The Indian economy is currently amongst the best performing large economies of the world. It is natural for everyone to expect the Finance Minister to give the economy a further fillip through the upcoming budget. The overhang of geo-political turmoil, by virtue of increased competition between China and the US for global dominance, China’s adventures on the Indian border, the Russia-Ukraine war and lurking fear of a new variant of the coronavirus are bound to have an impact on the budget.
While higher allocation in the budget to areas such as healthcare, agriculture and defence is likely, my wish list for the FM will be around four key themes.
Post the pandemic, a reasonable medium-term fiscal policy is an absolute necessity. The central government’s fiscal deficit will increase to an estimated Rs 17.4 lakh crore in FY2023 (6.4 percent of GDP, actually over 9 percent of GDP for the Centre and states taken together) from Rs 6.5 lakh crore in FY2019. The fiscal deficit is being financed through borrowings in the form of government securities, which in turn is financed by banks, insurance companies, mutual funds and pension funds. It is also financed by small savings from households. In both cases, the government is competing with the private sector (including banks) for household and corporate savings, thereby crowding them out and increasing interest rates. The markets will take great comfort if the FM announces a firm resolve and a reasonable glide path for correcting the deficit to below 4.5 percent over three years.
To meet these fiscal targets, the government will have to prune subsidy bills, which have surged to 2.1 percent of GDP, compared to the pre-pandemic 3-year average of 1.1 percent, with food and fertiliser comprising the bulk. Will the government have the political flexibility to do this in a year when nine state elections are due, followed by the general elections?
The government needs to push the asset monetisation agenda with imagination and drive. The NHAI can monetise around 20,000 km of operational highways through a large infrastructure investment trust (InvIT) with sovereign funds or through toll-operate-transfer and toll securitisation modes. This can unlock nearly Rs 2 lakh crore over the next 2-3 years.
Privatisation of the smaller PSU banks is a big opportunity. It helps address two issues— the future of these banks and the release of deposits locked by such banks for lending, given their low credit-deposit ratios. The government can even aggressively monetise several real estate assets owned by them or their entities.
Taming the Current Account Deficit
The external sector balance in India continues to swing to the global tune with the volatility of the Indian rupee. While exports have grown steadily, imports are heavily concentrated in a select few categories (oil, bullion & precious stones, electronics and coal account for about 60 percent of the imports basket), which lends stickiness to the current account deficit (CAD) and increases the vulnerability of the economy. The trade balance and the CAD have accordingly worsened to levels not seen since FY2014.
Gold is an Indian obsession, and the demand is difficult to curb. Similarly, the demand for oil is inelastic. In the medium term, an increase in electric vehicle (EV) sales and a focus on renewable energy will moderate the demand for oil and coal. While the government has taken significant measures on renewable energy, a big impetus to EVs is the need of the hour. On electronics, a focussed execution under production-linked incentive (PLI) schemes should help. The PLI schemes need to be expanded to more sectors, and that will help import substitution and/or export promotion.
We also need a concrete medium-term plan to turbocharge exports. Some articulation of a national strategy for this will demonstrate the government’s resolve on this.
India has an opportunity to set its agenda in this exciting area, and the FM has the opportunity to capture the imagination of the world and investing community by being a fast mover on this. The government can come up with specific measures to channel funds towards sustainability.
To promote sustainability, the government could set up the National Sustainability Bank of India (NSBI) as a nodal agency through which the financial sector can offer cheaper refinance rates and credit guarantees, and channelise government subsidies for projects. The government can offer tax breaks on interest and capital gains for green bonds issued by the NSBI.
The government and the RBI can announce a framework of benefits and incentives for projects as defined in the national sustainable finance framework, including the classification of loans to these projects as priority sector lending (PSL). Institutions falling short in lending to this sub-segment of PSL can be asked to route funds to a Sustainability Fund managed by the NSBI. Further, to create investment pools for sustainability, mutual funds and alternative investment funds (AIFs) investing more than 51 percent of their corpus in sustainable projects can be given “zero tax” status. Carefully designed and calibrated schemes like PLIs for solar equipment manufacturing and EV manufacturing will help the country leap into the renewable energy and EV field.
Simplify Laws and Regulations
India needs to take several measures to make it easier for doing business. Measures are required in procedures, taxation and labour laws, among others. Here are a few thoughts for action.
– The capital gains tax regime can be rationalised to bring simplicity and consistency. Currently, the tax structure is complex with varying holding periods for different instruments and asset classes and differing indexation benefits in different situations.
– The BFSI companies operating across India file approximately 1,400 returns annually. The government can reduce this burden and complexity without any loss of revenue by providing a single GST return form.
There could be multiple such areas that are amenable to simplification in many sectors.
With FM presenting the Union budget in the next few weeks in a BANI (Brittle, Anxious, Nonlinear and Incomprehensible) world, there will be competing demands on budgetary resources, but it isn’t easy to please everyone. She must choose wisely between spreading resources across multiple initiatives and targeted allocations for carefully selected priorities to keep up the growth momentum.