Budget for uncertain times

On the face of it, getting to the Economic Survey’s higher FY19 GDP forecast(prediction/foretell-पूर्वानुमान) of 7-7.5 per cent as compared to this year’s 6.75 per cent shouldn’t be too difficult. The growth-dampening(diminish/decline-घटना) impact (effect/ influence-प्रभाव) of both GST and demonetisation is behind us and a moderate pick-up in exports, the result of powerful global growth, should do the trick. The question, however, is whether this will be sustainable and whether this will create jobs.

The answer to both is iffy(uncertain/unknown-अनिश्‍चित), indeed even the FY19 growth forecast requires oil prices to fall — the good news is US shale output is rising a bit — and the rupee to be weak. But an inflation-combating(competition/rivalry-मुकाबला) RBI is unlikely to lower interest rates, and the high rates attract global capital flows in both debt and equity markets — that keeps the rupee strong, encourages(promote/stimulate-प्रोत्साहित करना) imports, which then lowers domestic industrial activity and makes exports that much more uncompetitive.

A big factor in the story of India’s recovery(retrieval/regaining-वसूली) was meant to be the dollar getting stronger due to US growth picking up and firms like Apple bringing back billions of dollars of back-taxes to the US — the dollar, however, has weakened against other currencies like the pound and that has kept the rupee strong. If India’s exports don’t grow fast — India’s labour laws have kept firms small and already lowered their competitiveness — that puts a ceiling to GDP growth in FY19.

What, then, will stimulate(promote/spur-प्रोत्साहित करना) jobs which are critical(important-महत्वपूर्ण) for consumption growth to get strong? Analysis of EPFO data by IIM Bangalore’s Pulak Ghosh and SBI’s Soumya Kanti Ghosh suggests that 4.5-5 million formal sector jobs were created in each of the last two years, but this sounds problematic(troublesome-समस्यात्मक). Since the total number of genuine EPFO accounts is in the region of 50-60 million, this would mean a sixth got created in just the last two years when the economy was limping(decrease/worse). That said, it is equally true that the official data on jobless growth doesn’t sound kosher either.

Reviving(resuscitate-पुनर्जीवित) investment is the most obvious(clear/apparent-स्पष्ट) solution, but as the Survey points out, since this is largely the consequence(outcome/result-परिणाम) of firms being debt-stressed, revival is not easy. And while the Insolvency Code’s role in selling off these debt-stressed companies at a discount is very important — only when firms are not debt-stressed(pressure/tension-तनाव) can they invest more — this is not a short-term palliative(soothing/analgesic-शांति देनेवाला). In the past, and in the budget later today as well, the government will try and boost public sector capex, but this is minuscule(subtle/meticulous-सूक्ष्म) compared to the private sector capex that has disappeared.

But while it is true debt-stressed firms will take a few years to invest, in areas where firms are still keen(eager/anxious-इच्छुक) to invest like oil and telecom — despite the RJio havoc(devastation/destruction-तबाही) — government policy has been quite unfriendly. In both cases, nothing has been done to cut very high government levies(tax) though this has been known for years. In the case of oil, gas prices haven’t been fully freed(release/set free-आज़ाद) despite it being obvious(clear/apparent-स्पष्ट) that the administered prices were unremunerative(no profit/unadvantageous-अलाभकारी).

Given this, and the fact that the government is now in the last year before elections, the expectations(hope/supposition-उम्मीद) to splurge(swank/brag-शेख़ी) on all manner of sops(concession/exemption-रियायतों) is naturally high. In the farm sector, where prices have crashed(collide/strike-दुर्घटनाग्रस्त) due to a bumper crop, there is a demand that the government hike(increase/rise-वृद्धि) minimum support prices (MSP) and procure(obtain/acquire-खरीद) more at this price; since Madhya Pradesh is trying to give farmers a deficiency payment if market prices fall below MSP, there is a demand the Centre also try this.

While a certain amount of extra spending can’t be ruled out, this has to be kept at a minimum. If it is not, the bond markets will get even more spooked than they are right now, interest rates will rise and, to that extent, will dampen(diminish/decrease-कमी) whatever industrial activity there is right now. While genuine privatisation of PSUs is the best, even if the government is not up for this, it can get over Rs 2.7 lakh crore if it lowers its stake in 69 listed PSUs to 51 per cent. This sounds like selling the family silver to pay the grocer, but since a large part of government expenditure is capex on railways and roads, it is really asset recycling which is a good thing.

The budget, while keeping a tight rein(control/command-लगाम) on the fiscal deficit(deficiency/shortage-घाटा), must focus on reforms, some of which, as it happens, will also get the government votes. Instead of the huge fertiliser subsidy that is cornered by a small number of rich farmers, give each farmer a cash subsidy; pare down(assort/cut-छांटना) MSP-based procurement(purchase-खरीद) that benefits large farmers in a few states and, instead, give per acre cash payments to farmers.

Allow FDI in food retail so that farmers can benefit from direct purchases from them, do not stop farm exports every time inflation levels rise and, since the BJP is in power in 19 states, direct their chief ministers to genuinely free up cartelised mandis, ensure contract farming and allow large buyers to buy directly from the farm. Ideally a GST-council like body of state agriculture ministers should be created to fix the sector’s problems but at least start in 19 states.

Simplify GST further and, since revenues(income/earning-राजस्व) now look on track and thanks to GST and demonetisation, direct taxes are also quite buoyant(cherry/happy-प्रसन्नचित्त), use the fiscal space created to lower both corporate and personal income tax rates — apart from stimulating investment, this will also increase spending power. While the large number of tax disputes give India a bad name — these total Rs 7.6 lakh crore or 4.7 per cent of GDP — why not create a body that has the power to settle (resolve/compromise-समाधान करना) these cases; unlike in many countries, India has no body where an across-the-table settlement can take place. That’s potentially a huge source of income and will also improve the country’s business rankings. In short, it is possible to be both pragmatic(practical-व्यावहारिक) and populist at the same time.