Fault lines

The continuing budget allocations to several thrust areas is a testimony to the governance deficit of the previous regimes

By Mohan Sule

The Union Budget 2017 stood on the tripod of growth with financial inclusion and fiscal discipline.  As expected, the exercise was distilled to a simple act of presenting the expenditure and revenue projections for the next fiscal. What the budget did was to inject a massive fiscal stimulus to boost rural employment, infrastructure and low-cost housing. Urban spending got a booster dose by the halving of the personal tax rate for the lowest tax slab. Peak corporate tax on micro, small and medium enterprises, with a turnover of less than Rs 50 crore and unable to bring down their tax liability by availing of various exemptions that big companies do, has been cut by 5%. MAT set-off can be availed for 15 years. The combo of a lower interest rate regime due to ample liquidity with banks, scaling back of government borrowing (down by nearly Rs 75 lakh crore this fiscal), and push to infrastructure and rural consumption was a heady mix for the market despite the fiscal deficit pegged at 3.2% of GDP in the current financial year, down from the projected 3.5%, with the 3% target pushed to the next financial year. Resources for expenditure will probably come from the higher GST of 18% on many items currently enjoying lower sales tax and growth in direct taxes on a wider base. The post-budget euphoria was reminiscent of the previous booms, fueled by the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, 2005, when consumption stocks bubbled, from early 2006 till mid 2009, before feeling the heat from the global liquidity crisis of September 2008. The market started gathering momentum early 2014 on hints of change of government to March 2015, appreciating nearly 7.000 points, when two years of drought reversed the trend.

The highest-ever allocation of Rs 48000 crore since the inception of MGNREGA is ironic considering  Prime Minister Narendra Modi had specifically singled out the scheme’s existence to the failure of the UPA’s decade-old rule. Yet hiking the outlay means two things. One, demonetization has badly hurt the village folks in the absence of adequate penetration of banks, roads and electricity. Second, it is an admission of the failure so far to reduce the dependence of a majority of population on agriculture income that swings to the vagaries of monsoon. Unless a sunset clause is set for phasing out the scheme, there will be no compulsion to measure the outcome. Earlier, leakages were blamed for cash not reaching the beneficiaries, an inadvertent acknowledgement that the program basically comprises handouts disguised in a market-oriented nomenclature. Now with Aadhar and direct bank transfer facility on stream, auditing the progress of the irrigation projects on which the funds are utilized is possible. Hopefully, the cut in the peak rate to 25% for those with turnover with less than Rs 50 crore should entice more players from the informal sector to join the mainstream and broaden the tax base. Another essential ingredient to complement moderate levies is a re-examination of the labour laws so as to impart flexibility in maintaining payrolls in tune with external conditions.     

 The Rs 10000 crore earmarked to re-capitalize PSU banks can be at best viewed as a symbolic gesture in view of the actual requirement, with some estimates putting it at nearly Rs 1 lakh crore. There are three charitable explanations for the finance minister’s tight-fist. One, and obvious, is the paucity of funds. Second might be that a road map is being prepared to sell these lenders burdened with rotten assets. Third is that there is a belief among the policy makers that the growth that will be fueled by lighter rates will be the recipe to return to health. None of these looks feasible in the short term. Hopefully, one of the reforms of the many that the budget has hinted will see the creation of bad banks to hold varying degrees of non-performing assets that will in one sweep cleanse the banking system.  No amount of coaxing will de-clog the credit pipeline as long as banks remain risk-averse. Another puzzle is the sadistic ritual of dangling a PSU divestment target to the market. It is nearly Rs 30000 crore more than the collection, which is off the mark, in the current fiscal so far. The confidence apparently stems from the fact that, instead of OFS, the approach will be through the ETF route. In its bid to maintain discipline, the recent budget exercise has exposed historical fault lines of lopsided development and governance deficit. There seems to be a realization that transforming policies should be kept outside the budget purview. Hike in FDI in insurance, amendments to land acquisition, and GST were debated thoroughly and conclusions arrived through consensus, imparting a stamp of legitimacy to the process.