Known Challenges, Clear Solutions

Swarajya decided to ask a few economists what they think should be the essential elements of a bold Budget 2016. We also asked them to list some off-Budget initiatives that they would like the Finance Minister to touch upon on February 29. Here are their responses. And, independent of one another, they agree on most things. This, clearly then, is the agenda for a vibrant Indian economy, and a vibrant India.

Overall, there appears to be a consensus on the challenges facing the Indian economy as well as the solutions. The key worry points: rural distress, sluggish industry, lack of employment, lagging investments and fiscal stress. Some recommendations were identical.

One, increase public investment in infrastructure sectors (especially roads and railways). Gaurav Kapur, senior economist, Royal Bank of Scotland, quotes an RBI study which estimates the long-run fiscal multiplier of capital outlays by general government on GDP at 2.4, which is significantly higher than the multiplier for revenue expenditure. It would be perfectly all right if fiscal policy was relaxed a bit to enable this.

Says Saugata Bhattacharya, senior vice-president, business and economic research, Axis Bank: “The government owns Rs 2.9 lakh crore of land assets and Rs 6.5 lakh crore of financial assets. These are at book value, and the actual valuation is likely to be multiple times.”

Two, improve agricultural productivity and profitability.

The first, through investments in rural infrastructure, crop insurance, encouraging use of improved technology. Money for all of this could come from reworking the minimum support price and subsidy regime. The second requires fast tracking the creation of the national agricultural market, including dismantling of the Agricultural Produce Marketing Committee (APMC) system. And the direct benefit transfer regime needs to be pushed for a more effective and efficient delivery of subsidies.

Three, get the goods and services tax (GST) law passed. Somehow.

Four, give more attention to education and healthcare.

Does this look like the usual laundry list? Perhaps. But as Shashank Bhide, director, Madras Institute of Development Studies, says: “The challenges for this year are not very different….Much groundwork has been done in framing the strategies for achieving the larger goals. Expectations this time from the Union Budget would be much more on strategies for sustaining the initiatives made and implementation, rather than new goals.”

The views expressed here by all the economists are personal.

D.K. Joshi
Chief Economist, CRISIL

Budget Priorities

• The economy needs support from an accommodative monetary policy, less restrictive fiscal policy and structural reforms. Budget 2016-17 need not target reducing the fiscal deficit to 3.5 per cent of GDP in the next fiscal, but instead go for around 3.9 per cent. This will allow additional spending of Rs 45,000-61,000 crore.

• Weak demand (domestic and external) is the foremost constraint facing the economy. Public spending in infrastructure will support demand and help in crowding in private investment as well. It will raise the productive potential of the economy and is not inflationary. There is also a need to scale up spending in sectors with high multiplier effect, such as roads and irrigation.

• Although state governments account for the bulk of spending on health and education, the central government needs to do its bit as well. The Centre today spends only 3-3.4 per cent of GDP on education and just over 1 per cent of GDP on medical and public health, water supply and sanitation.

• Committing additional resources for employment generation and creating assets for rainwater harvesting and storage on a war footing is necessary. This will go a long way in drought-proofing the economy and also provide support to fledging rural demand.

• Deteriorating air and water quality is a key concern. The government needs to put forward a comprehensive pollution control programme backed by adequate Budgetary support. This has become particularly important given the thrust of the government on promoting industrial activity under the “Make in India” programme.

OFF-BUDGET priorities

• The government should extend the direct benefit transfer (DBT) mechanism to food and fertilizer subsidies. CRISIL estimates that DBT could help the government save as much Rs 25,000 crore in food subsidy by eliminating costs associated with procuring, distributing and storing foodgrains. Moreover, DBT will help bring millions of poor households that currently do not have access to the public distribution system into the food subsidy net.

• Go full tilt to get the GST Bill passed. GST is a “big bang” reform and would be the most important indirect tax change in India. Passing the Bill will be a huge sentiment booster and will restore faith in the government’s ability to push through game-changing reforms.

• The bankruptcy code is an imperative to protect the rights of borrowers and lenders, and thus facilitate lending. Making it a law should figure high on the agenda of the government. Easy dispute resolution through this code will help in developing a market for lower-rated bonds.

• The next fiscal will be closely watched for implementation of the reforms measures announced, the most important being UDAY in the power sector and Indradhanush for revitalizing public sector banks. The government should ensure total success of these initiatives.

• Budget 2016 must signal a move to accrual-based accounting. It may not be possible to switch from the current cash-based accounting in one shot. The government, therefore, needs to announce a transition path for this. This will help in avoiding the timing mismatches and present a clearer picture of revenue and expenditure.

Shashanka Bhide, Director Madras Institute of Development Studies

The Union Budget for 2015-16 laid out a broader vision, aiming for freedom from many deficits of today by the seventy-fifth year of Independence. The major challenges that the budget identified were of immediate concern: distress in agricultural income, need to raise investments in infrastructure, need to shore up manufacturing, restructuring of allocation of resources between the centre and the states and, finally, the fiscal stress.

The challenges for this year are not very different. The problem is not so much of choosing goals but pf strategies and implementation. Perhaps much ground work has been done in framing the strategies for achieving the larger goals. Expectations this time from the Union Budget would be much more on strategies for sustaining the initiatives made and implementation, rather than new goals.

The arithmetic for the budget is hard. Interest payments and subsidies account for about 40 per cent of the total expenditures. As a percentage of revenue receipts, the share of these expenditures is over 60 per cent. The decline in petroleum prices may have reduced the share of subsidies, especially if the tax revenue has been protected from the effects of lower petroleum prices. The hard budget constraint is underscored by the fact that the expenditures in 2015-16 were budgeted to increase by a mere 5.7 per cent over the previous year or very little in real terms.

The expenditure priorities would, therefore, need to reflect sustained efforts to achieve the larger goals of employment creation and improvement in the quality of public services with the available fiscal head room.

The five priorities for expenditure:

• Infrastructure: The push for improvements in all the major infrastructure sectors would have to be retained. Railways, power and roads require resources. Although private investments have been seen as the key drivers for expansion of infrastructure, experience has shown that availability of public funds is critical to attract private investments. The pace of improvement and maintenance of services of railways and roads has to be accelerated. Creation of more and better jobs is linked to improvements in infrastructure especially as manufacturing and other production sectors now face global competition.
• Agriculture: While the farm sector is faced with many issues, focusing on some of them may be important in order to get significant results. Development of modern national markets is one such focus area. This initiative requires investments in logistics services. Would the budget provide funds for this? Railways have carried grains and milk over long distances, but would there be dedicated corridors of railways for farm produce transport for the national agricultural market? Farm distress is not only one of lower income but one of fluctuating revenues. While longer term relief requires sustained efforts to improve productivity, the measures to strengthen efforts towards stable revenues are of immediate requirement. Strengthening marketing links between the producer and the consumer would lead to benefits to both the producer and consumer. Nutrition is seen as a health issue but its translation into production strategies will require public policy initiatives. Support for marketing and productivity of fruits, vegetables, pulses and other protein rich foods is necessary.
• Trade: The goods and services tax (GST) will alter the way goods and services are produced and traded. There is a need to invest in modernising markets and trade practices across the board. IT applications are changing trade practices. Technology may help in building stronger links between the rural and urban markets.
• Social sectors: The improved quality and efficiency of services relating to education, health, drinking water supply and sanitation should receive priority in the allocation of resources. While large amounts of resources come from the budgets of the state governments, improvements in the quality of services should be the focus in the central budget.
• The urbanisation project: Preparedness for a growing urban sector will require more than one model for the cities. The new initiatives perhaps reflect a bunch of options to consider. How much more resources will the urban project get from the central budget?

Some off-budget priorities:

• How do we address the impact of climate change? Are we doing enough? Building awareness of these issues is important. Even as we protect our development space in global agreements, adaptation and mitigation strategies will have to be implemented from our own perspectives. Solar energy push is an important initiative.
• The development agenda: While subsidy reduction is an important goal, strengthening pathways out of poverty should receive resources and attention. There must be constant monitoring and review of what works and what is not working and search for new solutions. Skill development, creating better job conditions where poor find jobs should be given attention.
• Governance: There should be continued stress on greater quality in public services. Take steps to improve public safety. Follow up on the gains in ease of doing business with steps to improve ease of using public services. Demonstrating efficient and accountable mechanisms of service delivery by the public sector would go a long way in building credibility of such systems.
• Stress on development with commitment to sustainable use of natural resources. Cost of achieving development is increasing and this cost should include care and repair of environmental damage that may be incurred in development.
• Build on measures to reduce economic uncertainty and create institutions and mechanisms that can promote efforts to provide support at a greater scale. Steps at improving the reach of quality health services at affordable prices would have far reaching benefits. 

Gaurav Kapur Senior Economist, Royal Bank of Scotland N.V Budget priorities

• Public investment in key physical infrastructure sectors like roads and railways. This would not only help in raising long-term growth prospects and keep inflation in check, but would also help in attracting private investments. Non-defence capital outlays by the government can be the most effective source of growth. Greater capital spending by the government would also help revive private investment activity.

• Step up investments in the farm sector focused on increasing crop yields, enhancing productivity and efficient use of inputs like water and seeds. Per capita availability of foodgrains and pulses has seen a declining trend in recent years and with expansion of the National Food Security Act, the need for buffer stocks is going to increase. Moreover, food inflation still remains a key challenge.

• Increase spending on skill enhancement to improve employability and tap the demographic dividend. There is a requirement of 120 million skilled people in the non-farm sector between 2013 and 2022, according to National Skill Development Council studies. The current capacity of skilling is inadequate and needs to be scaled up.

• Renewable energy sources to reduce reliance on imports and to promote clean energy. The installed capacity of various renewable energy sources was 33.8 GW at the end of December 2014, with wind energy constituting more than 60 per cent of this capacity. The government plans on renewable energy include scaling up cumulative installed capacity to 170 GW that includes 100 GW of solar power by 2022. India’s renewable energy sector is driven primarily by the private sector. The government has been promoting private investment through an attractive mix of fiscal and financial incentives. This is clearly an area where the government can enhance its focus through direct Budgetary support and further facilitate greater private investments.

• Urban infrastructure development to meet the fast pace of urbanization. According to Census 2011, as many as 35 cities had a population of a million plus. The level of urbanization has increased from 27.78 per cent in 2001 to 31.18 per cent in 2011. According to the Economic Survey 2014-15, at current rates of growth, the urban population in India is projected to reach 575 million by 2030. There is an urgent need to step up investments in urban infrastructure in order to help cities cope with growing populations and emerging challenges.

Off Budget priorities

• Implement a well-designed GST regime and put in place a predictable and simple tax regime, with the objective of improving the overall business climate. Adopting the recommendations of the Tax Administration Reform Commission would help improve the business climate.

• Resolve delayed investment projects, both in public and private sector, in order to push investments and to help reduce non-performing and restructured loans of banks. A special focus needs to be given to the power sector, especially to facilitate participation of states in resolution and restructuring of the debt of discoms under the UDAY scheme.

• Overhaul the subsidy regime through rationalization of beneficiaries and direct transfer of benefits across all subsidies, including fertilizers and food.

• Reduce inefficiencies in the public distribution system for food procurement, distribution and storage, as well as lessen impediments to inter-state movement of agricultural produce. Fast track the creation of the national common market for agriculture.

• Simplify the regulatory regime around land acquisition and develop an active market for leasing land. Ritika Mankar Mukherjee Economist, Associate Vice-President, Ambit Capital Budget priorities

• Budget 2016-17 should deliver an explicit focus on curbing leakages by aiming to disburse food, fertilizers and kerosene subsidies through the direct benefit transfer framework.

• The mid-year economic review had made the point that the government needs to step up spending on the infrastructure sector, as the private sector is too indebted to pursue infrastructure capital expenditure. In the light of this, the government needs to rationalize revenue spends so as to avoid deviating from the fiscal deficit target of 3.5 per cent of GDP.

• The government should hike indirect tax rates as well as synchronize exemption limits in a bid to prepare for the eventual implementation of GST.

• The government should continue to rationalize the plethora of centrally sponsored schemes in order to better target the beneficiaries of welfare services and remove inefficiencies in their delivery.

• The combination of the Seventh Pay Commission Award and One-Rank-One-Pension-related commitments is likely to result in an outgo of Rs. 1,30,000 crore. The central government must rationalize the quantum of spending required for these two headers in light of the tight fiscal position and given that capex-related spending needs to be a greater priority.

Off Budget priorities

• The government should provide a concrete blueprint for the recapitalization of public sector banks. Almost all the banks are capital-constrained and cannot grow their loan books by more than 10 per cent, thereby affecting economic growth.

• At present, a significant number of public-private partnership projects have been stalled by legal disputes over financial issues. Following the recommendations of the Vijay Kelkar committee report, this area should receive government attention.

• The Budget should focus on employment generation, given that the combination of two consecutive droughts and slower construction sector activity has exacerbated the rural jobs problem.

Devendra Kumar Pant, Chief Economist, India Ratings

Expenditure, particularly revenue expenditure, is a relatively rigid component of government finances. While India’s expenditure to GDP ratio is comparable to that of its peers, its revenue to GDP ratio is much lower. This results in lower ability on the part of the government to adjust public finances to adverse situations. Therefore, even though there is scope to ramp up both tax and non-tax revenue, the focus has been on expenditure to balance the government finances.

In order to achieve maximum output from government expenditure, the forthcoming budget needs to focus on these: 

• To control and target the subsidies more effectively, the scope of direct benefit transfer should be increased. A recent World Bank study shows that implementation of DBT can lead to significant gains.
• Focus should be on increasing capital expenditure to pump prime investment, as public investment crowds in private investment in most sectors. However, capital expenditure has not crossed 2 per cent of GDP after 2007-08. Despite government stepping up capital expenditure, in the current financial year, it has remained at 1.75 of GDP.
• There should be particular focus on rural infrastructure – irrigation, roads, agriculture supply chain. This will not only reduce rural distress, but also provide gainful employment in rural areas.
• Cutting wasteful expenditure should be a priority. The government should take advantage of low crude prices and deregulate kerosene and LPG – the amount saved can be used on capital expenditure
• Rationalise corporate sector exemptions. A low corporate tax rate and high exemptions cannot co-exist.

Steps outside Budget

• Focus on evolving consensus on implementation of the goods and services tax; it would provide a growth push to the economy.
• Continue undertaking those reforms which do not need legislative approvals.
• Most state governments are on board for the UDAY scheme. While UDAY will provide boost to the generation and transmission sector, the distribution sector cannot run on crutches of bailouts. There is need to focus on improving efficiency; otherwise neither the bail-outs nor tariff increase will work.
• There should be  movement on the development of a national agricultural commodity market and dismantling remaining obstacles to movement of agricultural goods, including the Agricultural Produce Marketing Committee regime.
• There should be an attempt to clearly define the role of the Niti Aayog and leverage its expertise to help states emerge stronger in the federal set up.

Saugata Bhattacharya Senior Vice-President, Business and Economic Research, Axis Bank Budget priorities

• Rationalize government expenditures to open up further space for capex spends, redeploy savings for productivity increases, and promote skill development. Map functions with similar objectives in multiple ministries and departments, so that duplication of Budgets and roles can be minimized. Recommendations of the Expenditure Management Commission need to be actioned.

• Continue on the path of fiscal consolidation. India is now one of the most attractive destinations for global investors, and fiscal prudence has been proved to be one of the best enablers of sustained growth. Sovereign ratings or outlook changes will look at the quality of spends with the objective of sustainably increasing growth.

• Capex spends must increase. Private sector corporate balance sheets have been deeply impaired, particularly those of large corporates with large exposures to infrastructure projects. Besides increasing capex spends directly on projects, and increasing equity funds of public financial institutions, innovative structuring of vehicles like the National Infrastructure Investment Fund (NIIF) and MUDRA-SIDBI for small and medium enterprises is necessary.

• Resolve the apparent contradiction between the above recommendations by monetizing substantial owned assets. The government owns Rs 2.9 lakh crore of land assets and Rs 6.5 lakh crore of financial assets. These are at book value, and the actual valuation is likely to be multiple times. Leveraging and disinvestment can raise significant funds.

• Fund the crop insurance scheme. The 2015-16 Budget for fertilizers was Rs 73,000 crore, and for food, Rs 1.24 lakh crore. By restructuring the minimum support price component of food subsidy, and from the fertilizer component, the government can save the amount required for crop insurance for farmers. Off Budget priorities

• Tardy resolution processes have hampered both new asset creation, due to investor worries about exit, as well as extracting the best value of assets which have ceased to be going concerns. Enact the bankruptcy law on the lines of the framework suggested by the Bankruptcy Reforms Commission.

• Land is the most used and most potent backstops and collateral for credit and lending, and is critical for increasing credit flows to micro and small enterprises. GIS mapping technologies, computing power and cheap data storage can facilitate this. Concentrate on dense urban areas and radiate to peripheral areas, to start with.

• Rationalize pricing frameworks for optimal allocation of resources. Gas and energy, minerals, spectrum, are areas where this is needed. Adverse distributional impacts can be compensated through targeted subsidies, delivered directly to affected entities. This is likely to minimize first-order distortions in impeding investments.

• Establish a national agriculture market. This is not just critical for mitigating increasing rural distress, but also for generating opportunities for employment, migration, managed urbanization. Facilitate online mandis where farmers can sell across states, even if taxes are still paid to APMCs. The Small Farmers Agribusiness Consortium can coordinate setting up of the portal.

Abheek Barua Chief Economist, HDFC Bank Budget priorities

• The government must ensure adequate support to road and railway investment initiatives. These two remain the main drivers of the economy.

• It is important to extend funding to some successful rural initiatives like those relating to irrigation and the Pradhan Mantri Gram Sadak Yojana.

• While implementing the Seventh Pay Commission recommendations, the government should stagger pay hikes for central government employees in order to ensure that some degree of fiscal consolidation is achieved and that the states do not have to follow immediately.

• The government must allocate funds for recapitalization of banks under stringent conditions. It is unlikely that banks can raise capital from the market, given the current conditions.

• While fiscal consolidation is important, the government should not fixate on meeting the fiscal deficit target at any cost; it must leave some headroom for capital expenditure.

Off Budget priorities

• A bankruptcy code is critical to clean financial sector balance sheets. The government must move fast on this.

• The government must work seriously on strengthening asset reconstruction companies, so that an effective “bad bank” can be created.

• It is necessary to keep minimum support prices in check in order to prevent inflation concerns. Support for agriculture can be provided through investments instead.

• The government should increase the scope of direct benefit transfers (DBT) substantially.

• The government must work on a strategy for quick divestments of its stake in public sector undertakings whenever market conditions are even temporarily supportive.

D. K. Joshi

Chief economist, Crisil

Expenditure priorities

• The economy needs support from an accommodative monetary policy, less restrictive fiscal policy and structural reforms. The Budget need not target reducing the fiscal deficit to 3.5 per cent of GDP in the next fiscal, but instead go for ~3.9 per cent . This will afford additional spending of Rs 45,000-61,000 crore. Over the past few years, the government’s capital spending as a percentage of GDP has been falling. The budget estimate for the current fiscal raised it to 1.71 per cent of GDP, which still fell short of what was seen in 2011-12.
• Scale up public spend in infrastructure. Weak demand (domestic and external) is the foremost constraint facing the economy. Public spending in infrastructure will support demand and help in crowding in private investment as well. It will raise the productive potential of the economy and is not inflationary. There is also a need to scale up spending in sectors with high multiplier effect, such as roads and irrigation.
• Social sector spending. Although state governments account for the bulk of spending on health and education, central government needs to do its bit as well.The centre today spends only 3-3.4 per cent of GDP on education and just over 1 per cent of GDP on medical and public health, water supply and sanitation.
• Push to rural economy through productive employment generation: Committing additional resources for employment generation and creating assets for rainwater harvesting and storage on a war footing is necessary. This will go a long way in drought-proofing the economy and also provide support to fledging rural demand.
• Increase resources for prevention and control of pollution: Deteriorating air and water quality is a key concern. The government needs to put forward a comprehensive pollution control programme backed by adequate budgetary support. This has become particularly important given the thrust of the government on promoting industrial activity under its flagship ‘Make in India’ programme.

Off budget initiatives

• The government should extend the direct benefit transfer (DBT)mechanism to food and fertilser subsidies. CRISIL estimates that DBT could help the government save as much Rs 250 billion in food subsidy by eliminating costs associated with procuring, distributing and storing foodgrains. Moreover, DBT will help bring millions of poor households that currently do not have access to public distribution system into the food subsidy net. At fiscal 2016 prices, cash transfers under the DBT will amount to almost Rs 5,800 per year for a family of five, which will implicitly raise their disposable income. At first glance, Rs 5,800 may seem small, but it is more than the reported total annual expenditure of the poorest 5 per cent of rural households.
• Go full tilt to get the GST Bill passed. GST is a ‘big bang’ reform and would be the most important indirect tax change in India. Passing the Bill will be a huge sentiment booster and will restore faith in the government’s ability to push through game-changing reforms. GST will reduce the cost of doing business, attract investments and induce growth.
• The bankruptcy code is an imperative to protect the rights of borrowers and lenders, and thus facilitate lending. Making it a law should figure high on the agenda of the government.  Easy dispute resolution through this code will help in developing a market for lower-rated bonds
• The next fiscal will be closely watched for implementation of the reforms measures announced. Of these, UDAY in the power sector and Indradhanush for revitalising public sector banks are the most important ones. The government should ensure total success of these initiatives.

Budget 2016 must signal a move to accrual-based accounting.It may not be possible to switch to accrual-based accounting from the current cash-based one in one shot. The government, therefore, needs to announce of transition path for this. This will help in avoiding the timing mismatches and present a clearer picture of revenue and expenditure.

Gaurav Kapur

Senior Economist, Royal Bank of Scotland N.V.

Top five expenditure priorities 

• Public investment in key physical infrastructure sectors like roads and railways. This would not only help in raising long-term growth prospects and keep inflation in check but would also help in attracting private investments. Non-defence capital outlays by the government can be the most effective source of growth. A Reserve Bank of India study shows the long run fiscal multiplier of capital outlays by general government on GDP at 2.4, which is significantly higher than the multiplier for the revenue expenditure. Greater capital spending by the government would also help revive private investment activity. 
• Step up investments in the farm sector focused at increasing crop yields, enhancing productivity and efficient use of inputs like water and seeds. Per capita availability of foodgrains and pulses has seen a declining trend in recent years and with the expansion of the National Food Security Act, the need for buffer stocks is going to increase. Moreover food inflation still remains a key challenge for the policy makers.
• Increase spending on skill enhancement to improve employability and tap the demographic dividend. There is a requirement of 120 million skilled people in the non-farm sector between 2013 and 2022,  according to National Skill Development Council studies. The current capacity of skilling is inadequate and needs to be scaled up.
• Renewable energy sources to reduce reliance on imports and to promote clean energy. The installed capacity of various renewable energy sources was 33.8 GW at the end of December 2014, with wind energy constituting more than 60 per cent of this capacity. The government plans on renewable energy involve scaling up cumulative installed capacity to 170 GW that includes 100 GW of solar power by 2022. India’s renewable energy sector is driven primarily by the private sector. The government has been promoting private investment through an attractive mix of fiscal and financial incentives. This is clearly an area where the government can enhance its focus through direct budgetary support and further facilitate greater private investments.
• Urban infrastructure development to meet the fast pace of urbanization. According to Census 2011, as many as 35 cities had a population of a million plus. The level of urbanization has increased from 27.78 per cent in 2001 to 31.18 per cent in 2011. As per the Economic Survey 2015, at current rates of growth, urban population in India is projected to reach 575 million by 2030. There is an urgent need to step up investments in urban infrastructure in order to help Indian cities cope with growing populations and emerging challenges as witnessed recently from high levels of air pollution to natural calamities like floods.

Off budget initiatives and measures to support the economy

• Implement a well-designed GST regime and put in place a predictable and simple tax regime, with the objective of improving the overall business climate. Adopting the recommendations of the Tax Administration Reform Commission would help improve the business climate.
• Resolve delayed investment projects, both in public and private sector, in order to push investments and to help reduce non-performing and restructured loans of banks. A special focus needs to be given to the power sector, especially to facilitate participation of states’ in resolution and restructuring of the debt of discoms under the UDAY scheme.
• Overhaul the subsidy regime through rationalization of beneficiaries and direct transfer of benefits across all subsidies, including fertilizers and food.
• Reduce inefficiencies in the public distribution system for food procurement, distribution and storage, as well as lessen impediments to inter-state movement of agricultural produce. Fast track the creation of the national common market for agriculture in order reduce fragmentation of the market for agricultural commodities and to make farming remunerative.
• Simplify the regulatory regime around land acquisition and develop an active market for leasing land.