On both these aspects I was pleasantly surprised that an underlying approach was spelt out in Union Budget 2019-20 as well. With an objective of becoming a $3 trillion economy (by 2020) and a reiteration of “minimum government, maximum governance” that people thought has gone out of the window, there is a return to the approach where the government is focusing on creating the right environment.
Let me give you an example of infrastructure because everybody expects the government to have a role in it. Infrastructure is supposed to create an environment where economic activity flourishes. Here, PPP (public private partnership), which had kind of disappeared, is back.
I am encouraged due to the underlying approach plus a few very specific things.
Many people have felt that the financial intermediation system is messed up — that it is a danger to economic growth and must be addressed. In the budget, there is an attempt to correct various aspects via regulations, financial market reforms and some specific budgetary announcements. This is encouraging.
Regarding non-banking financial companies (NBFCs), I never supported the argument that a lot of money should be pumped in to support the failing NBFCs. The government hasn’t done that. It has been selective, it has changed regulations, it has talked about some bonds and underwriting part. It has come up with a very careful, selective approach and at the same time given them the right support.
There was a great opportunity to promote exports by bringing in supply chains. Traditionally, our exports have been niche and we are not part of supply chain. In that context the budget per se did not do enough to make this happen. Now, we will have to see if it comes separately.
Also, GIFT City (Gujarat International Finance Tec-City) was supposed to be the country’s first international financial centre hub but it hasn’t really taken off. The budget has looked at it and is giving incentives. That is the way to do it: you do certain things and if these don’t work, you try to see what’s wrong and improve on it. So selective reforms, focused reforms and attempt to relook at things which haven’t worked have been the way.
A very innovative thing that few have noticed is in the Make in India initiative. Finance Minister Nirmala Sitharaman said “the government will launch a scheme to invite global companies through a transparent competitive bidding to set up mega-manufacturing plants in sunrise and advanced technology areas”. In high-tech industry, you can’t have much competition with a lot of players. The government has brought out a very innovative mechanism for attracting them. Such industries will not come unless you give them incentives. The government has said it will do so but the selection of a company will be through some auction. This idea is very innovative: you have the most eager person who wants the minimum incentive needed and also there is less scope of people accusing you of making some sweetheart deal. It shows some understanding of the nature of the industry.
On achieving the target of becoming a $5 trillion economy, I do not see such broad statements as old-style planning objective. It is more inspirational. A message is being conveyed to the departments that we must all work to achieve this goal. It sets a common goal and helps to motivate.
Nitin Gadkari, Union minister for road transport and highways, and MSMEs, has been working to achieve that goal. Similarly everyone would ask how they can contribute towards that common goal of the government. This is more motivational and inspirational. Now will we achieve it? I don’t think that if there is a delay of a year or so it will make a difference. The important thing is that the policies and programmes must be aligned towards achieving that goal.
My only problem with the budget is to an approach that is becoming clear in the last few years: efforts to raise marginal income tax rates. It is the antithesis of the I-T reforms of 1996-97 in which I was involved where we drastically reduced marginal income tax and that led to a huge increase in direct tax collection due to voluntary compliance. Now, for the last two-three years, the government is going in the opposite direction. I do not think this is wise.
As someone who has worked on tax reforms, I do not think there is enough appreciation in this government about the negative effects of marginal tax rates. Simplify and broaden the tax base and voluntary compliance will increase. This means that even if you reduce the marginal tax rates, your revenues go up. This was shown in the tax reforms of the mid-1990s. If it is a onetime increase, people will accept it. But this has been happening for the last three-four years. This is the biggest negative for me as well as for the market. While there is a serious effort to make it easy to pay taxes, with digitisation, the surcharge is negative.
I would rate the budget like this: A for Part A and B-negative for Part B that deals with taxation and tariffs.
As told to Prerna Katiyar.