“The ability of the Indian budget to impact the economy in terms of its expenditure is low,” according to R Seshasayee, Executive Vice-Chairman, Hinduja Group.
Delivering a special address at the seminar on ‘Budget-2020: Where from here the Economy?”, organised jointly by Observer Research Foundation, Chennai, and the Madras Management Association (MMA) on 14 February, Seshasayee felt that in India, there was too much expectation that the budget would energise the economy.
“The amount of light and sound on the budget says we are expecting it to solve all our economic problems. In countries where the tax to GDP ratio is high, such as EU nations and the US, it makes sense to look to the budget to boost economic growth. This is not the case in India,” he said. Seshasayee argued that looking to the budget to provide economic stimulus in terms of expenditure
per se did not make sense. Instead, it was more appropriate to look to the budget for getting an understanding of the direction in which the economy was headed.
When looking for economic stimulus, Seshasayee said it was important to follow economic rationale and therefore to consider four pillars of the economy, i.e. public consumption, government-spending, private consumption and exports -- and then to ask: “What does the budget say about these pillars? What catalytic effect will the budget have in terms of catalysing the private investments or being a force multiplier in terms of economic impact?”
“For private consumption to go up, you need to have a robust banking system which is able to push and market credit,” Seshasayee pointed out. Credit growth was at 7-7.5 percent. “This means people are not borrowing, but they are repaying. The fact that they are not borrowing means either they don’t have the faith in the future or they are not borrowing because the banks are not lending. This is not a good thing.” he explained. The Budget has not addressed this challenge of low credit growth. “There is no new capitalisation proposed in the budget. This has to do with the culture of banks. They do not have to ability to move on,” he regretted.
Seshasayee said it was possible today to deploy econometric models that can calculate the multiplier-effect in terms of private investment or job creation co-efficient of each type of expenditure. He wondered why this was not being done. He believed that it was useful to identify the impact of the various programmes of the budget in terms of job creation impact or multiplier impact.
Completely different
Dr S Narayan, former Economic Advisor to Prime Minister Vajpayee, in his key-note address, said the most striking feature of the budget was a “definite ideological paradigm-shift in the way the government is approaching the economy. There are specific aspects of the budget that go back to core ideology of the ruling party, not of the economy. As economists, everything we have grown up and thought is towards one direction and the direction taken by budget is completely different”.
According to him, this is reflected most starkly in the differences between the budget and the Economic Survey, presented to Parliament only a day earlier. The Survey lists weakness of the public sector banking system, need to promote experts, weakness in the public-private partnership (PPP) model as among the economic infirmities. Narayan pointed out that none of these issues were dealt with in the budget.
“Therefore, you can see a distinction between the articulation of things in the budget and what the economic institutions are saying needs to be done. The institutions, the industries, the finance sector say one set of things need to be done, and the budget goes in the totally different direction,” he remarked. He was concerned about how these two different ways of thinking were going to align.
Among the positive aspects of the budget, Dr Narayan listed, getting LIC listed on the markers, as well as the decision to sell off Air India and BBCL. According to him, this has sent out the right message that the government was not interested in business but more focused on governance. Protection of MSME sector was seen as a step in the right direction, though he did not believe raising tariffs was the way to do it. “The MSMEs are our future. We do not have the capital-capability to build up huge manufacturing organisations, so we should focus on the MSMEs.”
Focus on internal tourism was identified as having huge potential. Dr Narayan stated, “If we are able to generate 100 tourism locations within India by upgrading them, there is huge potential there.” He explained that every time people were traveling within the country they were driving the consumption economy. To conclude, Dr Narayan said, “These are all the positives sides of the budget that will take the economy in a certain direction, I’m not suggesting this is the only direction to go.”
Missed opportunity
N Ravi, former Editor-in-Chief, The Hindu, and at present Director, Kasturi & Sons, the publisher of the newspaper-group, said, “In India, perhaps we attach too much importance to the budget as the main plank of economic policy-making. Though it is an important plank, we also have monetary policy, industrial policy for several sectors and services, trade policy, agricultural policy and so on.”
He discussed certain negative aspects of the budget such as the provisions for higher import duties on some products. He said they were problematic as they raised the question whether the protectionist mindset of the seventies still persists today. “Are we back in the import substitution mode?” was a question being asked widely.
Income-tax provisions with two different tax rates, though it was done with the goal of simplifying the tax structure, was another area of concern, with many questioning whether it will create further complications.
Positive steps taken by the government, Ravi, like other panellists, mentioned, divesting the whole of Air India and listing LIC and therefore creating more transparency, were very good moves. He said, “By and large there are both positive and negative aspects to the budget. In addition, there are missed opportunities as well.” Among these, Ravi felt, focusing on joining the global supply chain was a huge one.
A move towards ‘Assemble in India’ was a very sound one, he remarked. However, he regretted that there was no mention of this in the budget. He said, “While, the Economic Survey had been waxing lyrical about this but the budget has not made any provisions, this is a huge employment opportunity.”
How safe are banks?
V Nagappan, stock market consultant, began by addressing the main concern of the people. He said “In an era of post-demonetisation, everything is digital. We keep a larger part of our money in the bank. With the NPAs that are coming in, people have concerns with the banking system and are often asking: How safe is the banking system?” He felt that this concern was addressed very well by the budget by increasing the limit from Rs 1 lakh to Rs 5 lakhs under the deposit insurance scheme.
Nagappan believed that “this five-fold increase gives a lot of comfort-level with the bank for a typical middle-class investor.” He also felt that the dividend distribution tax was a good move. He ended by saying he had concerns over the primary deficit and was unsure how the government planned to deal with it.
‘Devil is in the detail’
Earlier, welcoming the gathering, Ravichandran Purushothaman, President (India Region), Danfoss A/E and Executive Committee member, MMA said, that the organisers chose to “have the session a couple of weeks after the budget was officially presented in Parliament to give everyone time to assimilate all the information because sometimes the devil is in the detail.”
N Sathiya Moorthy, Head, ORF-Chennai Initiative, introducing the theme of the seminar, added, “As the title suggests the focus of this session is not to narrowly look at Budget-2020, but to consider what it means for the economy, not just in the present, but the long-term impact also.”
(This report was prepared by Dr. Vinitha Revi, Independent Researcher, Chennai)
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