Column: Budgeting for clarity

Written by Sunil Jain | Updated: Feb 29 2012, 21:17pm hrs
Given that it not possible to achieve even an 8% growth rate on a sustained basis as long as investment levels remain at 35-36% of GDP, more so given the sharp fall in the share of private corporate investment since 2007-08 (see table), it is obvious the key to raising GDP growth lies in raising investment levelscorporate investment fell from 17.3% of GDP in 2007-08 to 12.1% in 2010-11. And, if we are not to have a serious balance of payments crisis, a commensurate rise in savings levels is a precondition.

To do this in 2012-13 is going to be a big challenge, as the Prime Ministers Economic Advisory Council (PMEAC) pointed out since, of the sharp fall in savings rates, from 36.8% of GDP in 2007-08 to 32.3% in 2010-11, 3.3 percentage points was caused by the fall in public sector savingsthink of not just the sharp rise in the fiscal deficit, but also of the R1 lakh crore plus annual under-recoveries in the petroleum sector that the oil PSUs have to bear and the R15,000 crore or so that the railways lose on account of below-cost passenger fare each year. While public sector savings rose dramatically in 2010-11 (to 1.7% of GDP from 0.2% in 2009-10), this was entirely due to the 3G/BWA auctions and so cannot be easily replicated in 2012-13. Which is why the March 16 budget is being keenly awaited since this will signal just where the government hopes to go.

But even the perennially optimistic will have a problem expecting the Budget to deliver much here, just being able to stave off the pressure of implementing a full-blown Food Security Bill (this alone can add 1.5-2 percentage points to the fiscal deficit) will be considered reform enough. So what other kind of signalling can one expect from the Budget

Apart from the fall in savings rate, two other factors have complicated things more. One, thanks partly to government bungling like abolishing distributor commissions on mutual funds and sharply reducing those on insurance, the share of savings in gold and land have risen steadilyhousehold savings in financial assets fell from 11.63% of GDP in 2007-08 to 10% in 2010-11. Two, there has been an equally sharp fall in the investment levels of the private corporate sector, by around 5 percentage points between 2007-08 and 2010-11. The Budget has to try and do something about this.

In the case of the incentive structure for financial savings, the finance minister could announce he plans to get all the regulators to sit down together to examine this and most expect some kind of a gold bond scheme to mop up wasteful savings locked up in gold, for example. Investments in gold have doubled, from 1.1% of GDP in 2007-08 to 2.1% in 2010-11.

Getting back investor confidence will take more than one budget, given how this has been eroded systematically over the years. Even assuming the budget announces reforms like allowing foreign airlines to invest in aviation in India or the governments plans to get a consensus on FDI in retail, there are far too many cases of the government hitting individual companies for investors to forget this in a hurry. The list is a long one, but Vodafone is a good example. While there are merits in asking Vodafone to pay taxes since the underlying assets it bought are in India, the fact is the Indian law doesnt have any provisions for such taxation. While the taxman got his way and levied the tax, the Supreme Court has come down heavily on the governmentyoud think this would be the end of the matter, but a review petition has been filed by the government.

Whether the finance minister introduces General Anti Avoidance Rules (GAAR) in the Budget, as expected, will be worth watching since this will bring some clarity on where the Indian law is going, but there are more fundamental puzzles that the FM needs to ponder over and provide some answers to. Assuming he introduces GAAR, this means Vodafone-type transactions will have to pay capital gains taxes in the future. But, under the law as it stands, FII dont have to pay capital gains taxesindeed, since there is an STT, even local investors dont pay capital gains taxes on investments held for more than a year. But arent FDI and investments in factories by local supposed to be preferred to portfolio investments! So why do they have to pay capital gains taxes Thats a question investors are looking for clarity on.

The last has not been heard on the 2G licenses cancelled by the Supreme Court and, apart from the likely Presidential reference to the Court on the matter, various governments including the Russian one are putting pressure on the UPA, so investors are going to be watching this with interest.

While it is not expected that the finance minister will bring in any retrospective amendments to get Vodafone to pay taxes on its purchase of Hutchs India operations, the possibility of retrospective changes in other areas remains. For one, based on the SC judgment, there is the possibility that licenses other than those granted by A Raja may also get cancelledthis is not a direct ruling of the SC but the government asking for clarity on the issue is likely to precipitate matters. Two, though additional spectrum was given to BSNL/MTNL/Bharti/Vodafone and others on the basis of a subscriber-linked criterion in the past, the government is seeking to charge these firms for the spectrum on a

retrospective basis.

Investors wont get answers to all their questions on March 16, but it will give them a preliminary sense of whether the government is even serious about getting on with the business of governance. A strong move to start making some subsidy payments using UIDAI instead of the traditional ways, as looks likely right now, will send a powerful signal about its intent.