- By Charan Singh
Union Budget 2019: The fiscal policy of the country can play an important role in enhancing growth. The union Budget of July 2019 is raising expectations, as it is being prepared by a trained economist, our new Finance Minister. And the country seems to be performing below its potential in recent quarters, for various reasons, both domestic and external. The global slowdown is predicted by the International Monetary Fund, and accordingly, Fed Reserve is holding the interest rates as also Bank of England. The Reserve Bank of India has also moved to accommodative stance from neutral, indicating that interest rates could ease.
The global slowdown and uncertainty is reflecting in India too. The data on increasing inventory of houses and automobiles is not encouraging nor the developments in financial sector, including Non-Bank Finance Companies (NBFCs). In the automobiles, sales have been low and inventory in some cases higher by 300 per cent. This is alarming because automobiles absorb output from more than 100 industries. In the housing sector, which has interlinkages with more than 270 industries, inventory is of nearly 10 lakh houses across the spectrum. In other words, in normal times, this would take about 42 months to clear while in normal times, it would take about 16
months to clear the inventory. In addition, MSMEs have been facing resource crunch as also troubled liquidity by NBFCs.
An important aspect, philosophical in nature, related to absorbing the increasing number of youth joining the workforce is to dispel the image that private sector is inferior to public sector. Over the years, under the shadow of socialistic pattern of growth that India followed for nearly six decades, general opinion is that private sector is exploitative, and therefore employment in public or government sector is most sought after. To accommodate the increasing millions, the negative image of private sector needs to change as most employment opportunities in future will have to come from commerce, mainly located in non-government sector. Further, private sector needs to
be encouraged and supported, not financially but philosophically, and industry should be permitted to be profitable with sufficient buffers to absorb losses in short period. The financially strained private sector would only cause stress to the commercial banks, mainly public sector, and public finance, given well-recognized interlinkages. Hence, the aim of the Government should be to partner with the private sector to generate employment and not simply to pontificate curtailment of their profit margins. At this crucial juncture, going forward, both private and public sectors are necessary for India’s growth.
The Union Budget can help in these challenging times with policy announcements which will help build confidence in the markets. The first objective should be to unleash the productive forces to finance higher growth. Therefore, glaciered finances lying locked in inventory of housing and automobiles need to be unfrozen. In the budget, the Government could consider incentives like lowering stamp duty on houses for a stipulated time window and easing of capital gains tax on housing and real estate for a specified period. Also, the Government could consider
linking the unsold inventory of housing with PM’s Awas Yojana to defreeze liquidity in housing. Similarly, for automobiles, the Government could consider similar tax concessions for a stipulated time. This exercise would kick-start flow of money in housing and automobile sectors benefitting many inter-linked industries.
In creating employment and sustaining consumption demand, the role of micro and small industry (MSIs) needs to be strengthened. In this context, commercial banks will have to play an important role, as also mudra loans. The Government could help create conducive opportunities where MSIs can flourish, illustratively, by selecting few cities with the potential for tourism, and financing smart infrastructure. In a resource-constrained economy, with high levels of poverty, religious and nature tourism could be most affordable for the Government. The Government
could consider developing these select tourist spots in partnership with the private sector, industry and airlines. The virgin areas in North East would offer excellent opportunity to attract domestic and international tourists, and inject liquidity in the economy. The tourism industry can also enhance female labour force participation which is very low at 30 per cent as compared with the global average of around 60 per cent.
The Government, after winning with a thumping majority and wide spread support, is presenting its first budget. It would be in the spirit of ideology of NDA and celebration of victory, if the new capital city is planned by the Union Government. The current structure of Government buildings, including Rashtrapathi Bhavan reminds of colonialism, subjugation and India’s painful exploitation for centuries. These existing structures can be converted into memorials and museums. But new and resurgent India should have its own Parliament and buildings, to house
offices of independent Indian Government; all conceptualized, and designed by Indians. This initiative would also usher in new enthusiasm in the economy, arouse animal spirit, boost construction activity and provide positive impulse to growth.
The drying up of liquidity in the market, if persists, could lead to solvency problems, highlighting the difficult situation of NBFCs. The role of NBFCs to reach the last person in the country where commercial banks cannot reach has to be recognized. Therefore, NBFCs have to be strengthened by better regulation and closer supervision. The RBI in its latest Financial Stability Report released on June 27 reveal that NBFCs provide a unique challenge. NBFCs are a heterogeneous group of entities: while some NBFCs have suffered because of market discipline
others have been able to raise resources. The Report also discusses the significance of NBFCs in case of any failure and hence the need to safeguard the NBFC sector. The Government could consider a dedicated regulator and supervisor for NBFCs.
The Government has assigned an inflationary target regime to the RBI which it is mandated to follow in word and spirit. The Government has to consider, as also the trained economist in Nirmala Sitharaman about the trade-off between unemployment and inflation. In a young demographic country like India, with sagging growth and teeming millions, mostly young, appropriate employment would be preferred over inflation and “dole-like” mainly unproductive, MGNREGA. The Government could consider either, temporarily, raising the inflation target assigned to the RBI, or instructing the RBI to observe “pause” on inflation targeting and pursue, singularly employment and growth, in a focused manner.
- Charan Singh is Chief Executive and Director, EGROW Foundation.