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The Indian government’s policy of recovery by a thousand cuts can work

Govind Sankarnarayan / HINDUSTAN TIMES No Comments Share:

Nirmala Sitharaman’s budget speech, which broke records for its length, is likely to have left some disappointed. She faced the challenge, common among Indians during the wedding season, of having presented the bride with an expensive gift in advance of the wedding and then finding herself somewhat empty-handed on the big day. Readers will recall that there were already big bang announcements with regard to corporate tax cuts, credit facilities for non-banking financial companies (NBFCs) and the merger of banks, which are in progress. After these announcements, her budget speech was always likely to fall short of expectations.

Despite this challenge, the finance minister has stayed consistent with her party’s philosophy that it is the institutional economic framework of the country that needs to change. Consequently, a lot of air time was spent communicating budgetary philosophy (often through the medium of Tamil poets and, remarkably, even Harappan inscriptions) rather than stating actual allocation numbers. I indicated in a newspaper article on Jan20 that budgets were communication tools and hence communication (even if through poetry) was actually quite desirable. I had called for greater articulation on the simplification of taxes, explicit recognition of the contribution of honest businessmen and clarity on macro-economic data. I was gratified to see these issues addressed in the speech.

Given the absence of big bang reforms, what exactly is the government planning to do to improve the economic plumbing? In the backdrop of the challenges the economy faces, the budget seeks to rekindle the economy through a range of activities around agriculture, health and education. There are large sums allocated to improvements in food warehousing, financing of agricultural warehouse receipts, enhanced limits for agri-credit as well as several interesting initiatives in health and education. Building roads have always been pet projects of Bharatiya Janata Party governments and there were clear five-year targets set for them, while also promising 100 new airports. On a more personal note, my home town Bengaluru’s now legendary traffic gridlock may be alleviated by a Rs 18,000 crore (about $2.5 million) suburban rail project. Most of these actions should drive job creation.

In tune with the belief that small initiatives can have larger beneficial consequences, small NBFCs will now get the legal benefits under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. This will enable precisely the kinds of organisations that lend more to small enterprises and help in job creation to lend more with the comfort of greater recoveries. On a similar note, encouragement of TrEDS ( the platform that enables invoice discounting) is another excellent but under-marketed scheme that still hasn’t achieved traction. Public sector vendors will now use TrEDS, making them easier to finance.

In this manner, the government seems to be looking at “recovery by a thousand cuts”. This can indeed work if the government can execute well on even a few of these initiatives.

One is also happy that the government is clearly in a mood to bust its fiscal deficit. It would be surprising if the fiscal deficit for 2020 was only 3.8  percent and the actual number for 2021 is likely to be higher than the promised 3.5 percent However, finance ministers who are confident of achieving deficit numbers do not say, as Sitharaman did, that they would need a “margin” of 0.5 percent. Clearly, the government is prepared to cross into 4 percent territory. But, it doesn’t want to admit this openly. This is fair game and is the only way to climb back to growth. In connection with deficits, there was a somewhat dramatic announcement about the potential divestment of a part of Life Insurance Corp (LIC). This is likely to meet with resistance. There are many other organisations the government could choose to sell before it divests LIC. I expect this particular proposal will not materialise and, to that extent, the fiscal slippage will widen.

A few other initiatives stand out. First, there is a reduction in direct taxes for the middle class, which will certainly drive a little more consumption. There is also the reduction of the vexatious dividend distribution tax, which should make it simpler for overseas investors to invest in India.

If one had been limited to only one wish for the budget, it would have been a mechanism to bring in large amounts of long-term capital into the Indian bond markets, to enable the funding of the tens of lakhs of crores we need to boost infrastructure and to achieve the green transition. In this area, there is an interesting waiver of tax on sovereign wealth funds that should catalyse investment in the approved sectors.

For the second budget in a row, the government is giving more attention to its climate change commitments. The allocations for smart metering and the funding to allow farmers to generate retail  solar power are all in the right direction. The finance minister also indicated that there could be regulation requiring highly emissive thermal plants to close. If followed through, this is a remarkable step for the government of a growing economy. Those who are critical of the current government often fail to give it adequate credit for being among the most enlightened in terms of its responses to climate change.

Following Sitharaman’s speech, we now know that the government is not looking for dramatic changes in policy such as steep reductions in customs duties or the abolition of capital gains tax. Instead the message we must absorb is that the economy, in the main, needs to strengthen itself in the normal course and the government will try to help by active social sector spending and easing bottlenecks along the way. This approach also reflects the reality that the government has four more years to go and, therefore, does not believe it needs to use stronger ammunition.

Fortunately, big bang budgets have not always resulted in sustained economic growth (with the exception of 1991) and one hopes that the government’s generally sound track record in execution will help it achieve its policy of “recovery by a thousand cuts”.


Govind Sankaranarayanan is a former chief operating officer and chief financial officer at Tata Capital and is currently vice-chairman at ESG Fund ECube Investment Advisors. HINDUSTAN TIMES

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