Reads like an election manifesto

Undecided between charisma and delivery, the Finance Minister has produced an effort which has in some quarters been described as the ‘Mother of all election manifestoes!’ While stressing the need to bolster the vibrant equity and debt markets, he has announced many schemes that could support economic growth.

One certainly gets the impression that the government intends to look at development in a holistic manner. The emphasis on fuelling the rural economy through measures around agriculture, and on creating an enabling ecosystem through investments in infrastructure such as roads, railways and urban infrastructure is certainly commendable.

So is the incentive plan for the MSMEs which will help create jobs. As D V Subba Rao and Amitendu Palit (writing in ‘The Straits Times’) put it, the message is loud and clear –“Manufacture in India if you want to access the Indian market.” Also welcome are the announcements relating to the new defence production policy and the two defence production corridors. One needs to note with approval that affordable housing continues to get preferential treatment.

By far the biggest policy initiative announced in the budget is the sweeping plan to provide health insurance to 200 million households for up to Rs 5 lakh. This, combined with the government’s move to provide health coverage up to 5 lakh rupees to 10 crore for families, makes it the biggest scheme of its kind in the world and is consistent with the stated approach of buying rather than providing services.

The need for such an investment can hardly be disputed, because health expenditure in India has been hovering around 1.4% of the gross domestic product, compared to China’s 3.1, Sri Lanka is 3 and Ethiopia’s 2.9. While the allocation is justified, how it is spent remains to be seen – because that is also an important aspect of the initiative.

The government’s ambitious target of doubling farm incomes is supported in the budget through the announcement that agriculture will henceforth be treated as an enterprise and an income-centric activity, rather than a production-centric activity – a plea that has been made in several informed quarters for over two decades now.

The Bhavantar Bhugtan Yojana experience in Madhya Pradesh notwithstanding, the price differential in mechanism is a good idea, and other initiatives including cluster-based development, Krishi Sampada Yojana to boost agro processing financial institutions and Operation Greens which intends to stabilise the prices of volatile tomato, onion and potatoes are all welcome initiatives, as is the Gobar Dhan programme which aims to ensure a scientific management of all residues of agriculture and animal husbandry activities.

The formal non-agricultural payroll is much greater than believed – more than 30% if formalities defined in terms of access to social security provisions like EPFO, IDSIC and more than 50% when defined in terms of being in the GST net. This shows that the attempts being made to address the problem of growing contractualisation of the labour force, items such as the Pradhan Mantri Rojgar Protsahan Yojana, encouraging concepts like fixed firm employment and liberalising various laws and rules relating to compliance of labour laws, are contributing to this trend.

There is also hope that more employees will be accorded social protection mechanisms which are the hallmarks of organised sector jobs. Also one can look forward to improve revenue receipts that can reduce fiscal deficit.

On the flip side, one disturbing feature is the manner in which the speech jumped here and there, giving the impression of having been put together in a cut and paste style, with no coherent continuity or orderly sequence.

While the pre-budget economic survey predicted a growth rate of 6.75% for the current year, the budget itself talks about the growth (anticipated) rate next year of 7.75% – which actually represents a marginally negative growth rate (compared to the average of 7.3% over the last three years).

A study of some of the macro-economic indicators indicates several encouraging signs. For instance, the attempts by the government to widen the tax base, through measures such as the GST and demonetization, can be said to have been reasonably successful. There has been a 50% increase in the indirect tax base and about 18 lakh extra in individual income tax filers have come into the system. This indicates that the tax to GDP ratio will increase in the near future, thus helping greater formalisation of economy.

Consumer prices in the country increased, on a year – on – year, basis by 5.07% in January 2018. Inflation remained about 4.88% for the third month, a level not seen since July 2016.

Foreign exchange reserves have reached a record level of $432 billion in December 2017, which augurs well as it shows that India is getting increasingly integrated into the global economy, and has sufficient contingency reserves to face any situation of global volatility with reasonable confidence.

The fiscal deficit for the first eight months of 2017 for the first eight months of 2017-18 reached 112% of the total year far above the 89% norm - a clear indication of the government inability to increase non-tax revenue as per the target fixed and also performance by, especially, its revenue collecting agencies.

Luckily the target for disinvestment proceeds is likely to be reached, which is a good sign and reflects greater investor confidence in the future economic performance by PSUs. Needless to say increases in fiscal deficit condition further escalate cost of borrowing for corporates which is bad economy.

The index of industrial production (IIP) has growth at the rate of growth 3.2%, real credit growth to industry is still in the negative territory and the growth in world trade remains less than half the level at which it was a decade ago.

When all the three factors are taken together and interpreted, there is a clear indication that the manufacturing sector is struggling to grow (also reflected in the lack of interest corporates have shown in borrowing from banks, poor monetary transmission and a tenure of monetary policy) and the lack of interest in raising capital (in spite of falling levels of cost of equity) and declining competitiveness of manufacturing in several sectors vis-a-vis world trends.

The twin balance sheet problem hunting the Indian economy remains a challenge, with corporates unable to borrow on account of the inability to service existing debts, and the banks unable to lead in the face of the persisting problem of NPAs.

The NK Singh Committee recommended reduction of the fiscal deficit to 2.5% and the debt-to-GDP ratio to 38.7% from the earlier numbers of 3.5% and 49.4% respectively. However, the budget only promises reductions to 3.3% and 48.8%. Also, the revenue deficit for 2017-18 shot up to 2.6% as against the budget estimate of 1.9%.

One must record a sense of deep disappointment about these numbers. However, the fact that steps have been taken to amend the Fiscal Responsibility and Budget Management Act, following the acceptance by the central government of some of the key recommendations of that Committee, is reassuring.

As a general observation, it must be noted that a separate Railway was justified when colonial masters desired to examine the commercial viability of their largest enterprise in our country on a year-to-year basis. This is no longer required and the practice has rightly been dispensed with. Not since the first budget presented by the TDP government (under NTR in 1983) has one seen a budget so blatantly populist – reading more like a wish list for political party than a serious fiscal statement by the government of largest democracy in the world.

In fact, as someone remarked, the fact of imminent general elections being around the corner notwithstanding, it is time for the government to come into its “hosh” and come out of the euphoric post-election “josh” of the post – election euphoria more than 3 years ago!