‘Every little helps’ Budget no plan to get to $5 tn GDP

The Narendra Modi government’s first budget of the second term seems to have gone off the mark. On several counts, the estimates or projections are unrealistic.

Starting with the turning the Indian economy into a $5 trillion powerhouse in five years to investing Rs 50 lakh crore in railways and Rs 100 lakh crore in infrastructure sectors are overambitious. In five years, all these targets may remain unachieved, given the poor work plan laid out in the Budget. Even the stiff target of mobilising tax revenues worth Rs 24.7 lakh crore this fiscal looks like a pompous claim.

There have been several scholarly articles on why the $5 trillion by 2024-25 target is unrealistic – it requires 12% annual economic growth for five years, as against the 7%-plus expected this fiscal. We may close in on $3 trillion in 2019-20, with most multilateral organisations and RBI expecting growth to be 7.4-7.6%, which itself is difficult to achieve. Worse, the current growth figures are themselves under scrutiny.

The claim of investing Rs 50 lakh crore in Railways between 2018-2030 is bombastic. In effect, every year, Railways will have to mobilise Rs 5 lakh crore every year during Modi’s tenure and then from 2025 to 2030. This estimate looks way too optimistic given that the entire railway budget was Rs 2.17 lakh crore, at an operating ratio of 95%.

While the government hardly chips in with funds, most railway resources through freight and passenger tickets sales go into meeting maintenance expenses, wage bill and pension bill. The big pitch made was to mobilise investments through public private partnership (PPP) projects. If the experience of the last five years is any indication, private investments in Railways will at best be negligible. The much-trumpeted PPP projects have not taken off.

Infrastructure investment projections are a maze again. The Economic Survey 2018 under former finance minister Arun Jaitley had estimated that India will require investments of about Rs 280 lakh crore till 2040. Now, Finance Minister Nirmala Sitharaman has estimated that Rs 100 lakh crore would actually be invested in core sectors to give infrastructure growth a push. But then, does the government have the funds to realise such capital investments?

At best, a fraction of this humungous need for resources can be met. Private capital and foreign direct investments is what the government thinks will drive the infrastructure sectors. Even if healthy FDI flows, coupled with domestic companies picking up green field and expansion projects happen, will Rs 20 lakh crore be invested annually over the next five years? Even if were to go with a 10-year timeframe, we would still need Rs 10 lakh crore in investment every year.

With the GST mop-up consistently below the targeted Rs 1.1 lakh crore monthly, what amused old-time North Block mandarins was the target of Rs 24.61 lakh crore revenue mobilisation through taxes this fiscal. The Centre’s share of GST has, in fact, been lowered to Rs 5.26 lakh crore this financial year over Rs 6.03 lakh crore estimated in the budget of 2018-19. Even taxing the super-rich high net-worth individuals through higher surcharge, the larger impost on foreign portfolio investors and the levy on share buybacks may not bring the revenue buoyancy desired by Sitharaman. She may have to depend heavily on diesel and petrol levies to mobilise revenues. If the Rs 2 per litre hike in fuel prices was any indication, one will have to brace for yet another round of price hikes during the year.

What has flummoxed even diehard supporters of the Modi government are the investment projections made for five and 10 years. Having rejected the Nehruvian model of perspective planning, Modi did away with the Planning Commission and brought in the rudderless Niti Aayog. Budget projections made for the medium term seem to indicate a rethink in the Modi school of thought on perspective economic planning as the way to at least reasonable success on the economic front.

The Budget proposals have largely centred around the Modi government’s avowed commitment to providing a larger fiscal space to private and foreign investments. There are hardly any measures in it to promote investments. Even if the corporate tax rate for companies with turnover of up to Rs 400 crore was slashed to 25%, the effective rate of taxation continues to be 42.5%.

Rich individuals and foreign portfolio investors that operate as trusts and associations of persons are required to cough up 42.7% of their earnings towards meeting tax liabilities. The private sector’s virtual rejection of Budget proposals was reflected in the bloodbath in markets post-Budget presentation. Sitharaman could have used her reply to Budget proposals in Lok Sabha to address investors’ concerns. Instead, she continued to stonewall suggestions to moderate taxation. The government’s decision to impose a duty on imported books has alienated the intelligentia that depends largely on publications abroad to satisfy its intellectual urge and undertake research. But then, there’s hardly any meaning to such proposals in the Budget.

The sovereign bond issue to part-finance the fiscal deficit also may not be the right medicine. The UPA government under former finance minister P Chidambaram had the option to float a sovereign bond issue to mop up cost-effective debt funds, free up space in rupee market to private companies. But the then chief economic adviser Arvind Virmani had opposed the move for obvious reasons. Cost-effective debt funds should be mobilised for capital investments, not to bridge government debt, even if inflation is under control and exchange rate risks are minimal.

While Modi made song and dance of the $5 trillion GDP figure, the budget proposals do not support such an objective. Sitharaman’s work plan is, at best, a shoddy patchwork of bits and pieces from every possible source. It’s not just a lack of financial resources but even the lack of intellectual capital in North Block that has become visible. To push up growth and consumption, the government will have to think afresh and get innovative.

(The writer is a senior Delhi-based journalist)