Budget 2019: Searching for reforms

The spectacular mandate for the NDA government had raised a lot of hope that the new regime would fast track the reforms agenda to accelerate growth and increase employment in the country.

The Union Budget presented by Finance Minister Nirmala Sitharaman was expected to provide a clear roadmap for reforms in the next 100 days. This is particularly important as GDP growth in the last quarter of 2018-19 was the slowest in the last five years and considering that the capacity utilisation in manufacturing had already peaked, reviving the investment climate was critical to accelerating economic growth.

At 6.1%, unemployment is the highest in four decades. With slowing exports and distress in the farm sector and the twin balance sheet problem still haunting, the Budget had to provide clear signals of fast tracking the reform process.

The finance minister had a difficult job of balancing, particularly when revenues are not buoyant and expenditure expectations are high. To be fair, it is noteworthy that the minister has tried to show her commitment to fiscal consolidation by containing the fiscal deficit at 3.3%. The difference between the 3.4% budgeted in the interim budget and this (Rs 93,168 crore) is mainly due to higher nominal GDP estimate used in the denominator.

The tax revenue estimate of Rs 16.49 lakh crore is lower than the estimate in the interim budget by Rs 55,463 crore. This is substantially offset by higher non-tax revenue of Rs 40,532 crore and thus, there are not many significant departures from the estimates of revenue and expenditure presented in the interim budget. The gross income tax revenue is estimated to be lower than the interim budget by Rs 90,000 crore, mainly on account of lower GST (Rs 97,857 crore) and individual income tax (Rs 51,000 crore).

Despite taking lower estimates, the revenue estimates in the Budget look far too optimistic in comparison with the pre-actuals given by the Controller General of Accounts. To realise the Budget estimates, the increase over the actual tax collected in 2018-19 in gross tax revenue will have to be 21.2%, in the net tax revenue by 25.3% and the non-tax revenues will have to increase by 27.2%.

A major source of additional revenue projected in the Budget is from disinvestment. This is expected to generate Rs 1,05,000 crore, which is higher than the interim budget estimate by Rs 15,000 crore. The Budget speech also speaks about an active disinvestment policy, beginning with Air India. Hopefully, the environment will help to implement this. Another source of revenue which is expected to increase is the dividend, mainly from the RBI. The dividend at Rs 1,63,528 crore is higher than the estimate in the interim budget by Rs 21,457 crore .

The most important reform measure in the Budget is the proposal to streamline multiple labour laws into a set of four labour codes. Although the details of this are not yet available, it is hoped that the government will embark on much-needed reforms in this area. This is a contentious issue that has been debated for long.

The Economic Survey, too, has referred to the need to make the factor markets less distorting and the disincentives these laws create in ensuring optimal sizes. Hopefully, the government will address this in the interest of increasing employment and exports of labour intensive goods.

On customs duty reform, there are some disturbing signs. It was hoped that the Budget would reverse the trend of increasing protectionism resorted to for ‘Make in India’ over the last three years. These only make Indian manufacturing non-competitive and invite retaliatory measures.

With the US coming down hard on India by dispensing with the Generalised System of Preferences, it was hoped that there would be an attempt at drawing down the protectionist wall. By selective increases in import duty and by varying the rates based on nature of the good (intermediate good, capital good and final consumer good), the Budget has raised the effective rate of protection on many items much higher than the nominal rates in unintended ways.

Banking reforms

One of the major initiatives needed at the present juncture is to reform the banking system. The Budget allocates Rs 70,000 crore for recapitalisation of the public sector banks but is silent on the urgently needed structural reforms, including governance reforms. Nor are there any concrete measures to deal with the NBFC crisis apart from empowering the RBI to undertake the regulatory function. The time is opportune to change the structurer of incentives and accountability.

An important measure to revive the investment climate and to attract foreign direct investment is the tax system. A recent OECD study has shown that corporate taxes in India are very high, amounting to almost 48% when the dividend distribution tax and surcharges are taken account of. The 2015-16 Budget promised to bring the basic rate down to 25%. This was implemented for companies with Rs 250 crore turnover in the 2018 Budget and the present Budget increases the ceiling to Rs 400 crore. Although that ceiling would cover 90% of the companies, their tax payment is less than 10-15%. This will hopefully be addressed in the next Budget which is just six months away.

The finance minister spoke about the rejuvenated Centre-state dynamic and commitment to cooperative federalism shown by the government during the last five years. At the same time, most of the measures taken to raise additional revenues are by way of cesses and surcharges.The increase in income tax for people with more than Rs 2 crore and Rs 5 crore is by way of additional surcharge. Similar is the case with additional tax on petrol and diesel. This way of raising revenue excludes the states from sharing the additional revenues, besides complicating the tax system. Hopefully, the Committee on Direct Taxes Code will try to simplify the structure by consolidating it.

(The writer is Chief Economic Adviser, Brickwork Ratings and was Member, Fourteenth Finance Commission)