( a long piece- on budget making as well as this current one)
Budgets are wonderful things. They create so much flutter before they are presented and then a lot of debate. Industry captains uniformly praise the budgets (with some brave exceptions like Rahul Bajaj). Others will praise or condemn the budget depending on political leanings and some personal preferences or prejudices.
Before every budget, the stock markets start to go up. They like to forecast which sectors will get some bird droppings from the budget. And then of course, there will be hasty ramp up in prices of some stocks where the punters place their bets.
THE FUDGET MAKING EXERCISE AND SOME THOUGHTS:
I like to call the document as a ‘FUDGET’. This annual document is the annual report and accounts of the national exchequer. Unlike traditional annual accounts of a company, this document is not audited. And there are no uniform accepted accounting standards. Each year, the mandarins who prepare this complex document, will invent some new classification or measure. Their objective is twofold:
- To manage expectations of global lenders and investors; and
- Manage expectations of the general public.
Of course, there is something called “Fiscal Responsibility” which is mentioned whenever convenient.
In any household or business, the objective is that we should live within our means. But the nation never does something like this. In a house, if I have a temporary shortfall, I can borrow. But I have to repay it as promised. And, no one will keep on giving me loans indefinitely. Here is where the politicians, bankers and the sovereign budget score. In the last sixty odd budgets, I do not think we have ever lived within our means. We have created a mountain of borrowings that will be the burden on the next generation. And the government can also ask RBI to freely print more currency notes. The government can also ‘borrow’ money by issuing bonds. It is wise not to ask if the government of India can ever repay its debts. The total stock of outstanding debt simply keeps on increasing year after year.
So, there is no point in looking for the budget deficit number or any other big number. It is just arithmetic. The real issue is that the debt mountain keeps growing and as banks, insurance and FIIs have more and more money, they will keep ‘investing’ more and more in to debt issued by the government. Of course, we must not forget that in addition to central government, each state government also is part of this financial wrecking crew. Debt is truly forever. And the world is happy with the system where government profligacy finds takers in the form of fixed income investors. Of course, the sovereign has the highest credit rating when it comes to domestic currency.
BUDGET OF 2017-18
This budget is finely crafted and treads a middle path. I will not go in to the numbers or the various ‘yojanas’ that do not seem to appeal to most of those who will be reading this.
At the outset, every budget, whether household or sovereign, is based on the premise that one should live within the means. Both the sources and the uses keep expanding and it is always a struggle to make one equal to the other. Unlike an individual, a sovereign has the luxury of perpetually being in ever increasing dollops of debt. There are limits to it, beyond which the economy collapses in to becoming a poor state with hyper inflation and misrule, To this extent, we have been fortunate that over the last decade or so, fiscal discipline is talked about and boundaries are generally observed.
This budget sticks to the boundaries of prudence. Fiscal deficit at a modest 3.2% (could become lower if some schemes do not spend everything/revenues are more than expected or could slip if some revenues do not materialize as expected) is manageable given the ownership of the printing press. Economic growth numbers will be shy of eight percent but in today’s global economic situation, anything above five or six is good. Our economic growth is also a function of our entrepreneurial capability, our native intelligence and our fortunate failure to make global trade a big issue. Inward looking is perhaps turning out to be an ugly blessing that has stunted our growth over years, but saving us from pain at this juncture when the world is turning from free trade to protectionism. It is ironic that China is now advocating free trade to America!
What I liked in this budget are:
- Announcement to do away with the FIPB;
- A call to State Governments to do away with APMC in respect of perishables (read vegetables). This is interesting. Will help new aggregators and cold chain companies to deal directly with farmers and sell to the consumer/retail outlets. Filing forms, paying two percent cess for the State doing nothing has been the sole function of the APMC. In addition, the APMC creates a cartel of intermediaries who deprive revenue to the farmer and push prices up for the consumer. Companies like Reliance Fresh can directly enter in to Contract Farming and give better and cheaper produce to the consumer.;
- A five percent lower rate of taxation to companies with turnover less than Rs.50 crores is a welcome step. These companies are the true start-ups and entrepreneurs that create jobs. A big boost;
- The disincentives for cash business with lower rate of income tax on digital or cheque transactions will improve the tax base for sure. This is a far reaching step;
- The lowering of limit for cash donations to political parties is a good beginning
- Making it unlawful to deal in cash for transactions above 3 lakh in value is another good move to lower the circulation of black money;
- Raising the threshold of compulsory audit for professionals to Rs.2 crore per year is a good move.
What I can see is that while there is an attempt to clean up and tone up the tax administration system, facilitate small and medium business and boost in government spending, they have not given in to resorting to ad hoc measures to boost revenue. Given that there are uncertainties on GST, they have not tinkered with the Service tax rates. Yes, we can always argue for more administrative reforms.
Today, the economic circumstances of India are wobbly. Just as we were getting healthier, the world is becoming more inward looking and each country is having its set of problems. Globally, there is a slowdown and global capital flows are kind of afraid. The US, with a radical leader at the helm, is having every one on edge. Suddenly, everyone is realizing that a healthy and prosperous US is a precondition for world growth. Even China has to stand up and lecture US on free trade! In this environment, where our largest export earning industry (IT) is facing headwinds and low Oil prices threaten the remittances in foreign currency, it is important that our economic policies give a nudge to capital flows. They also have to encourage domestic asset building. For example, our steel industry, which was in the doldrums thanks to dumping from China, is looking up once we imposed anti-dumping duties.
At the end of the speech, the first reaction was, “Is this a budget at all?”. Then came the feeling that budgets ought to be like this. Reforms are a continuous process. Budget is after all akin to a business plan. I hate to go in to the numbers because then it becomes a “Fudget”. I do not want to go in to the fine print and dig in to the numbers. It is impossible, even in this digital age, to prepare a precise statement of affairs. And given that the previous budget period still has two months to go, the extent of ‘estimation’ is very high. So let us leave the numbers aside. What will be real is the final government debt that will get added up. And it is a rising number.
Given that the budget came after the much-debated ‘demonetisation’, there would have been a logical temptation for Mr Jaitley to be very populist. That he has resisted the temptation itself is a big positive. This budget is only the beginning of the current year. The implementation of GST is the event of 2017 that I am looking out for.
Given that a budget score will start at five on ten, I will give this one seven on ten. For being boring and for brining in incremental administrative reforms.