Economic Highlights

New Delhi, 9 January 2017

Budget Anxiety

FOCUS ON VILLAGES, TAX CUTS

By Shivaji Sarkar

India keenly awaits the Union Budget giving the much-needed demand and production boost for all-round happiness. The wait is for new tax policies, public and private investment in both industry and agriculture, overall growth and what strides the Government will take with the new currency.

In fact, there are bound to be aspirations on the Narendra Modi government taking a break from the past and steering the country through a low-price, low inflationary high paced path. The corporate too is hoping for a dream Budget that would increase production by raising demands. It does want a mix of cash and other modes of transaction for resuscitating the economy.

However, the Budget has also to relook at the GDP data. Chief global strategist of Morgan Stanley Ruchir Sharma says the figures are overstated and wants these to be corrected. Referring to the black money scenario, the RBI Financial Stability Report (FSR) released on December 29, 2016 says the best way to contain this menace is to improve governance, quality of services, avoid excessive regulations and have a compatible tax structure.

Many in the country have the misconception that once black money is removed, India will somehow be magically transformed into El Dorado. The money comes back to the same government system that is the source of embezzlement. At its end, the RBI has set a tall order as it lowers growth projections by .05 per cent. The Budget will need to take care of each of these moves. The Government will thus have to present a soft Budget.

Modi would do well to consider the RBI’s prescription. He has shown that he can take an independent path by initiating the process of having floor bank deposit interest rate at 8 per cent for senior citizens.  This may change later and apply to all deposits. The cut in interest rates for housing up to Rs 12 lakh is likely to give a boost to the housing sector and create a demand for construction workers.

Importantly, the people seemed to have accepted Modi’s tough demonetisation for two reasons. One, it will be the end of Manmohanomics and two, it shall usher in the low tax regime-- a promise the BJP manifesto made in 2014. Obviously, the people have high expectations. They want an end to personal income tax, highway tolls, end to raid raj, simplification of indirect taxes and ease of doing business.

Insofar as economists are concerned, they take into account that the economy earning kudos from the IMF, World Bank and other international observers. Way back in March 2015 the IMF Chief Christiane Lagarde stated: “India is the bright spot in the global economy at the moment”. A year later, in March, hailing Modi government’s ‘Make in India’ and ‘Digital India’ campaigns she noted: “India’s star shines bright with the promise of more reforms in coming days”.

However, there is the other side. Niti Ayog Deputy Chairman Aravind Panagariya has written to the Prime Minister asking him to end the income tax raids as these will stifle growth. Chief Executive of the largest $10 billion IT company, Infosys, Vishal Sikka has warned its employees of challenging times ahead. Chairman of the third largest software services, Wipro, Azim Premji too has told his employees that events in 2016 had raised questions and obstacles that could not be ignored.

The Nikkei/Market Services Purchasing Managers’ Index (PMI) too is not very helpful. It shows the numbers in November at 46.7 and in December at 46.8. A reading above 50 indicates expansion and a figure below showing contraction. “Indian service economy ended 2016 on a grim note, with the average PMI activity index for October-December the lowest since early-2014,” noted Pollyanna De Lima, economist at IHS Markit and the report’s author.

Additionally, the overall industrial index figures too were not bright. It registered a growth of (-0 1.9 per cent in October 2016 with manufacturing at (-) 2.4 per cent; mining at and electricity at (-) 1.1 per cent. The cumulative IIP registered a growth of (-) 0.3 per cent during April to October 2016. The above clearly indicates stagnation in industrial growth and a consequent fall in jobs.

As for the banks, these face a fresh problem. Flushed with deposits of Rs 14.96 lakh crore deposits (in the wake of Rs 15.44 lakh crore demonetised) since November 8^th, they have significantly high interest payouts, but face a poor loan demand meaning they have to sit idle on the huge pile.

Meanwhile, bad loans of banks have shot up to 9.1 per cent in September from 7.8 per cent in March 2016, according to the FSR of RBI. It states that the NPAs of public sector banks may soar to 12.5 per cent as asset quality of large borrowers deteriorated significantly. The total NPAs may cross Rs 12 lakh crore – meaning that much of depositors’ money is at stake. Besides, security agencies have told the Government that e-push may well be fine but their staff simply doesn’t have the skills to thwart fraud.

Thus, a larger fiscal deficit is possible. As it is, it has already touched 86 per cent of the estimated Rs 5.33 lakh crore during April-November. The problem and question before the Government is how soft it could be on taxes even as it is imperative for future growth and a favourable political climate. It would do well to raise the income tax ceiling ideally to Rs 25 lakh by 2018 and immediately to Rs 10 lakh to give a high push to demand and growth. But, it will probably be limited to around Rs 4 lakh income, which is unlikely to pep up the market.

Another step the Government can take is to give up inflationary unpopular moves such as the dynamic train freight/fare, which is increasing rail losses, as people are either opting for air travel for long distances or by road for short distances. Similarly, it needs to cut highway tolls or at least abolish it for private and farmers’ vehicles to encourage movement.

In its list of dos, the Government must stress on agricultural investment. Farmers need storage, warehouses and cold chains, but sadly big houses have not invested in these. The Governments too in the past have talked about these but done precious little. Now it must promote big farmers to invest by providing them soft loans so that they don’t have to sell their produce in distress.

Additionally, agri-biz also needs to be given a boost through value addition and cluster-village mode. The Government can assist farmers to have funds through easy loans and that they should be given incentives (not subsidy). The shift is bound to increase rural investment, raise demand, create jobs and bolster rural economy. The tack has to change-- from urban-industry orientation to rural India. And, this can be the panacea for overall development the budget pines for. ---INFA

(Copyright, India News and Feature Alliance)