Statistical Nudge Ahead Of Budget

Statistical Nudge Ahead Of Budget

FPJ BureauUpdated: Saturday, June 01, 2019, 04:03 AM IST
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Union Finance Minister Arun Jaitley’s first full-fledged budget for 2015-16 will be presented later this month. If his main challenge is to revive investor sentiment and boost growth, the Central Statistical Organisation (CSO) has apparently taken care of that vexing problem! With a new base year and methodology, the Indian economy now has the stride of an Asian tiger than like a sluggish elephant. Growth in the current financial year is pegged at 7.4 per cent – a pace not very different from the world’s fastest growing economy, notably, China. No doubt, this good fortune will be attributed to the market-friendly reforms of the Modi-led NDA Government.

Jaitley should resist this obvious temptation. The priority still is to craft a budget that rekindles the animal spirits of investors and triggers rapid economic expansion. The CSO’s latest data series should be used only after a wider public debate. Even the government’s chief statistician is confused by these numbers that suggest a growth in income, but not output! The RBI governor has also not commented on these new growth tidings and instead prefers to make his economic assessments with the old data series. The latter indicate that the Indian economy has hit lows of a 5 to 5.5 per cent rate of growth, thanks to the collapse of investments.

As yet, there are no green shoots of recovery in domestic and foreign investments – a point noted by the finance ministry’s mid-year review of the economy. There is no uptick in new industrial projects or those that were shelved earlier and have come on stream. Although the clearing of stalled projects has begun, there is still a backlog. Even if this is cleared, there is the problem of attracting private investments in infrastructure, noted the review. Investor sentiment will also revive if there is greater clarity and stability in tax laws and a fair mechanism for resolving disputes. It is these budgetary signals that are awaited by investors.

How then has growth accelerated from 5.1 per cent in 2012-13 to 7.4 per cent in 2014-15? The finance minister would do well to note that there is no durable rebound in investment activity even in the latest data series of the CSO. The rate of spending on factories and machinery adjusted for inflation was 33.6 per cent of GDP in 2011-12 and steadily declined to 29.8 per cent of GDP in 2014-15. Major investment goods manufacturers like Bharat Heavy Electricals Ltd and Larsen and Toubro report lower earnings, operating income and a lean order book. Here is a clear example of the mismatch between the latest GDP data and industrial output growth.

The forthcoming budget thus should focus on reversing such dismal investment trends. The finance minister, however, faces a far more difficult situation as he has limited fiscal head room. Despite the bullish CSO numbers, there has been no buoyancy in tax collections. The revenue projection in the interim budget was too optimistic. Around Rs 10.5 lakh crore or 0.84 per cent of likely GDP growth in 2014-15 is the revenue shortfall that now looms ahead. The major positives are that inflation has moderated. Non-Plan revenue expenditures on subsidies like diesel, LPG and fertilisers can also sharply reduce as global oil prices have crashed.

Equally daunting for the finance minister is the political opposition to economic reforms. In the budget session of Parliament, the NDA Government is expected to table bills that allow a limit of 49 per cent foreign direct investments in insurance and land acquisition, for which it had promulgated ordinances. If these bills are defeated in the Rajya Sabha, they will be passed in a joint session of Parliament, in which the NDA’s superior numbers will prevail. Investors, however, will roll out their plans only when these bills are passed, not otherwise. The ordinance route to reform has also run its course as the President may not sign any more on the dotted line.

The first full-fledged budget is also expected to signal a non-adversarial and conducive tax environment. There is a growing list of foreign companies slapped with transfer pricing violations. Transfer pricing relates to the determination of the correct market price at which multinational corporations and their subsidiaries transfer products, services or assets across borders. India has one of the highest number of pending transfer pricing disputes in the world. Investor sentiment took a serious beating when tax authorities were given powers to reopen tax cases going back to 1962, enacted by the previous UPA Government!

The NDA Government was trying to make amends when it formally announced that it would not appeal against the favourable decision Vodafone India Services Private Ltd (VISPL) secured from the Bombay High Court on a transfer pricing tax demand in October 2014. The revenue authorities have instructed their field officers not to pursue transfer pricing cases similar to VISPL’s. The government has also decided to accept all other orders of the courts, where similar rulings have been given in favour of the taxpayer.

Exorcising the spectre of retrospective taxation — that targeted companies like Vodafone on a different matter – is also another idea whose time has come. This has been described as the ‘defining moment’ when foreign investor sentiment turned hostile to India during the last years of the UPA Government. Although the NDA Government has repeatedly affirmed that it will not resort to such measures, it still remains on the books. All eyes will be on whether such provisions are reversed once and for all in the Finance Bill.

Ultimately, it is budgetary surpluses that can provide the kick-start to flagging growth. They can be generated only when the NDA Government generates adequate tax and non-tax revenues (through offloading blue-chip public sector scrips and auctions of spectrum and coal blocks) to meet routine housekeeping expenditures and reins in non-plan revenue spending. It is only then will resources be freed for public investments in infrastructure. Doing so through borrowings has run its course. Jaitley’s priority must be to revive the growth story through the budget.

(N Chandra Mohan is an economics and business commentator based in New Delhi)

N Chandra Mohan

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