Searching for reform signals (The Hindu)

Mains Paper 3: Economy
Prelims level: Union Budget 2019
Mains level: Key highlights and reforms

Context

• There were high expectations from the Budget to provide a clear road map for much-needed reforms, given that the government received an unprecedented electoral mandate.
• The GDP growth in the last quarter of 2018-19 was the slowest in the last five years, and considering that the capacity utilisation in manufacturing has already peaked, reviving the investment climate is critical to accelerate economic growth.
• The unemployment rate, which is 6.1%, is the highest in four decades.
• With the Economic Survey making a pitch for creating a virtuous cycle of saving and investment, there was hope that there would be far-reaching announcements in the Budget.

Balancing the books

• From that perspective, it is noteworthy that she has tried to show her commitment to the process of fiscal consolidation by keeping the fiscal deficit budgeted at 3.3%.
• The difference between the 3.4% budgeted in the interim Budget and this is mainly due to higher GDP estimates (₹93,168 crore) used in the denominator.
• The revenue is lower by ₹55,463 crore compared to the interim Budget estimate but this is offset by non-tax revenue estimated to be higher by ₹40,532 crore.
• Thus, there are not many significant departures from the estimates of revenue and expenditure presented in the interim Budget.
• The gross income tax revenue is estimated to be lower than the interim Budget by ₹90,000 crore, mainly on account of lower GST (₹97,857 crore) and individual income tax (₹51,000 crore).
• Despite taking lower estimates, the revenue estimates look far too optimistic in comparison with the pre-actuals given by the Controller General of Accounts.
• To realise the Budget estimates, the increase over the actual tax collected in 2018-19 in gross tax revenue will have to be 21.2%, net tax revenue must rise by 25.3%, and the non-tax revenue will have to increase by 27.2%.

Reforming labour laws

• The most important reform measure in the Budget is the proposal to streamline multiple labour laws into a set of four labour codes.
• Although the details are not yet available, it is hoped that the government will embark on the much-needed reforms in this area.
• This is a contentious issue that has been long debated.
• The Economic Survey too has referred to the need to make the factor markets less distorting and the disincentives these laws create in ensuring optimal sizes.
• Hopefully, the government will address this in the interest of increasing employment and exports of labour-intensive goods.

The reform front

• On the reform front, while much was expected, the Budget has been clearly disappointing.
• There are very few measures that can steer the economy to acceleration, leave alone changing gear to achieve the aspirational goal of achieving 8% growth to reach a $5 trillion economy by 2024.
• On the contrary, some of the measures take us back to the pre-reform era.
• Over the last three years, there has been a steady increase in import tariff in the name of ‘Make in India’, and with the U.S. coming hard on India by terminating India’s designation as a beneficiary developing nation under the key Generalised System of Preferences programme, it was hoped that there would be an attempt at lowering and reducing the expansion of the protectionist wall.
• The objective of ‘Make in India’ should be to make the economy competitive and not to dish out higher cost, inferior products to domestic consumers.
• By selective increases in customs duty and by varying the rates based on whether the item is an intermediate good, capital good and final consumer good, the Budget has caused the effective rate of protection on many items to be much higher than the nominal rates

Reform banking system

• One of the major initiatives needed at the present juncture is to reform the banking system.
• The Budget allocates ₹70,000 crore for the recapitalisation of public sector banks, but is silent on the urgently needed structural reforms including governance reforms.
• Nor are there any concrete measures to deal with the Non-Banking Financial Companies crisis apart from empowering the RBI to undertake the regulatory function.
• Not that everything has to be done in the Budget, but events have shown that there is a need to improve both the legal framework and governance system.
• Consolidation of public sector banks cannot serve the purpose of changing the structure of incentives and accountability.

Revive the investment climate

• The revival of the economy requires the revival of the investment climate.
• A recent OECD study has shown that corporate taxes in India are very high amounting to almost 48% when the dividend distribution tax and surcharges are taken account of.
• The Budget in 2015-16 promised to bring the basic rate down to 25%.
• This was implemented for companies with a ₹250 crore turnover in the 2018 Budget; the present Budget increases it to ₹400 crore.
• Although these companies cover 90% of the number of companies, their tax payment is less than 10-15%.
• If large investments have to be attracted, then the reduction should have been general and the scaffolding approach can only disincentivise the companies to grow bigger and better.
• This only discourages the companies from becoming larger.
• While the Economic Survey is eloquent about the need to transform the ‘dwarfs into giants’, the various measures taken in the Budget to incentivise the MSMEs amount to reiterating that ‘small is beautiful’.

Cooperative federalism

• The Finance Minister speaks about the rejuvenated Centre-State dynamic and commitment to cooperative federalism shown by the government during the last five years.
• At the same time, most of the measures taken to raise additional revenues are by way of cesses and surcharges.
• The increase in income tax for people with more than ₹2 crore and ₹5 crore is by way of additional surcharge.
• Similar is the case with additional tax on petrol and diesel. This is clearly to exclude the additional revenue raised from the divisible pool and deny the share of the tax to the States.
• Hopefully, the Finance Commission which is deliberating on the devolution will take note of the issue.
• On any case, such measures do not promote cooperative federalism.

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Prelims Questions:

Q.1) With reference to the European Union (EU), consider the following statements:
1. German Defence Minister Ursula von der Leyen has been nominated as the first woman to head the European Central Bank.
2. Chief of International Monetary Fund (IMF) Christine Lagarde has been nominated as the first woman to become the European Commission Chief.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None

Answer: D
Mains Questions:
Q.1) While the Budget shows commitment to fiscal consolidation, there are very few measures that can steer the economy to acceleration. Comment.