Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
General Studies 2
Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Union Budget 2017-18 is considered one of the toughest budget in recent years with demonetisation in background, pain of common man and economy in general. The expectation of windfall gains from budget underlined high hopes from union finance minister. But the government was required to balance between fiscal prudence and need to give push to growth.
The FM did not have much elbow room to make unrealistic targets due to limited fiscal space. On revenue side, the GST had been announced and so there was no point in increasing indirect taxes. Hence the status quo was maintained. Post demonetisation, there was no chance of being adventurous on direct taxes either. On expenditure side, share of government money going in salaries, pensions, interest on debts rose to 80% from 72% due to addition of railways in union budget. Thus, introducing new schemes had very little space. Under these circumstances, the government played a balancing act. It has increased allocation where effect would be the maximum — impacted sectors due to demonetisation and dealing with increase in aggregate growth which is hurting economy.
The economic survey talked about growth between 6.75-7.5%. This range shows the flexibility in economic environment. It should be noted that the economic growth was not encouraging even before demonetisation. The fixed capital formation to GDP ratio was 26.5%. It is the lowest level of investment rate since 2004-05 where it touched the peak of 38%. With this investment rate, fast growth is not possible.
Increasing the investment
The economy is facing Twin Balance Sheet problem:
Banks have huge bad loans
Companies have huge debts
Unless this is solved, more investment is not possible. This year’s budget as a proportion to GDP shrank, which is currently 12.6% whereas last year it was 13.4%.
Out of government expenditure, 14% is capital expenditure which is higher compared to last two years. But capital expenditure as a proportion to GDP has come down to 1.81% from 1.86% earlier.
The routes for private sector investment have to be opened. It can’t happen if banks don’t lend. The budget has not done much to solve the twin balance sheet problem. It has just given Rs. 10000 crore to banks to recapitalise. However, the caveat in the speech is that if need is there, government will fund more.
World has huge savings which is now looking for profitable deployments. The question is if India can generate confidence that if money is invested in India, high returns will be provided. This calls for standard governance reporting norms etc. and not big bang budget announcements. This will give confidence to people that the project they will invest will give stable returns.
Enhancing capacity development
Also, Higher allocation to infrastructure investment is needed. Transport infrastructure needs more investment. Concern is that budget has followed route which depends on government execution abilities. If government fails to perform, the investments will be affected. For example, last year, national highways allocation had revised estimate 10,000 crore less than the budget estimate because NHAI did not have the capacity to spend that money. This year the allocation increased to Rs. 64000 crore but EPC model and not PPP model has been adopted.
PPP model failed because the growth in the economy was slowed down, the traffic on highway was not as expected and hence the collection was not as expected. Government needs to revive those to augment the inability to spend the money.
In railways, the operating ratio is 94.9%. This leaves only 5% for capital investments. Even this year, government gave them Rs. 55000 crore. But it is not able to reap the benefits of higher allocation which is visible from the fact that railways were also enabled to borrow from LIC fund apart from budget. But it didn’t draw a single penny due to its inability to spend capital amount efficiently and without fear of 5Cs- Court, CIC, CVC, CBI and CAG.
The difficult implementation
Allocating resources is fine, but ministries and departments need to spend them wisely. Thus, real issue is implementation. For instance, DMIC is talked about since last 10 years, yet it is nowhere near complete. There are other big infrastructural projects which haven’t seen light of the day because of environmental clearances, corruption, land acquisition issues, community opposition etc. Earlier, government decided to do these projects through PPP model but PPP was going sick and there were rise in NPAs due to various reasons. Thus government shifted to EPC model. For this also, large number of private contracting companies available need to go to bank and take up the projects. But if they have NPAs, banks will not lend them. This cycle needs to be broken somewhere which has become a big headache.
In this budget, private sector won’t do much as capacity utilisation is low (70%) and falling further due to demand contraction. The private sector investments will not suddenly take off. This arises the need of public investment but budget doesn’t allocate much here either. Budget gives incentives to promote investment consumption with Tax concession to SMEs having revenues less than Rs 50 crore been given a cut in corporate tax rate to 25%, from 30% earlier. However, if demand is not there, the industry will not be able to survive. So market to generate demand has to be created.
The fiscal space was not much there to make drastic changes. Because of fragile environment, indian economy cant afford to have a high fiscal deficit as it might trigger outflow of funds and depreciate economy. Thus, there is a need of something like bad banks to boost private investments.
Land availability is a major constraint on developing infrastructure- PPP model or government projects, it needs to address the ever growing need of infrastructure.
Agricultural development not attracting private funding in large way. If there is lack of demand, it will be difficult to sustain or increase growth and employment. Most of the employment is in unorganised sector and thus any changes there will affect other extents of economic growth.
With regards to black money, not much hope should be hinged on the increase in tax collection in year 2017-18. The tax collection incentives, IDS etc. will show its effect only in 2018-19. Hence, no drastic increase in tax collection is bound to occur.
Black money is widely used in election and thus focus should be to eliminate it from such sphere. For this, there has been proposed introduction of electoral bonds which may serve to put a break on black money.
When one looks at an economy, budget shouldn’t be looked at in silos. Its entire ecosystem has to be looked at. There is a need of conducive environment where investment is convenient, people feel stable and secure. Many parts of budget attempt to be reform oriented- agriculture, education, wealth, hence it is going to take time.
The mature economy is the one where the budget announcement doesn’t impact much to the nature of economy. Demonetisation and GST have been big policy decisions that have taken place to impact the economy outside budget decisions. Such approach can be continued for broader change possibilities. The budget is expected to make the economy tread a new as well as cautious path for the year post demonetisation.
EPC is a model of contract between the government and private sector players for public infrastructure building .Under this system the entire project is funded by the government.
Under EPC model the contractor is legally responsible to complete the project under some fixed predetermined timeline and may also involve scope for penalty in case of time overrun.
In EPC as all the clearances, land acquisition and regulatory norms have to be completed by the government itself and the private players do not have to get itself involved in these time taking procedures.
In PPP funding and all other necessary clearances were responsibility of private players. With low financial availability, delay in project clearance and slow global economy private players were showing little interest in investment in PPP projects.
In PPP delays have caused huge number of stuck projects. The private contractors now want to exit these projects as there has been no progress for a long time this has caused the build up of non-performing assets (NPAs) of banks which are now under stress. In EPC as government is funding, no such issues arises there.
The shift to EPC model is definitely a better option since the risk will not be borne by the private player. The risk will be borne by the government, which is better at handling it.
Fixed capital formation to GDP ratio:
Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings.