For 93 days, since the DEMON-etisation bomb was detonated on 8 November 2016, there has been endless debate on whether that nuclear strike wrecked or reconstructed India’s economy. Today, the cat jumped out of the Budget (from a thoroughly chastised government)!
By presenting an ultra-cautious, safe and non-disruptive document, M/s Modi/Jaitley admitted that India would not survive another seismic shock – thereby proving that the 86 percent currency cancellation was a reckless move which shoved the economy into the critical care unit.
Even the lightest of blows could have now pushed the gasping patient into the morgue. So best to leave it untouched and prostrate, from where it could slowly recover its health and mojo.
Clearly, bitten once, M/s Modi/Jaitley were now twice shy.
Pretty Pre-Demonetisation Macro-Economic Picture
There was another poignant admission of guilt. Remember, all the stats in the Budget are based on pre-demonetisation data/trends (because the chastised/bitten/shy government chose to play it safe by using 31 October as the cut-off date, rather than risk getting devastated by the unknowable impact of 93 days of extreme, cashless distress). And here the irony gets truly cutting, because the pre-shock data painted such a pretty macro-economic picture.
- Fiscal deficit at 3.2 percent.
- Revenue deficit under 2 percent.
- Taxes buoyant at 17 percent for two years running.
- Less public borrowing by over Rs 50,000 crore.
Thank God, It’s Not a Tax-and-Spend Budget
Wow! The economy was really getting into the pink of health, before it was yanked into an unchartered landscape. But that’s another tale, to be told elsewhere. To return to the current budget, here is what I would endorse:
1. Mercifully, this is not a tax-and-spend budget. In fact, full marks to M/s Modi/Jaitley for not increasing any direct or indirect taxes, not even the service tax, which was widely thought to get closer to the expected GST rate of 18 percent.
2. Whoa, FIPB is finally abolished. Dair aaye, durust aaye; better late than never. But it would have been so much more wonderful to have articulated a fully decontrolled/liberalised FDI regime. Frankly, only four levels of FDI matter: 26 percent to exercise strategic influence, 51 percent to control, 76 percent to control under strategic restraint, and 100 percent to fully own and control the asset. That’s it. All other sub-limits should be removed, four asset categories need to be created, and automatic approvals given. Simple.
3. Most public sector companies, including those in the insurance/railways sectors, are to be listed. Honestly, this is a quarter-reform. I would have ideally preferred privatisation, but since that’s out of the book, a public listing is to be welcomed. At least there will be much greater transparency, disclosures and shareholders’ pressure to perform. And the desire to merge various oil corporations into a mega entity is a positively intriguing idea.
4. Quite a significant push to infrastructure spending, including on affordable housing. Of course, as we have often seen in the past, many of these allocations remain pious intentions. And their impact or outcomes are even more ephemeral because of State sloth and corruption. So let’s leave this one floating on routinely belied hope.
A Few Piercing Disappointments and Omissions
While the government was understandably ginger while handling a critically ill patient, it could have been much bolder in several areas.
1. Keeping a meagre Rs 10,000 cr aside to recapitalise public sector banks is like trying to dismantle a mountain of debt with a pick-axe. The finance minister chortled about a 25 percent hike in infrastructure capex.
Perhaps he could have been adventurous about diverting this additional cash into troubled banks’ balance sheets. Imagine the win-win outcome: Instead of sprinkling this money over low productivity public investments, he could have converted it into a massive credit multiplier, as the banks would have used their repaired balance sheets to lend aggressively. Combined with a lower public borrowing of Rs 50,000 cr, interest rates would have fallen sharply, further bolstering banks’ bond portfolios and kick-starting a virtuous cycle of private investments/consumption. What an opportunity missed!
2. He could have belled the political funding cat much more effectively. True, by lowering the threshold of anonymous contributions from Rs 20,000 to Rs 2,000, he has made it ten times more difficult to be corrupt. But please don’t put it past our inventive genius to easily overcome this minor irritation. The political bearer bond idea is a smart one, but it only addresses the symptom, and not the cause. How I wish M/s Modi/Jaitley had gathered the courage to open political parties to mandatory audits and RTI. That would have been a pioneering reform!
3. The Law of Confiscation of Property of Overseas Absconders, proposed as a reaction to the snook that Vijay Mallya is cocking at India, is currently just a thought. It could have been detailed. And it should not become another instrument of harassment in the hands of trigger-happy enforcement agencies.
4. Mercifully, the government admitted its blunder and withdrew the disastrous circular on taxing Foreign Portfolio Investors (FPIs) for an “indirect transfer of assets”. It would have been terrific if a similar conscience call was taken on settling other frivolous, and utterly damaging, tax claims (including Vodafone, Shell, Cairn and hundreds of others).
5. Finally, the biggest cop-out of this budget. The corporate tax rate should have been slashed to 25 percent (perhaps even to 20 percent) for all companies, along with the removal of every exemption. That single measure would have catapulted this budget from the “safe/cautious” slot to the “dream/big/bold” category. Alas!
Time is a Great Healer
In conclusion then, thank you M/s Modi/Jaitley for acknowledging that DEMON-etisation was an unconscionable shock that left India’s poor, informal and middle economy reeling in the doldrums. Thank you for understanding that the patient was in precarious health. Thank you for sparing him a few more shocks. Thank you for leaving him alone. Thank you for allowing him to “slumber” through to recovery. For time is the best healer.
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