What’s In The Bag?

For all intents and purposes, the Budget is in the right direction. Except, it could use a plan to achieve its ambitious goals

From the moment finance minister Arun Jaitley began reading his career’s third Budget speech, all the way till the very end, the stock market’s bellwether index, the BSE Sensitive Index, oscillated wildly. Social media comments too reflected the mood in the bourses — swinging between complimentary and scathing, to downright snarky and fulsome praise. 

One tweet even claimed (without furnishing any proof) that though the Budget speech was read out by Jaitley, its key architect was Prime Minister Narendra Modi. Another, snidely claimed the Budget seemed to have UPA-III’s imprint, given its emphasis on rural and farm sectors. There were other similar tweets. While you can’t really expect a proper analysis in 140 characters, it’s true that the tenor and content of Budget 2016 has left experts confounded and desperate to find the one thread that ties up the whole package of measures.

Indeed, there are multiple strands to Budget 2016, each striving to provide a specific solution. The question is: do all these cohere to form a meaningful tapestry? Does it make sense? It might be worthwhile to examine some of the overarching themes in Budget 2016.

Let’s consider the first charge: Budget 2016 is a political document. To be fair, Jaitley had little choice. Economic policy-making cannot be conducted in a political vacuum. With key states (Assam, West Bengal and Tamil Nadu) going to polls this year, followed by Uttar Pradesh and Punjab next year, it might be naive to expect that Budget 2016 will be bereft of any political grandstanding. 

That might also explain this Budget’s exaggerated emphasis on playing Robin Hood: imposing a slew of additional taxes on the wealthy, under the heading “Additional resource mobilisation for agriculture, rural economy and clean environment”, without bothering to specify whether these taxes will indeed be sequestered for the specified objective, or even caring to explain what happened to taxes collected under similar heads over the years. Ironically, Jaitley has himself provided the counter-point: pensioners withdrawing life savings from pension funds will now have to pay tax on 60 per cent of the accumulated corpus, if it is not invested in an annuity. As a wag observed drily, Thomas Piketty’s whistle-stop tour through India has left economic administrators with fleeting notions of inequality.

Two other broad themes dominate Budget 2016: a stimulus package to spur rural consumption and enhanced outlay to speed up investment in infrastructure. As argued in these pages a few weeks ago (http://goo.gl/GvFnbP), Jaitley was faced with a binary choice: either ramp up public investment to derive economic growth, or stick to the fiscal straight-and-narrow. A spirited public debate ensued with growth adherents advocating a temporary slippage in fiscal deficit. Fiscal hardliners argued it would be foolhardy to relax vigil during these trying times of global turmoil; a downgrade by credit rating agencies would scupper even incipient growth impulses.

In the end, the minister has chosen both options. How he achieves both ends will have to be seen. While his public investment outlay is up 15.5 per cent over previous year’s estimates, he has also set aside large amounts for the rural and farm sectors. Jaitley stated capital expenditure on railways and roads will alone account for Rs 2,18,000 crore this year. Additional outlays have been announced for investment in power generation, ports and waterways. It is interesting to note that even in infrastructure investment, the emphasis is on the rural sector: investing in expanding the coverage of irrigation (to reduce Indian farmers’ vulnerability to fickle monsoons) and investing in rural roads and rural electrification. Connecting unconnected villages will help farmers get their produce to markets. 

In the midst of this enhanced spending, the FM has also promised to adhere to the fiscal deficit target: 3.5 per cent of gross domestic product. A lot will depend on the revenues he manages to raise — Rs 19,610 crore of additional tax revenue (some of it from soaking the rich) and a 25 per cent increase in non-tax revenues. One large chunk of non-tax revenues (Rs 98,995 crore, compared with last year’s Rs 56,034 crore) is expected to come from telecom spectrum auctions. The other source of non-tax revenue is a leap of faith: the government expects Rs 56,500 crore from disinvestments. In this fiscal year, the government managed only Rs 25,312 crore against a target of Rs 69,500 crore.

Undoubtedly, the agricultural sector needs additional resources: it is not only hobbled by numerous structural deficiencies but poor monsoons over the past two years have caused deep distress in the sector. The Budget wants to double farmer incomes by 2022, by facilitating easier access to markets for inputs and finished products, higher credit allocation and better infrastructure. But, the text lacks details of how this will be achieved; there is no mention of a roadmap.

A massive allotment of Rs 2.87 lakh crore — in the form of grant-in-aid — has been made to village panchayats and municipal bodies. Again, there is lack of clarity about the end-objective of this fund flow. Will it be used for local infrastructure? How will the money be spent — in one year or five years?

The FM’s intentions seem honourable and generally aimed in the right direction. The economy needs higher public investment in the absence of private sector capital expenditure; there are deep structural flaws in the farm and rural sector that need urgent corrective action; fiscal discipline is non-negotiable. What’s lacking is clarity, or the nuts and bolts of how the FM intends to achieve these objectives. There are some other unanswered questions in the Budget:

Monetary Policy and Monetary Policy Committee have now acquired a statutory basis. Details on the committee’s composition are absent. While it has been clarified that there will be equal representation from both the government and the central bank (with RBI governor getting the casting vote), it is not known whether the original plan of appointing a senior bureaucrat on the committee as an ex-officio member still exists. The bureaucrat’s status as an observer is to report to the ministry on the voting pattern of the committee members. I am sure you get the picture.

There is an overall increase in the incidence of cesses and surcharges. One example is the Krishi Kalyan Cess, which will levy an additional 0.5 per cent on all taxable services. When combined with a consumption upsurge, due to Pay Commission arrears and a fillip to rural demand, the after-effects are most likely to be felt on the price line. What happens to inflation targeting then?

PM Narendra Modi’s ambitious Make In India programme suffers from domestic industry’s negative propensity to invest. Industry, in turn, complains that bank credit is not forthcoming. Banks, on the other hand, carp that their ability to lend is seriously impaired by mounting bad loans. In short, banks need fresh capital to start the lending process once again. Against this background, Jaitley’s allocation of only Rs 25,000 crore towards bank recapitalisation is underwhelming. FM Jaitley also mentioned consolidation; is he proposing public sector bank mergers as a way of reducing the drain on the Central exchequer?

The fiscal deficit target for 2016-17 — 3.5 per cent of GDP — is premised on GDP growing at 11 per cent. Given the global headwinds, and exports contracting for 14 months consecutively, slippage in the 11 per cent target will not be very surprising. Hopefully, the government’s resource transfers will keep the growth trajectory along expected lines.

A lot of Jaitley’s wishes are riding on revenue estimates delivering. He collected an additional Rs 54,334 crore of indirect taxes over the budgeted estimate during 2015-16 by increasing taxes on petro products, at a time when oil prices were crashing globally. Gross tax revenues are expected to grow by 11.73 per cent during 2016-17, at the same rate as India’s GDP. He is expecting tax on luxury consumption and a plethora of cesses and surcharges to fill the gap. It might be a bit of a tall ask.

There are too many imponderables in this well-intentioned Budget. Hopefully, some clarity will emerge in the coming weeks.

This article was published as cover story in Businessworld magazine (issue dated 'March 21, 2016) as part of the publication's special Budget package, titled 'Budget 2016 Split Verdict'.

The story can be found here.

Agriculture, The Engine Of Growth

The structural deficiency of the agricultural economy as a whole and the slipover impact from the rise of crude prices on fertiliser prices as well as on transport costs for ferrying food items need to be tackled urgently

THE meeting of heads of state from G-8 and eight other economically important nations (which included Indian Prime Minister Manmohan Singh) in Japan this week got headlines in the Indian media for all the wrong reasons. While the PM’s presence there provided the focal point of all political action in Delhi, the conclave wound up on Wednesday without reaching any meaningful action plan on the two most contentious issues: combating climate change and controlling global inflation caused by rising food and fuel prices. Preoccupied as he might be with all the political drama, Manmohan Singh should also be worried about food security. Especially, since Maharashtra faces a drought-like situation this year.

The greatest disappointment of the G-8 meeting, however, seemed to be the failure of global leaders to come up with a concrete plan to tackle the food crisis. News agency Reuters filed this report: “The G-8 leaders also acknowledged the economic threat from surging oil and food prices…but came up with no fresh initiatives to tackle what they said were complex problems requiring long-term solutions.” What’s strange is the absence of any acknowledgement from the G-8 leaders that the major reason for the rise in food prices is increasing bio-fuels production in the US and, to some extent, in Europe. The rich countries made no promises to remedy this structural issue, which promises to pull another 100 million people below the poverty line this year, but shifted the responsibility to other big emerging countries. Reuters also filed this report: “The G-8…called for countries with sufficient food stocks to make available a part of their surplus for countries in need.”

The World Bank says this upfront in a position paper (Rising Food Prices — Policy Options and World Bank Response): “Concern over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. The has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland…Other developments, such as drought in Australia and poor crops in the EU and Ukraine in 2006 and 2007, were largely offset by good crops and increased exports in other countries and would not, on their own, have had a significant impact on prices. Only a relatively small share of the increase in food production prices (around 15%) is due directly to higher energy and fertiliser costs.” On a more pessimistic note, the World Bank’s note prepared for the G-8 meeting — Double Jeopardy: Responding to High Food and Fuel Prices — states clearly that food prices are likely to remain above the 2004 levels till at least 2015.

All this raises worries about India’s food situation, particularly since repeated studies have shown that any rise in food prices, rather than fuel prices, is seen to have a greater impact on the common man’s inflationary expectations. This assumes greater importance in the case of the urban poor and the rural landless workers, where food has the lion’s share of the total consumption basket, compared to fuel which is either subsidised or almost free. What is likely to exacerbate the situation is the structural deficiency of the agricultural economy as a whole and the slip-over impact from the rise of crude prices on both fertiliser prices as well as on transport costs for ferrying food items from production centres to consumption hubs. Here are some of the urgent issues that need tackling immediately.

THE first anomaly lies at the macro level. Over 60% of the country’s population is today dependent on agriculture, which contributes to only 20% of GDP. This translates into low income per rural family, which then makes most of them vulnerable to debt traps and pushes them into distress every time there is an exogenous shock. The need is to wean away part of each family into skills-based training, without necessarily alienating the entire family from its agricultural roots. The solution is not to provide them with only urban-based jobs, but to create a talent pool for rural industry, whether it is manufacturing or services-based. Such an industrial base, through linkages, has the potential of bringing about qualitative changes in agriculture as well.

• As a result of so many people depending on agriculture for income, land holdings are exceedingly fragmented, leading to falling crop productivity. According to official statistics, close to 60% of all land holdings in the country are marginal holdings (where land ownership is less than 1 hectare). Consequently, the average size of operational holdings is not even half a hectare, or about 1 acre. Average foodgrain yields, therefore, have been almost stagnant.

• Diversion of crop land into non-agricultural use is growing and could be another cause for worry in the long run. New ways should be found of converting non-agricultural land into agricultural land (without actually reducing the forest cover) and employing technology to increase the productivity of these tracts. Antiquated legislation regulating sale and purchase of agricultural land also needs to be updated, with adequate safeguards, to allow for consolidation of farmland.

• A solution for improving the income and the yields would be to introduce contract farming in a big way. This allows a large corporate to tie up with a large number of farmers with contiguous plots. Both win: while the farmer does not lose his homestead and is assured of an income at the end of the harvest, the corporate is ensured a steady supply of output, which takes some of the uncertainties out of his supply chain.

• Finally, the government has no choice but to rise above petty vote-bank politics and take a hard look at all the handouts (such as loan waivers or cheap credit) and the subsidy structure. According to the World Development Report, 2008, 75% of India’s agricultural budget is spent on such private goods, instead of investing in public goods (such as rural roads, or increasing outlays for agricultural R&D).

In short, agriculture has the potential to become the engine for future growth in the economy, but only if the right cards are played now.

Published as an Op-Ed in The Economic Times (July 11, 2008)