Vijay Kumar Gaba

 The finance minister seems to have reinvigorated the animal spirits of Indian entrepreneurs and financial market participants. The Union Budget for FY22, is perhaps the most celebrated budget after the “Dream Budget” presented by the then Finance Minister P. Chidambaram in 1996.

This is also perhaps the first time when markets have cheered higher fiscal deficit. This ought to be taken as a sign of rising assertive India, which is fully aware of its importance in global order and refuses to be bogged down by unreasoned views of global rating agencies.

The market also cheered the fact that after dithering for six years, this NDA finance minister has picked up the threads from Vajpayee led NDA.

The finance minister has spoken about “privatization” of a majority of CPSEs, instead of “disinvestment of minority stakes”, as was the case in NDA-1.

The massive thrust on infrastructure building to ward off the impact of economic sanctions imposed in the wake of 1998 nuclear tests and bursts of dotcom bubble etc. was the hallmark of Vajpayee government. His government gave up government monopolies on Coal, Ports, Airports, Mobile Telephony, Roads, Power, Oil & gas exploration etc.; and introduced schemes like SEZ to encourage domestic investments. The incumbent finance minister has also ignored the fiscal slippages due to pandemic induced lockdown and focused on investment in infrastructure building.

It is widely expected that this Budget could unleash third round of Economic Reforms (Reform 3.0), after 1991-1994 and 1999-2001. It is therefore pertinent to evaluate whether the incumbent government has learned lessons from the earlier rounds of reform and adequate precautions are being taken to ensure that collateral damage of reforms could be minimized. For example—

·         Opening of Indian economy to global competition in early 1990s, led to redundancy of numerous small and medium sized Indian producers. This led to a surge in bad loans in the financial system and eventually led to failure of gigantic institutions like UTI, ICICI, and IDBI etc. High interest rates, higher inflation and sharp depreciation in INR during 1991-1998 were also partly associated with the reforms.

·         Massive investment in infrastructure building during NDA-1 regime resulted in massive demand-supply match. The investment resulted in accelerated growth during 2003-2008 period, but led to bankruptcy of many infrastructure projects (power, roads, airports, telecom, Oil & Gas etc.) due to lack of demand and strained finances. Schemes like SEZ were implemented without adequate regulatory framework, and was eventually reduced to land grabbing exercise by unscrupulous entrepreneurs. A part of the present day stress in banking system could be attributed to the projects initiated in early 2000s.

·         Both rounds of reforms resulted in two very popular governments not getting re-elected.

We shall have to see that the government does not lose sight of the severe stress in unorganized sector and burgeoning household debt.

I also found the following points in budget that may need closer scrutiny of investors:

·         Most of the development programs announced and funds allocated are for a period of 5-6 years. This effectively means that the government is resorting to long term plans, as was the case in (now scrapped) Planning Commission era. The only difference is that NITI Aayog the body that replaced the Planning Commission, may not be holding wide and deep consultation with State Governments on various issues, even though the number of central schemes transferred to the States has increased materially.

·         It is now many years since FRBM targets have been violated. It may be time to scrap this law and work out a more practical legislative framework. It would be prudent to stringently control the Revenue Deficit rather than bother too much about fiscal deficit in this phase of growth. Borrowing for investment should not be considered a problem so long servicing is not an issue.

·         The government continues to place very high reliance on high rate Small Savings for financing the fiscal deficit; while the sourcing from very low cost external debt is minimal. The appropriateness of this strategy needs to be evaluated.

·         Allocation for Information Technology and Education in FY22BE is less than the FY21BE. Similarly, allocation for Health in FY22BE is less than FY21RE; and allocation for Scientific Departments in FY22BE is less than FY21BE.

This does not sound congruent with the core ideas of the budget.

·         Corporate Tax collection target for FY22BE is lower than the FY20 actual collections. This needs to be corroborated with projected 14.5% rise in nominal GDP.

·         It is proposed to pre fill IT returns with details of income from salary, interest, dividend and capital gains from listed securities.

The government must make sure that it remains a facility for the tax payers and does not become a source of harassment. For example consider this. IT department will take data of capital gain on listed stock from Stock Exchanges. This data will be based on gross trade prices. In case of frequent traders the charges (brokerage, STT, Stamp Duty etc.) may be more than the amount of gain itself. Obviously, tax payers will have to correct the pre filled amount in the returns. If department runs a variance check, a large number of returns may be pointed oout and this could potentially lead to harassment of tax payers.