Friday, February 3, 2023

Post-budget ruminations

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Finance Minister Arun Jaitley’s “first journey” budget produced a deafening no-bang. Its chief characteristic appeared to be a lack of vision on real problems needing urgent solutions, such as debt-equity risk, which discourage new investments because project clearances are interminably delayed.

There was no thrust on the revival of manufacturing through labor reforms. Disinvestment took a back seat, although he promised sale of shares in public sector banks to retail investors. Initiatives on foreign direct investment, including the insurance sector, were wishy-washy.

MIRZAPUR, JUNE 18 (UNI):- A labourer unloading onion sacks from a truck at the wholesale market in Mirzapur, Onion prices are soaring across the country.  UNI PHOTO-26U
MIRZAPUR, JUNE 18 (UNI):- A labourer unloading onion sacks from a truck at the wholesale market in Mirzapur, Onion prices are soaring across the country.

The budget left big question marks. How does one revive growth and capital expenditure? Where is the insulin shot for a diabetic economy, the more colorful phrase for stagflation—the debilitating combination of low growth, unemployment and inflation? The budget did not meet macro market expectations. It contained, instead, sops for micro-political constituencies rather than blockbuster measures for changing the parameters of Indian economic policy. What happened to Narendra Modi’s “minimum government, maximum-governance” catchphrase? What India got instead was a polyglot of a thousand schemes, which will be like a honey pot to swarms of babus.

There was a huge gap in terms of what Modi said and what Team Modi delivered. And, P Chidambaram, the former finance minister, seemed to have the last laugh as he “welcomed” the new government to the realities of the marketplace. The key questions: Is the budget equal to Modi’s mandate? What did Jaitley signal? Is this the real face of Modinomics and an admission that the in-your-face “Gujarat Model” cannot be replicated on a national scale? Did Jaitley wimp out?

Or conversely, is this a good budget badly presented? Or, is it simply a psychological move—a feel-good budget to make people spend more and feel comfortable? Executive Editor ALAM SRINIVAS sneaks a peep into Jaitley’s mind, during the hours after his budget speech. He probes the finance minister’s thought process and winnows the chaff from the grain in a lively, no-holds-barred analysis.

Alam Srinivas’ Jaitley Diary Scenario

5.35 AM, July 11, 2014: Aaaargh! How my back hurts. I must be the only finance minister (FM) who took a five-minute break during the budget speech. My back ached so much that I had to sit down to deliver the rest of it. But more than the physical condition, it was my mind that was in turmoil for the past 45 days. We made many promises to most sections of society. There were many expectations—among industry, investors, individuals and experts.

AMRTISAR, MAY 4 (UNI):- Labourers fill sacks with wheat at a grain distribution point on the outskirts of Amritsar on Sunday. Punjab is India's largest wheat producing state, contributing nearly 70 percent of the national total.
AMRTISAR, MAY 4 (UNI):- Labourers fill sacks with wheat at a grain distribution point on the outskirts of Amritsar on Sunday. Punjab is India’s largest wheat producing state, contributing nearly 70 percent of the national total.

My first budget was government’s first major policy document. We said that we would hit the ground running. My budget had to prove it conclusively. Sadly, the morning newspapers the day after spoiled my mood. This is how The Economic Times, India’s leading pink daily, headlined its budget piece: “A Chidambaram budget with saffron lipstick”. This was the worst criticism I could get. How could Swaminathan Aiyar ever compare me to P Chidambaram, the former FM, whose budgets I ripped apart?

He didn’t get it. I said in my speech that I faced challenges because of the previous regime’s legacy. I had little elbow room to maneuver in terms of revenues, expenditure and taxation. I had to ensure high growth and low inflation, an almost impossibility in monetary terms. Yes, I know I criticized UPA-II for not achieving these twin objectives. But, I was then in the opposition. I could not sympathize with Chidambaram. I had to attack him.

As I finalized the details in the past few weeks, I had to show ambitious intent and exaggerated promises, play vote-bank politics, include ideological nuggets from BJP’s manifesto and RSS’ agenda, replicate the Gujarat model on an all-India level and, of course, give sops to investors and individuals. This government is about image and symbols. Thus, I had to include new welfare schemes named after “our” leaders.

6.47 AM, July 11, 2014: Big-bang reforms! Big-ticket announcements! Insulin shots! This is what everyone expected. But, give me a break. I have been the FM for only 45 days! I had to first understand the “real” state of the economy. How could I announce huge decisions without discussions and deliberations? Do you think it is easy to slash subsidies, kick-start growth, combat inflation, and manage the fiscal deficit?

Experts said I should introduce the Goods and Services Tax (GST). But there is no consensus among the states’ chief ministers (CMs) on it. The most vociferous critics are our own CMs. I have to wean them to my side. It needs constructive talks. This is why I announced that I will seriously take it up with the CMs and reach a conclusion by the end of the financial year. The Economic Survey idea for a part-GST was humbug.

Then, there was a suggestion about subsidies. I should rein them, especially those on food and fuel. But this is a huge exercise. It involves radical shifts in mindsets. It requires a complete revamp of the existing system. Can it be done in 45 days, a few months or a few years? No. It will require at least two full terms to achieve the objective. So, I said that we will target subsidies to the poor, exactly what Chidambaram tried to do.

7.56 AM, July 11, 2014: I decided to opt for a half-bang (some may say no-bang) strategy. A slew of steps were announced on taxes. I said there will be no retrospective taxes, unless it was necessary—I know, even the UPA-II said it—and I said that such cases would need to be first cleared by a senior committee—I know, even the UPA-II said it. But the most important step was to allow advance rulings on taxes for most investors.

Isn’t that great! It will imply that there will be minimal disputes between companies and the taxmen. No more controversial cases like Vodafone, Nokia, etc. And didn’t I allow higher exemption limits for individual taxpayers? Not many highlighted my bold steps to hike FDI (foreign direct investment) limits to 49 percent in defense and insurance. I understand there is no difference between 26 and 49 percent for a foreign investor. Both give him similar minority control. But didn’t these moves send the right signals globally? That this regime may oppose FDI in organized retail, but welcomes it in other sectors.

8.33 AM, July 11, 2014: Growth, inflation, unemployment and fiscal deficit! These four pillars of development hung over my head, and that of the nation, like four Damocles’ swords. I cried when onion prices shot up, and Met department declared a below-average and delayed monsoon. It requires systemic supply-side changes to curb prices. More important, it requires coordination and consensus between the center and states.

Right now, only a handful states are ruled by us or our coalition partners. There is no way I could have pushed for changes in the states’ Agricultural Produce Marketing Committee Acts, which are major bottlenecks. I could only announce that “the Central Government will work closely with the State Governments to reorient their respective APMC Acts.” Which could take months to achieve, and bad monsoons would prove to be the last straw.

Similarly, growth cannot happen in a short time. Right now, I could only improve the sentiments and ensure higher investments in infrastructure, which might contribute to growth in the medium term. This is why I announced that Real Estate Invest-ment Trusts (REITs), which proved to be non-starters in India but were successful globally, will have pass-through for the purpose of taxation. This incentive is enough for huge funds to flow into the realty sector, which will boost housing and construction. The same benefits will accrue to the innovative Infrastructure Investment Trusts, a modified REIT-like structure, to ensure flow of funds. I admit the introduction of REITs was already in process—SEBI issued draft guidelines in October 2013—but the pass-through tax was an obstacle that I removed.

A major problem is the financing of infrastructure projects. Banks are not keen to lend because of the long period of the loans, and the risks attached with such projects. I allowed banks to extend loans “with flexible restructuring to absorb potential adverse contingencies”. And I allowed them to raise long-term funds with minimum restrictions on requirements to keep a part of it as cash or investments in government securities.

My biggest employment-generation plan was the Rs. 10,000-crore corpus for start-ups. Most jobs globally come from small and medium enterprises. If India has to shift gears, and move away from jobless growth witnessed in the past decade, this is the way forward. We have to encourage entrepreneurship and small firms.

These measures will not change the realities in a jiffy. India will stutter towards growth. In my speech, I could only assure that 7-8 percent growth will happen in 2-4 years. Not to forget that the fiscal deficit will come down from 4.1 to 3 percent of GDP in two years.

1 PM, July 11, 2014: P, P, P! This has become my nemesis. My prime minister feels that PPP (public-private partnership) is the panacea for growth and our economic and social problems. It started with the railways budget, and I had to follow the principle. I mentioned PPP or PPPs 12 times in my speech. My boss thinks this model will lead to a flood of Indian and foreign funds to finance our grand infrastructure and other plans. In my heart, I realize that there are issues with PPP. In the past, across sectors like roads and highways, it has resulted in corruption and crony capitalism. The existing models and contracts were criticized by all the stakeholders, who drafted the model PPP agreements.

This is why I clarified that while India is the largest PPP market with 900 projects, “we have also seen the weaknesses of the PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced and sophisticated models of contracting and develop quick dispute redressal mechanism”. Therefore, I allocated Rs. 500 crore to set up 3P India, an institution to achieve these objectives. 3P India may take months to finalize and finesse model agreements that will satisfy the parties. But it is a beginning of a process. By the end of our tenure, you will see the results.

10 PM, July 11, 2014: My biggest headache was to pander to social, ideological, religious and vote-bank demands by my prime minister, the RSS, and our CMs. To please my supreme leader, I allocated Rs. 200 crore for Sardar Patel’s iron statue, the tallest in the world, in Gujarat, Rs. 100 crore for beautification of ghats, and Rs. 2,000 crore for Ganga-cleaning plan. I hinted at projects to link our rivers. To indicate who was now in power, I included new programs and institutions, named after our favorite leaders like Deen Dayal Upadhay, Syama Prasad Mookerjee, and Jai Prakash Narayan.

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I announced the revision of royalty on mining products, as most of the mining states are ruled by us. Vote-bank tactics forced me to provide Rs. 100 crore to finance Dalit-promoted startups, Rs. 500 crore for Kashmiri migrants (Pandits), and Rs. 100 crore to uplift the madrasas. RSS was placated through proposals on conservation of heritage and archaeological sites. Grand schemes—one of them an existing one announced by UPA-II—like Digital India (broadband in every village) and National Rural Internet and Technology Mission—were included in the speech. At the end of the day, it led to the making of a chillad (loose change) budget. I was forced to give Rs. 50 crore here, Rs. 100 crore there and Rs. 500 crore elsewhere.

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