As Sitharaman walks a tightrope, there is a silver lining. A handful of options are still available for the FM, especially when the industry’s expectations from the budget would be somewhat modest after a slew of recent interventions, including the slashing of the corporate tax.
What, then, are the options before Sitharaman?
FM can loosen the purse strings by relaxing the fiscal deficit target by half a percentage point and engineering a debt-leveraging exercise with the extra kitty.
Most economists and corporate honchos seem to be okay with it. If newly managed resources are spent in the infrastructure sector, and more so in small-ticket rural ventures, the demand will revive, luring cash-rich industries to invest more, which in turn, could help pull the economy up from the abyss.
Vinayak Chatterjee, chairman of Gurgaon-based Feedback Infra, says a development finance institution (DFI) has to be created to cater to core sector project financing. “What the budget can do is announce the setting up of a DFI, with a proposal for raising Rs 2 lakh crore equity by relaxing fiscal deficit targets and boosting asset monetisation, divestment, etc. By leveraging debt, the kitty could be worth Rs 18-20 lakh crore,” Chatterjee told ET Magazine, estimating that debt leveraging could be as high as 9-10 times that of the equity.
In an interesting turn of events, economists, who often call for fiscal prudence over anything else during budget season, have become more realistic, conceding that there is a need to breach the fiscal deficit target.
In her July 2019 budget, Sitharaman set a fiscal deficit target of 3.3% for 2019-20; this was much stringent than that set in the UPA regime when it allowed the deficit to balloon to 5.7% in 2011-12 before a fiscal consolidation road map was by and large adhered to by successive FMs. A target of 3.2% was set in the 2017-18 budget.
Former chief economic adviser Arvind Virmani does not worry too much about not sticking to the fiscal deficit target. What he wants to see in the budget is an introduction of long-pending reforms on the direct tax code and the simplification of the goods and services tax (GST). “A short-term (12-18 months) increase in fiscal deficit will be accepted by capital markets, if they can be convinced that gains from efficiency and voluntary compliance will reduce the fiscal deficit over the next few years,” he adds.
Virmani urges the government to ensure that most of the ongoing strategic sale of public sector enterprises is completed by March 31, 2020. “Zero sale in 2019-20 will again dent the credibility of the government, whatever be the reason given to justify the delay,” he adds.
The proposed sale of Air India, for one, will not be a painless job. The sale of the debt-ridden national carrier got off the ground earlier this week with Home Minister Amit Shah-headed group of ministers allowing the government to call for bids. The government is looking for a 100% sale.
Meanwhile, the Cabinet Committee on Economic Affairs has also given “in-principle” nod to strategic disinvestment in four public sector enterprises — Minerals & Metals Trading Corporation, National Mineral Development Corporation, MECON and Bharat Heavy Electricals — all of which will eventually fill the government’s coffers and make the fiscal math easier for Sitharaman.
However, to boost demand and revive a sagging economy, something more is needed. Chief economist of Crisil DK Joshi says the government must focus on putting money in the hands of the masses. PM-KISAN, for example, is yet to be implemented in full, he adds. “There should be a push for labour-intensive industries such as construction, housing, road-building and irrigation. These will trigger immediate consumption,” he adds.
Niranjan Hiranandani, MD of Hiranandani Group, says the need of the hour is to bring liquidity to the market, and although a larger responsibility lies with RBI, the Finance Ministry has to play its role here to ensure the economy gets back on rails. Hiranandani, a senior vice-president of Assocham, has asked for a one-time rollover of bank credit, like the one the central bank allowed in 2008, to ease the liquidity pressure on India Inc: “Otherwise, a lot of companies will enter crisis mode, even if they have positive net worth.”
To trigger demand in the market, he says the government should engineer a one-time, 25% reduction of GST across all rates with an in-built mechanism for compensating the shortfall from deficit financing. “It will cost the government a little but will immediately boost the economy,” he says, adding that the government also needs to tweak tax concessions in the real estate sector. For instance, raise tax deduction on rental income to 50% from the present 30% to give a boost to rental housing.
With 7-10 days left for the budget documents to be printed at the press in North Block’s basement, Prime Minister Narendra Modi has swung into action, meeting corporate honchos and economists, indicating that some of their last-minute ideas might find a place in Sitharaman’s “bahi-khata”.
For the government, the biggest challenge is to cajole large and profitable companies to spend money on expansion. Slashing of corporate tax in September last year from 30% to 22% for companies not availing of other tax breaks, and from 25% to 15% for new manufacturers, was mainly intended to incentivise profitable companies to spend more. According to ETIG Research, the corporate tax cuts saw companies’ profits going up by 11% in the June-September quarter of 2019. But the extra money has yet to find its way to the ground, as India Inc is waiting for consumer demand to accelerate.
Earlier this week, Modi met 11 industrialists, including Ratan Tata, Mukesh Ambani and Sunil Mittal, from top 10 business groups, to brainstorm on the revival of the economy and the creation of jobs. At the bourses, the group companies represented by these industrialists have a combined market capitalisation of Rs 34.17 lakh crore. Their combined annual revenues for 2018-19 were Rs 21.32 lakh crore, roughly 10% of nominal GDP, with the combined profit being Rs 1.19 lakh crore.
Understandably, the PM knows that even if the budget is being hailed as forward-looking and reformist, nothing much will change on the ground unless these captains of industry start their investment cycle.
Even if the PM is at his persuasive best, these corporate honchos are ultimately answerable to the shareholders of their listed companies. Non-promoter shareholding in most of these 10 groups are over 40%; in some cases, promoters do not hold even 50%. Shareholders will be convinced only if there is profitability and promise of a good return on investment — and that can happen only when demand picks up. Ahead of the budget, it is a quandary: can there be demand without investment and vice versa?
HERE ARE THE BUDGET WISH LIST OF SOME OF THE KEY SECTORS:
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Auto: Traversing a Road with Many Bumps
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Wish lists of other sectors