Budget day has come and gone. Millions of words have been spoken and written since Wednesday. Not many will remember the numbers or the artful phrases (there was none in this edition) or the flashes of poetry (who were the poets?). What will remain is the question, did this Budget leave the average citizen with the belief that the fundamental issues are being or will be addressed? Let me go straight to the heart of the matter.
Many people are poor. They have little or no income. They — or their children — do not have jobs. Everything else follows: poor housing, poor health, no access to healthcare, little education, discrimination and neglect, vulnerability, and denial of opportunity. Most children of the middle class also seek jobs but cannot find them. The proven antidote to poverty and joblessness is rapid economic growth. It may be an old cliche, but it is absolutely true that a rising tide will lift all (or nearly all) boats. After reading the 37-page, 184-paragraph Budget speech, I am left with the impression that India will not return to the path of high growth in 2017-18 or even in 2018-19.
A dismal record
The government has admitted that private investment is in the doldrums. The government is embarrassed by the fact that, in 2015-16, only 150,000 jobs were created. This is the twin challenge. Gross Fixed Capital Formation (GFCF) is a widely-used measure of investment, including private investment. According to the Economic Survey, growth of GFCF in the last three financial years was:
2016-17 (-) 0.2%
As for job creation, the best result under the NDA government was 150,000 jobs in 2015-16 — a far shot from the promise of creating 2 crore jobs a year.
What should the government have done? Here is a list of measures that were obvious, but not taken:
1. Boost aggregate demand. The tried, tested and best way to increase aggregate demand is to cut indirect taxes that are paid by all consumers of goods and services — poor, middle class and rich. If indirect taxes are cut, many crores of consumers will get immediate monetary relief. Producers of goods and services will benefit by increased sales. New capacities and new jobs will be created. I advocated this option in the list of do’s in my column last week (Navigating through the do’s and don’ts, January 29, 2017). To my disappointment, the Budget rejected this option and chose the option that I had included in the list of don’ts — cutting direct taxes!
2. Lend a helping hand to MSMEs. Micro, small and medium enterprises are the low-cost producers and job-creators. The demand contraction has hurt them badly. Demonetisation has forced nearly 80 per cent of MSMEs to close down. Most MSMEs are not companies, they are proprietorships or partnerships. 597,000 to 694,000 companies file income-tax returns and, among them, only 285,000 make profits. According to the Budget speech, 96% of such companies will qualify as MSMEs. Cutting the corporate tax rate for MSMEs (from 30 to 25%) will therefore benefit only about 270,000 companies. If the taxable income is modest, the benefit also will be modest. It will do nothing to increase sales or create new jobs. On the other hand, if excise duties and service tax had been cut, it would have boosted demand and revived many MSMEs that had shut down. That opportunity was missed.
3. Energise the Project Monitoring Group (PMG). Every business house and every major entrepreneur has at least one project that is stalled or stranded. If a businessperson has one stalled project in his basket, he will be loath to make a new investment. We have not seen or heard from the PMG in a long time.
The unwanted interruption
4. Accept that demonetisation was a very disruptive step. The worst affected were farmers, farm labour, manual workers, the self-employed, artisans and MSMEs. Crores of rupees were lost in terms of wages, incomes, operating losses and capital losses. The Budget should have provided them some form of compensation. Farmers should have been compensated through higher minimum support prices (MSP). Cut in indirect taxes (or reduction in power tariff for a limited period) would have brought immediate relief to all. The other option was an increase in minimum wages across all sectors. It is a pity that none of these options was explored.
5. Lend more. Thanks to non-performing assets (NPA), investors are ineligible or unwilling to borrow and banks are unable to lend. Hence, credit growth to all industries is at at an all-time low, and turned negative in October 2016. Take a look at the NPA situation of public sector banks.
As on Gross NPA ratio (% of Gross Advances)
Loan accounts that were ‘performing’ as on 31-3-2014 have become ‘non-performing’ under the NDA government, thanks to the deteriorating economic situation. The government can no longer airily dismiss the problem as a ‘legacy’ issue. To make matters worse, the Budget provided a measly Rs 10,000 crore to recapitalise public sector banks, leaving the banks to fend for themselves. Unless government finds solutions, more woes are in store for the banks and industry, even while credit growth will remain tepid.
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Budget 2017-18 will be remembered not for any bold measure but because it did not do great damage to the economy. India will muddle through another year of hopes belied and aspirations unfulfilled.