Boost to Digital India: The national fiber optic network will connect rural communities and make governance more effective, thanks to the troika of Jan Dhan–Aadhar–Mobile gameplan of the FM.

Keep taxes simple: The government will make tax less adversarial, reduce corporate tax with exemptions.

Inward and outward financial inclusion: A sector-neutral Financial Redressal Agency that address grievances against all financial service providers and an International Finance Center will help New Delhi reclaim lost business from the Asian markets.

More cash to states: This unique decentralization will allow more revenue to be passed to states.

But this doesn’t mean expenditure on these giveaways will shrink. For example, the next year’s bill for petroleum subsidies is expected to be half of this year’s total, thanks to lower crude prices. But spending on food and fertilizer subsidies will grow.

As for India’s rural-employment program, $810 million in additional funding has been pledged, guaranteeing non-farm work for poor households. Yet, a day before the budget, Modi had criticized the program as a “living monument” of the previous, Congress-led government’s failure.
RBI governor Raghuram Rajan’s assessment is yet to come. He had said before the budget that he wants “high-quality fiscal consolidation” to further lower one of Asia’s highest interest rates. According to Atsi Sheth, senior VP, sovereign risk, Moody’s Investors Service, India’s sovereign rating hinges on whether the country’s competitiveness improves. “The budget underscores our view that government finances are likely to remain a constraint on India’s sovereign credit profile. Fiscal consolidation appears difficult to achieve even by a government with a considerable parliamentary majority and during a period of accelerating economic growth.”

Dubai International Financial Centre






Dubai International Finance Center; (far left) The upcoming Gujarat International Finance Tec-City; the middle class will feel the pinch with Jaitley’s budget



However, the budget has unveiled two mega reforms, both financial. First, Jaitley has looked at the domestic financial sector and placed consumers of finance, the average household, at the centre of all laws. The idea is to ensure a properly functioning capital market that also requires proper consumer protection. Jaitley has plans to create a sector-neutral Finan-cial Redressal Agency (FRA) that will address grievances against all financial service providers. The move is important because of numerous financial scandals worrying Indians, thanks to wide-scale institutionalized mis-selling. Under the FRA, Indians will have a single complaint management agency to go to.

Jaitley also hopes to create one of India’s boldest laws, the Indian Financial Code (IFC), which is currently being reviewed by the Justice Srikrishna Committee and soon, will be introduced in parliament for consideration. If passed, the IFC could become one giant law that will place the consumer at its core and change the contours of India’s financial sector.

But the IFC will be tough to implement. It will need the NDA government to replace 61 existing laws and there could be pressures from a large community of vested interests of insurance agents or companies that benefit from weak regulations.

Now, let’s get to the second mega reform Jaitley pushed into the budget. It looks outward and eyes the global financial sector. “While India produces some of the finest financial minds, including in international finance, they have few avenues in India to fully exhibit and exploit their strength to the country’s advantage,” Jaitley said. “GIFT (Gujarat International Finance Tec-City) in Gujarat was envisaged as an international finance center that would actually become as good an international finance center as Singapore or Dubai, which, incidentally, are largely manned by Indians. The proposal has languished for years. I am glad to announce that the first phase of GIFT will soon become a reality. Appropriate regulations will be issued in March.”

Now, will this happen? The need for an international financial center has been pending ever since reforms started in India in 1991 and Indian companies expanded their global footprints. The idea was first discussed in 2007 in the Percy Mistry report by a high-powered expert committee on making Mumbai an international financial center.


Once GIFT takes off, it will be a globally benchmarked international centre. Its core operations will include offshore banking; insurance, assurance and reinsurance; regional financial exchanges and back offices. It will target 8-10 percent of financial services on 84 million square feet of space and create one million new jobs, 30,000 by 2016. Currently, it employs 700. In short, it will be a smart, urban infrastructure with schools, hospitals, clubs and entertainment centres that will attract top talent from across the world. Jaitley is confident that India’s international financial center will occupy a vacant time zone between Singapore to the East and Dubai to the West and will help New Delhi pull back many markets it lost.

This dual move, in many ways, is the FM’s masterstroke in this budget. If these two reforms can outpace each other in terms of implementation, inbound and outbound financial inclusiveness will be achieved.

So, hopefully, the next few weeks will test the FM’s ability to pass his proposals through parliament. Till now, Rajya Sabha has blocked key initiatives and often raised doubts whether lawmakers will make permanent Modi’s executive orders to ease land purchases, allow more foreign investment in insurance, and make coal mining more transparent. But now, things must move. As Sajjid Chinoy, JP Morgan Chase & Co’s India economist in Mumbai, said on Bloomberg TV India: “It’s very important now that the execution happens.”


Jailtley’s Misses

Who will resolve transfer pricing litigations?: There was just a mention of measures for dispute resolution, but the key is implementation. When will that happen?

Increased service tax: Many would use pirated software, ostensibly because of the dual tax on software. The net tax rate for software is over 20 percent.

Budget for children: India was one of the first nations to have a separate budget for children. The clock has now reversed with a reduction of 29 percent for children’s programs and 55 percent for the Women and Child Development Ministry budget. The mid-day meal budget too has been reduced by 30 percent and the scheme for setting up of 6,000 model schools at the block level is almost abolished (99.92 percent deduction in allocation).

Fiscal Deficit Target: For 2015-16, this is 3.9 percent, up from the 3.6 percent expected by markets, leading to disappointment.
Missing subsidies: There was no mention of food and fertilizer subsidies, which have been left at same levels as last year. Only the petroleum subsidy is expected to be around Rs.30,000 crore, but that’s due to lower global oil prices. Not touching subsidies means that not only the fiscal deficit, but even the revenue deficit for 2015-16, is going to be higher.

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