Vijay Kumar Gaba: finance minister

Showing posts with label finance minister. Show all posts

Tuesday, July 12, 2022

Challenge of being an Indian FM

Being the finance minister of India is arguably one of the most challenging jobs in the world. The incumbent has to deal with 28 Federal States and 8 Union territories, each having a distinct socio-economic and fiscal profile. Unlike some developed countries like the USA, the Federal States in India are not autonomous and/or self-reliant in fiscal matters. These states rely on the Union Government for financial resources. Besides, the finance minister of India is limited by the constitutional mandate of being “socialist”. To make things more complicated, implementation of GST; acceptance of the recommendations of 15^th Finance Commission; and abolition of the planning commission have materially curtailed the powers of the union finance minister.

Technically speaking, all the policies formulated and proposed to be implemented by the union finance ministry must pass the test of “socialism”, since the Constitution of India overrides all the legal provisions and policy directives. This makes it very hard for the finance minister to pursue the goal of faster growth through promoting capital investments in the private sector that are likely to eventually result in more socio-economic inequalities.

Even when the finance minister tries to extend fiscal and other support to large businesses to stimulate economic growth, these efforts are invariably met with strong opposition from the politicians belonging to the ruling party & opposition; civil society and common people.

To mitigate the political damage that may be caused by such criticism, the finance ministers have often supported the larger public sector; contrary to the stated policy of minimizing the role of the government in business. Also, the finance ministers in India have often taken the path of ‘crony socialism”.

They often pursue fiscal policies targeted to benefit a specific set of voters and/or specific regions; inviting criticism from the businesses and capital market participants. The finance minister is often criticized for inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in financial institutions etc.

The socio-economic condition (especially the fast waning demographic dividend) of the country warrants that the governments vigorously pursue the course of faster and sustainable growth over the next couple of decades. However, the pursuit of this goal would inevitably result in widening and deepening inequalities of income and wealth.

The experience of western developed economies indicates that faster growth ultimately results in 10:90 division of the society – 10% people owning most of the wealth and accounting for most of the savings; while the rest 90% just survive. Of course, the standard of life for the underprivileged 90% in developed countries is much better than the corresponding 90% population in India.

The issue that requires deeper research is whether our government has also accepted the 10:90 rule? If yes, then the job of finance minister of India would soon become the most “undesirable” one; because for couple of decades the onus of supporting the sustanance of 90% population will largely fall upon the union finance minister; till the 10% who are afforded all fiscal and other policy support are in position to take the mantle on themselves, i.e., engage more workers and pay more taxes.

Friday, January 28, 2022

I expect the Moon

Expectation is a strange animal. More you beat it, the stronger it rises. Consistent underachievement is perhaps the only way to kill it.

This is that time of the year when everyone gets an opportunity to express their wishes to the finance minister. Even though there is no empirical evidence to suggest that the finance minister would oblige even a significant minority of aspirants – not because she does not want to; but simply because she cannot.

Contours of the annual union budget

It is important to note that the finance minister of India is like the CFO of a business corporation. Her job is to keep account of the receipts and expenditure of the government; manage resources necessary for executing the plans approved by the Cabinet; ensure optimum utilization of available resources; and keep adequate provision for meeting the contingencies.

She is accountable to all the stakeholders, insofar as the transparency of accounts is concerned. Her discretion is however limited to choosing the sources of revenue needed for executing the plans of the government. She needs to plan how much resources to raise from (a) taxation; (b) sale of public assets; and (c) borrowing.

Taxation

In taxation, a balance has to be maintained between direct and indirect taxes to keep the incidence of tax just and equitable. However, since a major part of indirect taxes are now either in the domain of GST Council (GST), state legislatures (Excise Duty and Cess), or international agreements (Custom Duties), the union finance minister has very limited role to play in this. This restricts her discretion largely to the direct taxes only. Moreover, since most of the direct taxes have already been rationalized, she would have very limited scope to reduce direct taxes. If anything, she can impose some new taxes or additional cess. The best outcome for taxpayers therefore would be that the finance minister maintains the status quo on taxes.

Sale of public assets

In view of various Supreme Court decisions, legislations, rules and regulations implemented in past couple of decades, the Sale of public assets (mines, airwaves, PSE shares, land etc.) has to meet the criteria of sustainability, development, transparency, viability, socio-political expediency; etc. and depends heavily on the current market conditions.

In the past there has been absolutely no correlation between the asset sale targets announced in the budget and actual realization. Last year the finance minister budgeted aggressive Rs17.75trn from sale of assets. As of today, we have not achieved even half of it.

Borrowing

Borrowing depends on consideration of fiscal discipline, servicing capacity, and market conditions. Historically, we have borrowed from domestic lenders only. However, in recent years the role of foreign lenders has been rising; the exchange rate volatility has therefore become a consideration. The FRBM Act also guides the extent of borrowing.

Budget presentation – mostly a marketing event

The importance, or otherwise, of the annual budget presentation must be seen within this framework. Although the attention that is paid to the annual budget speech has diminished in past decade or so, it still evokes intense interest from the financial market participants. I feel it has more to do with the marketing success of business news channels rather than anything else.

…that raises anticipation and hope

In the run up to the budget presentation, a number of TV shows are hosted to propagate an environment of expectation, hope and fear amongst market participants. The anticipation, that is sometimes far beyond the realm of reality, guides the market volatility.

The representatives of various interest groups and lobbyists for pressure groups expect demand from FM, which she may have no jurisdiction to give. For example, someone asks FM to allocate more money for infrastructure spending. Whereas, this request should logically be made to the concerned ministry and departments, which in turn shall make a plan, and get approved by the cabinet. FM will be obliged to provide resources for a plan approved by the cabinet.

No one wants to yield

Everyone expects a moon from the finance minister, but no one wants to yield anything.

Like every year, the stakeholders are seeking massive investment in infrastructure; fiscal support for MSME; boost to private consumption by leaving more cash in people’s hand (lower taxes); higher spending on healthcare, agriculture, and education; aggressive disinvestment; lower fiscal deficit; stimulus of housing sector; etc. No one is proposing new or higher taxes.

…FM will continue with her trapeze act

The finance ministers have always struggled to maintain a balance between higher social sector spending and fiscal consolidation. That struggle will continue this year also. Regardless of what the finance minister reads in her speech, the allocations to various social sector schemes will see moderate changes only with many schemes getting lower allocations.

The emphasis could be on motivating private sector investment with little fiscal support.

I believe conditions are too fragile to introduce any new taxes like Estate Duty or any material hike in existing tax rates.

Tuesday, October 6, 2020

The best place to watch this Opera

As per media reports, the finance ministry officials shall start exercise for preparation of Union Budget for FY22 from 16 October 2020. The exercise usually starts with the finance ministry official and the finance minister meeting with various stakeholders, especially the business representatives; representatives of professional bodies like ICAI; officials from other administrative ministries; officials from state finance ministries; and policy making and statistical bodies etc. The suggestions made in these meetings are then considered in the preparation of final draft the budget documents.

Budget making is normally a very complex exercise that requires special skills to strike an optimum balance between the expectations of various stakeholders. These expectations are invariable at odds with each other. Therefore pleasing most of the stakeholders is almost an impossible task. In past many finance ministers have used some Big Bang announcement to overwhelm the stakeholders so that they are motivated to ignore their parochial interests for a promising bigger picture. The instant reaction of financial markets to all such big bang announcements is usually “ebullient celebration”. The euphoria however subsides in few weeks and markets usually return to their normal trajectory.

The budget making exercise for FY21 would be particularly complex for a myriad of reasons.

Firstly, the government has already announced multiple fiscal and monetary packages during the course of FY2 in the wake of the socio-economic lockdown announced as preventive measure for COVID-19 pandemic. There may not be much scope for giving any further relaxations in the budget; even though the stress in most sectors of the economy is still elevated and almost everyone is looking for a further, stronger dose of stimulus.

Secondly, the shortfall in revenue collection during FY21 is unlikely to be completely made up in FY22. The fiscal balance of the government thus remains precarious. The 2HFY21 borrowing schedule announced by the government is a clear indication that the government (i) does not want any significant deterioration in the head line fiscal deficit number; (ii) may encourage PSUs, Railway and States to raise resources on their own account; (iii) may accelerate the effort to disinvest its stake in PSUs like LIC, BPCL, etc.

This essentially means that both debt and equity markets will remain adequately supplied for most of next 12-15 months. The profile of the sovereign and quasi sovereign debt available in the market will deteriorate significantly with PSU corporate debt and state debt dominating the fresh supply. There could be a paradoxical situation where the benchmark yields are sustained at lower level by the maneuvering by RBI, while the spreads of center-state debt and 10yr-PSU bonds spread rise materially. The situation may worsen further if the business activity picks up sharply, leading to compression of credit-deposit gap, thus leaving banks with lesser resources to absorb the excess supply of sovereign and quasi sovereign paper.

Failure to implement agenda for disinvestment of strategic assets like BPCL, Air India etc, may force the government to dilute holdings in profitable PSUs like Coal India, NTPC, BEL and LIC. This will keep the equity markets well supplied throughout the year, capping any material upside due to liquidity.

Thirdly, the government would be constrained to raise fresh revenue through taxes and additional cess; especially when the dividend from PSUs is likely to dwindle further and elections to key states of UP and West Bengal would require continuous additional social sector spending. This will be the trickiest situation. Obviously, rich would be burdened with additional taxes and stocks markets usually do not like the rich people to be bothered much; and the government would like stock markets to be happy so that it can sell whatever it wants to. It would be interesting to watch how the finance minister manages to get out of this loop. The best place to watch this opera would be from the top gallery which is farthest from the arena.

Tuesday, November 19, 2019

Economic revival needs a coordinated effort att levels

Notes from my Diary

The first and often most crucial stage of finding solution to a problem is usually the "acceptance" that there is a problem. Till very recently the government and its various organs appeared mostly in denial steadfastly refusing to accept that—

(a) the country is facing a economic slowdown;

(b) the slowdown is structural in part and may not correct on its own without intensive policy intervention;

(c) the slowdown is wide enough to impact the most sectors of the economy and deep enough to impact almost sections of the society;

(d) the slowdown is caused by both domestic and global factors and may need comprehensive coordinated efforts at fiscal, monetary, trade, geo political and strategic policy levels; and

(e) the fastest rate growth is not fast enough for an economy having the largest number of unemployed, under employed, and employed in disguise youth in the world.

It should be a matter of some comfort that the realization has begun to dawn upon the government that the economy is slithering down. The finance minister recently admitted that “It would be too presumptive of me to say it (the economic slowdown) has bottomed out.”

As reported by news agencies, "Sitharaman said it’s a bit too soon to say whether Asia’s third-largest economy would be able to stick to its fiscal deficit targets. However, the government’s asset sales program -- key to plugging a gaping hole in the budget -- is moving ahead comfortably, she said.

The RBI governor has also made similar statements in past couple of weeks.

However, there are still many organs of the government which are refusing to accept the problem. For example consider the following:

Recently a union minister dismissed a suggestion of slowdown citing the crowd of people at railway stations and shopping malls.
The bureaucracy has not been adequately sensitized about the urgent need for economic revival. They have rendered many of the measures taken by the government to arrest the economic slowdown less effective. For example, the riders and exclusions added in the proposals to restructure the corporate tax rates and launch a rescue fund for the beleaguered real estate sector have rendered these measures much less effective.
There seems to be no direction to the enforcement agencies to not initiate coercive action against businesses merely on the basis of suspicion of wrong doing; and to the judicial officers of the government for not protracting the litigations unnecessarily.
We have not heard chief ministers of most populated states like UP, MP, Bihar, and West Bengal etc. admitting the economic distress in their respective states.
The public sector bankers and officers have not been assured of full immunity for any action taken, loan sanctioned, investment made in good faith and within the set parameters.

Unless, all the organs of the central government and various state governments arrive at a consensus and initiate a coordinated policy response, it may be difficult to find a sustainable solution to the current episode of economic slowdown.

Interestingly, many brokerages have already seen the light at the end of the tunnel. The next six months are going to be interesting for sure.