Event ReportsPublished on Jul 23, 2019
$5-T economy achievable, but should not become an obsession, says expert

“Achieving a $5-trillion economy in the next five years is an ambitious target to achieve -- not impossible, but difficult,” according to M R Sivaraman, former Revenue Secretary, Government of India.

Initiating a discussion on “Budget-2019” at Observer Research Foundation, Chennai,  on 13 July 2019, Sivaraman said, “It is important to think of the budget as a statement of previous achievements as well as a road-map for the future.”

According to him, in order to achieve a target of $5 trillion, the GDP has to grow at a nominal rate of 12 percent and a real rate of eight per cent. “This is a tall order, not impossible. At the current growth rate of seven percent, this is going to be difficult.” He mentioned that it was indeed possible to achieve this target by managing the exchange rate, but added that “this should not be the aim of any government”.

Urban, rural incentives

“Certain measures would provide relief to urban India such as the tax reduction on electric vehicles,” said Sivaraman. He referred to the GST on electric cars which was reduced from 12 percent to five, income-tax exemption of Rs. 1.5 lakhs on bank loans for electric cars, among others. However, there was no deduction in the case of electric bikes, he pointed out.

Sivaraman believed that the Budget reflected the socialist aims of the government, with most programmes heavily tilted towards rural India. Farmers are to receive Rs. 6000 every year under the PM-KISAN scheme. “Greater connectivity by linking the country through road, rail and waterways will boost rural demand through economic improvement of the lives of those living in the rural areas,” he explained.

Digital connectivity (particularly connecting over 2.5 lakh village panchayats with optical fibre-powered high-speed broadband internet) will take it further. Sivaraman said “the budget also aimed at, if not reducing the inequality in incomes, at least, to stop its aggravation by higher taxes on the super-rich.” Though he believed the notion of taxing the rich was largely symbolic, it was still a step in the right direction.

Employment generation

It was important to ask the question, “Will this budget lead to employment generation?” The answer, Sivaraman said, was both “yes and no.”  Certain measures were promising, such as the 'Scheme of Fund for Upgradation and Regeneration of Traditional Industries' (SFURTI) which aims to facilitate cluster-based development, in order to help traditional industries.

The SFURTI envisions setting up 100 clusters during 2019-20, to allow 50,000 artisans to join the economic value chain. The budget also announced 80 livelihood business incubators and 20 technology business incubators to produce 75,000 skilled entrepreneurs in agro-rural industries; as well as 10,000 new Farmer Producer Organizations (FPOs). However, whether these are likely to be successful is a question that only time will tell.

Infrastructure investment was in keeping with the overall objectives of the previous NDA government with an additional 100 Lakh crores. Modernisation of railways, modernisation of fisheries, solid waste management in rural areas, expansion of NH network, river navigation, 1.95 crores more rural houses were all laudable measures. The maintenance of pipelines would further generate employment observed Sivaraman.

Boost to industries

The budget aimed to provide a boost to industries, mainly with the corporate tax on income reduced to 25 percent for companies having a turnover of Rs 400 crores or less. The Finance Minister had referred to delays in payments to micro, small and medium (MSME) enterprises. Quoting Finance Minister Niramala Seetharaman’s budget speech, Sivaraman said, in her speech "government payments to suppliers and contractors are a major source of cash flow, especially to SMEs and MSMEs. Investment in MSMEs will receive a big boost if these delays in payments are eliminated." In this regard, the proposal for a payment platform is an important step, remarked Sivaraman.

“There are also a number of changes to facilitate Foreign Direct Investment (FDI) flows,” Sivaraman noted. The government is attempting to attract high tech companies in areas like electronic chip manufacturing and semi-conductor fabrication, to set up manufacturing units in India by providing tax incentives.

Sourcing restriction on a single brand retail firms are likely to be relaxed in order to attract big foreign players into this sector. Restrictions on FDI in Aviation, Insurance and Media sectors are also likely to be relaxed, felt Sivaraman. These sectors which need capital could attract inflows with greater control for overseas partners. The government also proposed to infuse Rs70, 000 crores capital into private sector banks.

Agrarian distress

Agrarian distress will remain a key issue in the years to come, lamented Sivaraman. According to him, the root cause of this crisis was the increasingly shrinking land holdings. The average farm size has more than halved from 2.28 hectares (ha) to 1 ha. Nearly one-thirds of farmers had land parcels smaller than 1 ha. Statistics show that India has the lowest land holdings in the world, regretted Sivaraman.

Farmer welfare schemes, farm subsidies and loan waivers sidestep the main problem which is the lack of land. “There is no incentive for future generations to carry on. Unfortunately, the economics of agriculture are not in favour of the farmers” explained Sivaraman. He has in the past recommended measures to aid consolidation of holdings and continues to urge the government to consider this aspect of the deep agrarian crisis that India is facing.

Looking at the budget as a whole, Sivaraman felt it was aimed at making India one country within the constitutional framework. “The GST was one such measure which has helped create one-market. The NEET is already in place. The national highways, ‘SAGAR Mala’, connecting ports and highways, river navigation – all of these can be seen as working towards this larger aim.” The Centre has proposed to help five states in improving their highways and other roads, Sivaraman pointed out. Digital India, E-Governance, Crime and Criminal Tracking System (CCTNS) are all similarly motivated.

In conclusion, Sivaraman said it was an ambitious budget. However, he explained, we need to understand that any budget is a roadmap and a wish-list for what the government would like. In this regard, it was useful to recall the lines from the English nursery rhyme, “If wishes were horses, beggars would ride” which highlights the pointlessness of merely wishing for something. “We need to wait and see how it will be implemented, and also whether it is implementable or not” Sivaraman said.

This report was written by Dr Vinitha Revi, Research Associate, Observer Research Foundation, Chennai

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