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The economic backdrop is mixed. Yes, retail inflation is substantially down from the double digits that prevailed five years ago. But the investment cycle is yet to recover and, on the other hand, you have agrarian distress which is still in crisis proportions. Finally, the country continues to be vulnerable to external economic shocks such as an oil price spurt or escalation of the global trade war. As a result, the expectations from the budget are enormous, to put it mildly. To address this and to understand the expectations ahead of the budget, we have lined up an exceptional panel of economists comprising Arvind Virmani, former chief economic advisor, chairman of EGROW Foundation and the original proponent of the idea of Aadhaar; Indira Rajaraman, economist, former member of the 13th Finance Commission; and Himanshu, assistant professor at Jawaharlal Nehru University (JNU). Edited excerpts from a roundtable discussion moderated by Mint managing editor Anil Padmanabhan.
Let me begin by requesting the panellists to share their expectations from the budget.
When the general public looks at the budget, there are basically two parts to it. One is the finance minister’s speech and, second, is the actual numbers relating to the budgetary allocations and the tax changes which are in a way hard numbers. So, let me start with what I expect from the first part. I would expect that the finance minister will lay out the achievements of his government over the last 4-4.5 years and, then perhaps, move to address what he still sees as potential challenges. Among these, people have mentioned the questions of farm and agriculture, employment opportunities and growth.
The second part of the budget really conventionally is a vote on account and that has a logic to it, the limitation of time. The next government has to be in place by May or so. So, conventionally, there is no time to really get a controversial budget passed. So, there used to be a vote on account where neither the government nor the opposition makes it a political issue and, therefore, by convention it is just passed. Now, in a few of the previous budgets, there has been, what is called an interim budget, where some changes have been made. So, really much of the speculation focuses on how much, given that the government has a clear majority in Lok Sabha. In principle, they could get anything passed because the Rajya Sabha cannot hold up a money bill, but it will be the government’s decision as to the extent of changes to go for. The more the changes, the more politically controversial it could be and there could be delay in passing it.
This is interesting. You are actually saying there is no precedent preventing the government from going ahead with the tax proposals.
My understanding is that there is no legal problem about doing it.
Mrs Rajaraman, your expectations from the budget?
I don’t know actually what to expect because this is a government which is going into a general election two months after the beginning of the fiscal year. Even if they get their tax proposals passed, that will be in effect a statement of intent to what they will do if they are voted back. But, in the very nature of things, whether they push through new tax proposals or not, these will be up for review again after the general elections. At the moment, I don’t know whether the government will think of pressing ahead with tax proposals, which in effect, they will be committed to if they are voted back. Or, if they will hold off on that with a promise of what they will do if they are elected back. So, I don’t know which of these options they will choose from.
I think the code of conduct will be in place from the beginning of March when the dates will be announced. So in a sense, even if the government would like to do certain things to increase spending in a big way, I don’t think there will be much that can be achieved in the one or two months that is there. Particularly, when the election cycle is fully there. So, I think, the budget although is going to be a vote on account, if there are big announcements, they will purely be keeping elections in mind. The political impact of the budget is important in the context of the severity of the agrarian crisis and the kind of challenges which the economy is facing. There is also an expectation that the government will not go to polls by simply not doing anything and that will be suicidal.
So, there is an expectation that the government will do something not merely for the sake of doing, but also for deriving political mileage. That is why the element of politics cannot be ruled out, at least for this budget. I think, the point that you don’t have time is clear. That really is a problem. Any (announcement of relief) is only going to be an intent, rather than something which is substantially going to be taken forward in the long or in the short run. So, one has to really see how the government responds, which are the pulls and pressures that are more important for the finance ministry.
Do we have the fiscal space to undertake a big spending agrarian package?
If we start with some of the things state governments have already done, such as loan waivers, there has been a lot of criticism at least from professionals and economists. Politically, it is a different issue. Secondly, a number of agricultural economists who have worked on these issues for years have praised. There are schemes in Odisha and Andhra. The problem is they require some collateral such as land records or some other aspects and, there, they have some gaps. Will they devise a scheme that takes this into account, as it will be harder to implement the scheme across the country than in Andhra, where they had the records. The second issue is whether to combine existing subsidies and make it a substantial thing or just do an incremental allocation, in which case, it will be notional because you cannot make a major new allocation. In some sense, shifting money within the budget would be more feasible. One way to get some funds is by shifting from one head to another. The second is by combining existing allocations like that of fertilizer subsidy. I would certainly commend the second, but I do not think it will happen. So, more likely, some token allocation giving to farmers or restricting it to the poor, or some creative way to signal that ‘we are going to do something like this so that people do not call it hype’.
I want to go back to my question, whether we have the fiscal space to sustain this kind of spending?
On redressing agrarian distress, what I would really like this government to do without going into issues of fiscal space is this. If it were to promise that there will be a close and well documented programme of looking at land ownership in agrarian India. As we all know, when we talk about loan waivers or income support schemes, the underlying documentation needed is of ownership of land. Once a farmer is an owner-cultivator, a slew of benefits are available to him, including access to bank credit and crop insurance. If they are tenant-cultivators, these things are systematically denied to them. If you are shifting from owners’ income support to tenants’ income support, there is a whole set of issues that will arise about land records and bringing informal tenancy rights. If the government were to not go into numbers, but were to say that it will systematically look into this issue and restructure land rights in agriculture, so that the majority of farmers who are tenant cultivators will benefit, I think it will get them huge political benefits. It will also assure all of us that they are serious about doing something about agrarian distress.
If the government is to go ahead with this suggestion, do we have a database of land ownership, or do we have to start afresh?
The database does not exist as of now. The only state that has done well in updating and digitizing the land database is Karnataka. Even there, the process has not been completed. Those issues are far more difficult in states such as Uttar Pradesh, Bihar or Madhya Pradesh, where land records are really in bad shape. The states, which have announced income transfers, have done it just before the elections with barely enough time to identify farmers, given that there is only the rabi season left. By the time the rabi season is over, elections will be half over. I don’t think this is something that is practically implementable for the government in the next two months that the government has. I do not think that it is an attractive proposition other than just making an announcement. The fiscal space question is very important. The only way I would suggest an income transfer is that it will create some demand in rural areas. That is the only advantage it has. Other than that, if it comes at the cost of big investment in agriculture, which is what this government has done. Agriculture investment in this government in real terms has declined in the last four consecutive years. The overall cost of the loan waiver is ₹1.9 trillion. Then you are going into this. I do not think, taking away the fiscal space that is already strained, is a good move either in the short or in the long term.
One has to examine the fiscal space question not from the political point of view, but also whether we have a solution. In 2008, we had the biggest loan waiver. Then we did it in Uttar Pradesh and Rajasthan. There has to be an end to this cycle that is going on. Income transfers are not helping farmers. The farmer is on the street because he is unable to sell his produce. Income transfer basically says you have to take the money and whether the produce gets sold or not is not our problem. That is like washing one’s hands off the problem. Farmers can say, ‘give me even more, I am not even going to cultivate’. I don’t think it is the way the thinking should be. It is politically very fashionable and attractive. The cost implications are humongous.
Given that agriculture is a state subject isn’t this then a collective political failure?
Look at this: The president of a political party (Rahul Gandhi) says ‘we are guaranteeing a loan waiver’. We have come to a situation where there is competition (in offering loan waivers). Rajasthan is an interesting example. Vasundhara Raje announced a loan waiver, then the Congress government comes in and promises another loan waiver, which they have implemented, and they are now saying that in Lok Sabha, there will be another loan waiver. Or in UP, for example, you had a loan waiver in 2017, another loan waiver is also being promised. It is not solving the problem. You are basically giving them the money, the loan waivers, but no one is talking about the basic question as to why the farmer is in a debt trap. Can you make sure that 10 years down the line you will not be talking about loan waivers? And, in states that have implemented loan waivers, the biggest cut in investment has been in the agriculture sector.
As you mentioned, agriculture per se, is a state subject, not a central subject. The whole point of increasing devolution of funds to states as per the last finance commission was that you cannot solve problems of agriculture from Delhi. Why was agriculture made a state subject? Because it is a ground level problem. So, the allocation has been there, people have refused to focus on the responsibilities of the state government. Secondly, there is a central element which is the import-export policy. And that I saw first hand. That everything is done in the name of the farmer, but when I saw the implementation, all those interventions, whether they are tariffs or quantitative restrictions, and I really do not want to libel anyone, but it was basically done for your friends and intermediaries. We would say free up the import, it would take three months to six months to get that done. Why? Because in the meanwhile, people have made money.
So, my solution has been there on record—you have to decontrol. You have to first look at what has worked and what has not. Minimum support price (MSP) has not worked. It is an outdated policy. Old solutions just will not work.
What is it that the government can do, which is a mix of both long-term and short-term measures, to revive the rural economy?
You know loan waiver is thought to be a good way of short-term revival and that is why it has widespread political support in the agrarian sector. But what is not understood is that even the farmers who are getting benefitted, only get relief on the interest due on their loan. It is only when the principal is back in the hands of the banks, they will lend to those farmers again. Will an income scheme revive rural demand? It will revive the wrong kind of rural demand. It will put money into the hands of middle to very well-off owner-cultivators, who may buy cars or two-wheelers, or whatever and, to that extent, there might be a marginal impact on demand for industrial products. But, what you really want to do is to put money into the hands of tenant cultivators so that they can invest in farm, warehousing and other things, which will give them better price for produce, and enable them to hold out after the harvest until they can sell when prices of agriculture produce is higher.
What I would like the government to do in view of its limited time before the general elections, is to exhibit awareness of these problems and structural reforms that are needed. Point out that they are not resorting to easy routes, but are committed to doing structural reform of the kind that really benefit the tenant farmer and the agricultural labourer. That is what will bring them a lot of political benefit.
I fully agree with that. I would like to make two points. We are focusing on agriculture, but the problem is not just of agriculture in the sense that the entire non-agriculture economy in the rural area has also collapsed. And, one of the biggest indicators of that is the wage rate collapse, which is the worst that we have seen in the last 40 years. That is why the demand question is very important. It is also important to stimulate demand by the people who would be spending the benefits given in a better way than to give benefits to owner-cultivators. That is why although a lot of farmers are in the streets, the middle class has woken up simply because the march happened in Mumbai and the farmers came on 29-30 November in Delhi. It is not just owner-farmers, you have to go for a comprehensive solution that will result in wages rising. The non-agricultural economy needs to pick up.
Look at the numbers, two wheeler sales are slumping. What we are responding to is the farmers’ question, whereas the real problem is that the rural economy has collapsed and that requires a different kind of treatment. I agree that the government can come up with some honest admission about the problem and how it plans to go ahead. A lot of structural changes actually do not require any financial commitment.
What can the middle class look forward to?
One needs to understand why they are dissatisfied. There have been some rise in taxes, the one which was very prominent was capital gains tax. That is an additional irritant. Adding more taxes is an irritant when it will not produce big collections. This old approach doesn’t seem to change. This has irritated the taxpaying middle class. Of course, they cannot implement a new direct tax code. But we have not seen the recommendations of the Arbind Modi committee. There is a possibility that they will say something about a new tax code that will simplify tax law. If they don’t say this, the middle class will not vote for them.
Has the NDA missed out on a chance of simplifying the tax regime?
Yes. One is waiting for the Arbind Modi committee report for the simplification, which may possibly come in. But the irritation the middle class has today is not so much about direct taxes, but is about GST. Roughly 60% of GST collections are coming from services. So, the incidence of indirect taxation on services has risen quite sharply and the GST network has been quite systematic in its coverage of services. Earlier, of course, there was a central tax on services, which the GST has replaced. But the coverage of GST has been much greater. I think a large part of the urban middle class with income from services is upset about this, whereas the GST reductions have largely been applied to goods, not services. So, services remained solid at 18% and tax net covering services are much more comprehensive than earlier. The middle class is upset about indirect taxation than direct taxation.
The Union budget, as an economic lever, has lost its original mojo. Your thoughts?
The middle class, if you remember the campaign, everybody has forgotten, was expecting to get things simpler. The point is that they expected it to get better and they have been disappointing. GST impact is not about money. The poor may be affected, trade definitely is affected and MSMEs may be, but not the general professional. Second, I don’t agree that investment has gone down. I have been pointing out that for 18 months investment is recovering. In the last three to six months, there were reports of improved capacity utilization in private sector and the cycle has turned. The problem is that private consumption has slowed down and there are reasons for it. One can go back to demonetization, etc., but the proximate one was oil prices, that has turned. That is going to reverse that. So, I don’t agree that everything is bad. I think it is recovering. Right now, the economy is on a recovery path. That doesn’t mean everything is perfect. Now, coming to the budget. You have to keep in mind that there is an election. The election restrictions do not apply to the budget. In principle, they can say or try to do anything in the budget. All I’m trying to say is there is a distinction between what they can do and what they are likely to do. The finance minister’s speech is going to give all the positives, but the key thing to look for is what they say about the future, including token allocation, whether it is agriculture or employment. They can say we are allocating ₹100 crore to look into land record issues or for some other new projects. The criticisms, the narrative is very important in elections. One can say we are allocating so much funds and, when we come back, we will give you more. If I was in their place, I would combine the subsidies. For example let’s take fertilizer subsidy, it basically goes to large farmers. I have heard this criticism when I was in government for 30 years, the subsidy goes to only large farmers and the smaller guys don’t get it. Then, get rid of it. I would say combine all the subsidies and give a cheque to all rural people, at least the poor guy will get something. If he even gets a cheque of ₹1000, he’ll at least get it in his hand.
I totally agree with Arvind Virmani that narrative matters more than the actual numbers in this budget, because the government has to make its statement of intent so attractive that they’ll be voted back. I actually think that it is a very good thing that the budget, in its details, is not as important as it used to be, because it means that the remit the fiscal policy at the centre is less wide as it used be. That said, there are many respects in which the manner of functioning of the central government deeply affects the lives of ordinary people. It is the last mile issue and, if the narrative, which is presented at this budget, were to state that the government is aware of these problems faced by people at the last mile, (it will help). And, I’ll mention just two. One, that there’s excessive focus on fiscal deficit, and whether it’ll be met or not. Incidentally, I see no way in which the budgeted target of 3.3% can be achieved this year. I think it has to be 3.8% simply because the borrowings that have taken place, according to the Controller General of Accounts, up to November, exceed the budget deficit estimates by that amount. But more importantly, one of the two points which really and deeply affects people in their ordinary functioning, is the well-known phenomenon of delays in government payments. When you speak to MSME industrialists, what is their biggest complaint? It’s not even about GST. It’s about delayed payments from the government and delayed payments from the public sector. So, you have now what is called the ricochet between the government and the banks. On one hand, the government delays payments to MSMEs, then it requests the banks to give regulatory forbearance to MSMEs, and this goes back and forth. It’s like a ping pong match between the government and the banking sector. Second thing is, I want to go back to this business of Aadhaar intermediaries and a whole bunch of other intermediaries. People who live in urban slums are often middle class in terms of their income levels, and they face obstructions in every turn because of this new documentation that has been forced upon them. At the very least, I think, children should be permitted to go to school and get their mid-day meals, or whatever their entitlements are, without having to produce documentation of any kind. Surely, that’s something we want. If the government were to exhibit its awareness of the problems that people are facing and promises to redress them that would be a huge relief.
You can take this as a budget speech, you can take this as a manifesto. After all, manifesto is all you are going to do, if you want to do. I think the serious question that this budget should try and cover is the trust deficit on the intent and actions. I think what the government can do without committing any funds is to show that they mean business. What it requires is honesty and political willpower to come out clean and say such and such structural changes can be brought in. Changing the regulatory framework does not require a single rupee.