In February 1, Anil Bhardwaj hopes Finance Minister Arun Jaitley will read out what he badly wants to hear.
And he is more hopeful than he has ever been. As secretary-general of FISME (Federation of Indian Micro and Small & Medium Enterprises), he represents 743 countrywide associations with two million members and over 10 million employees.
Small and unorganised, FISME members are often unheard and invisible on India’s economic radar. Yet, part of the informal sector — which contributes over half of India’s economic output and employs 90% of India’s 470 million workforce — it is critical for the economy.
Right now they are hurting. “Demonetisation has given us the biggest jhatka,” says Bhardwaj. For example, in Uttar Pradesh’s Yamuna Nagar, the hub of India’s plywood industry, factories are shut.
“Now, they have only two options: shut down or shift to the formal economy (where cashless transactions can be resorted to),” says Bhardwaj.
But that shift comes at a price, as thin margins and higher compliance costs render it unaffordable. The factories of Yamuna Nagar need help in offsetting, at least partly, the cost of formalising their workforce.
In Budget 2016, the government decided to chip in 8.33% of the employers’ 12% contribution in the first year for all new employees earning less than Rs 15,000 a month. “We had to get it reimbursed, which was a challenge.
We wanted the government to transfer it directly to the EPF account. They have now agreed to it,” says Bhardwaj.
FISME also wants Rashtriya Swasthya Bima Yojana, which offers a modest health insurance cover to BPL workers and their families, to be extended to all workers. “The government has responded favourably,” says Bhardwaj.
From a renewed thrust on Mudra loans targeted at very small entrepreneurs to invoice financing (called factoring in global parlance) to help MSMEs meet their working capital needs, the sector is looking to government with a lot of hope.
Chances are high that the government is listening. Prime Minister Narendra Modi’s year-end speech — announcing schemes for farmers, traders, among others — offered some clues. The thrust is expected to be on job creation, universal basic income for poor, and low-cost housing, among other areas.
If so, it’s a big shift from the recent past. “The last three budgets were more growthoriented and focused on longterm projects,” says Richard Rekhy, CEO, KPMG India. Programmes like Start Up India, Stand Up India, Swachh Bharat, Digital India, Make in India along with the Sagar Mala project (to modernise ports) got a lot of attention in the previous budgets, signalling a focus on infrastructure and investment-led growth.
That should remain. But in a relative sense — as much in substance as in optics — this budget could see the Modi government announcing some populist policies that might spread some warmth and cheer this winter.
Tilt towards Bharat
India’s next general election is at least two years away. But the build-up seems to have begun. “This is the last big budget before the 2019 elections. The government will focus on policies that will play out by 2019,” says Naushad Forbes, president of industry association CII.
“Earlier, their focus was on investment. Now they will need to balance it with policies to boost consumption,” says DK Joshi, chief economist, Crisil. Adds Pronab Sen, India’s first chief statistician: “The government will try to address livelihood issues. I expect this budget to be more populist.”
However, some like Forbes of CII and economist Surjit Bhalla caution that popular should not be confused with populist (which leans heavily on unsustainable handouts). “Populist is wasteful expenditure like doles or handouts,” says Bhalla. He expects the budget to be popular. Adds Forbes: “Popular means economic measures that are popular and also makes economic sense.” Example: the interest rate subsidy on low-cost home loan that the government announced.
Ahead of the budget, the government is not talking on record but off the record, they agree. “The thrust on policies for garib kalyan will continue. Employment and job creation are our top priorities. Besides world-class infrastructure, the focus will be on the poor, farmers, youth and the disadvantaged,” says a minister in the NDA government on condition of anonymity.
There are many reasons for this shift. Of course, demonetisation woes require urgent attention. Then there are the upcoming state elections — 690 seats across five states this year and another 964 seats in seven states next year.
There is one more reason why this budget might want to balance its investment push with a populist/popular tilt.
The Modi government cannot afford to forget the stunning defeat of the AB Vajpayee government in 2004. Many of its marquee projects, like the highway and rural roads programme, were in the infrastructure sector.
“The infra projects do not have an immediate payback. They take threefour years before benefits begin to be felt by the people at large,” says Sen.
The multiplier effect of the Vajpayee government’s highway programme began to show only when UPA 1 was in power. This must weigh on the government’s mind as it readies this year’s budget.
Where’s Acche Din?
Budget 2017 comes amid difficult times. Demonetisation has virtually stalled the economy. Automobile sales have dipped 18% in December over a year ago, the steepest fall since 2000 when it fell 21.81%. Real estate, hurting for some time, has slumped further. According to real estate consultancy firm Knight Frank, home sales and launches hit a six-year low in 2016, thanks to demonetisation.
Residential sales across top eight cities dropped by 44% in the October-December quarter even as new launches fell by over 60%. A survey done post demonetisation by State Bank of India among small businesses reveals that more than twothirds of them have seen a drop in business.
Another study done by the All India Manufacturers’ Organisation, which represents over 3 lakh MSMEs, reveals 35% job losses and a 50% revenue dip in the 34 days since November 8 when demonetisation was announced, with dire forecasts.
Not surprisingly, India’s growth forecasts have been pared down — the World Bank pegs GDP growth at 7% as against its October projection of 7.6% . Not that Indian economy was not facing the headwind before demonetisation.
The Central Statistical Organisation’s recent advance estimate shows that the economy was already slowing down by 0.5% in 2016-17 (7.1%) over 2015-16 (7.6%).
Between April and September, gross fixed capital formation (a measure of the investment trend in the economy) as a ratio of GDP fell nearly 4% — from 31.5% of GDP in 2015-16 to 27.6% in 2016-17.
And the latest CMIE data signals a poor investment climate — in the October-December quarter, investment proposals stood at Rs 1.25 lakh crore. In the last nine quarters of the Modi government, it averaged Rs 2.36 lakh crore worth of new investments per quarter. Some other cyclical factors are also playing out.
For example, lending rate cuts (0.85-0.90%) should ideally push up credit demand. But according to a report by Moody’s Investors Service, the demand for corporate credit will likely be muted in the next 12-18 months as the capex cycle for India Inc has peaked with projects nearing completion.
Worse, the pace of new job creation — critical for a nation that adds over a million new workers every month — has slowed down during the Modi tenure. According to a survey by the Labour Bureau, of eight labour-intensive industries, released early 2016, only 1.35 lakh jobs were created in July-September 2015, the lowest since 2009.
Remember that this happened amid a feverish pitch by the Modi government for Make in India and also to invest in India to global MNCs. “Coining slogans and organising mega events can get you attention.
But it may not make any significant impact on the ground (so crucial in electoral politics),” says Sunil Kumar Sinha, principal economist, India Ratings & Research.
Look at the state of special economic zones (SEZs) to get a flavour. A recent petition filed in the Supreme Court alleges that 90% of the 4,842 hectares acquired for various SEZs in the last five years in seven states have been lying unused.
And of the projected 12.47 lakh jobs that they were to create, only 42,000 were created, a shortfall of 93%. “Many issues like labour laws and industrial infrastructure are state subjects where the Centre has little control,” says Bhardwaj.
In Delhi’s winter chill, pessimism is easy. But it may be premature and unwise to write off Modi government’s policy thrusts at this stage.
From bullet trains to inland waterways, coastal shipping to the big push in the renewable sector, the UDAY programme for the ailing power sector to highway projects, from bankruptcy law to tax treaties with countries like Mauritius, a real estate regulator to innovative off-budget financing outfits like NIIF, seasoned heads in India Inc have a long list of initiatives ready to defend the NDA government’s journey so far.
“It takes a lot of time for big projects to go from drawing board to the ground.
I expect the investment cycle to start soon. The third quarter of 2017-18 could be the tipping point,” says Vinayak Chatterjee, chairman, Feedback Infra.
It is true that many of these initiatives are important building blocks for robust economic growth. But the payback time in long-term infrastructure projects is not immediate.
Hence, they may not have the appeal or the electoral heft to win elections. Perhaps it is this realisation that will see the Modi government balance its pursuit of growth with a populist flavour in this budget.
The Budget wishlist
Dealing with the impact of demonetisation is urgent and obvious, says Rajiv Kumar, senior fellow, Centre for Policy Research, Delhi. To work towards a less-cash economy, expect a slew of measures to curb cash usage and boost digital transactions.
Alongside, the government may take steps to revive growth. There are four ways — exports, private investment, public investment and a consumption push — to trigger growth, says Edelweiss Group chairman Rashesh Shah. There are only two levers — public investment and consumption — where the government has influence.
So expect measures that will benefit vulnerable sections like the poor, the farmers and the SMEs. Rural economy, which caters to 65% (800 million) of India’s population, should get top priority. A national agri-market, on the cards for some time, might get a push.
With better tax collections, some expect the government to launch unemployment benefit schemes and a version of universal income programme where poor families get a specified amount transferred directly to their Jan Dhan account.
Almost universally, the expectation is that the tax regime — personal income tax and corporate tax — will be overhauled. All this in an effort to widen the tax base, improve compliance, curb black money creation and move India closer to the global tax regime.
The demand is that corporate tax is brought down from 35% to under 20% while getting rid of all exemptions. “Small tweaking may not help. Something dramatic is required,” says Rekhy.
GST, of course, should get implemented this year. The government might consider bringing in an inheritance tax, a norm globally, says Girish Vanvari, partner (tax), KPMG.
Personal income tax, too, will get a look in. Economist Bhalla says a study revealed that of every $100 of tax that the US government collects, about $20 does not come in. In India, for $100, about $200 does not come in. “Demonetisation will have an impact on black money. But you want to reduce the creation of black money,” he says.
He, like many others, expects that the government will reduce tax rates and work to boost tax compliance and widen the tax base.
On the jobs front, a big push for the SME sector, road building and affordable housing may be on the horizon. “Before the previous NDA budgets, there was a buzz around affordable housing. But nothing happened.
This time it seems for real,” says Ankur Srivastava, chairman, Gen-Real Property Advisers, a real estate consultancy. It is one of the best low hanging fruits that can boost investment, create jobs, spur demand and bring in the feelgood factor.
Even better, if done well and fast, it can be turned around in 24 months with benefits accruing by the 2019 elections. Modi’s year-end speech, supposedly a trailer to the budget, announced interest subsidy on low-cost home loans.
Srivastava hopes that the government goes beyond interest subsidy and brings in accompanying policy moves — from tax breaks for low-cost housing under Section 80 IB to making land easily available, offering a onewindow clearance to bringing down stamp duty.
Chatterjee of Feedback has one suggestion to push up investment and growth — asset recycling. “Billions of foreign capital is hovering over India but is only keen on brownfield projects (building on existing infrastructure),” he says.
He suggests government find ways to get investment in assets/services of PSUs with steady cash flows. That money could be used to fund new state-backed projects.
Some like Bhalla have huge hopes pinned on this budget. “In terms of a major policy breakthrough, I would put the 2017 Budget at par with what 1991 managed to do for the industrial sector,” he says.
Disappointment is easy when expectations are set so high. But then the promise of acche din – along with the government tenure — has crossed the halfway stage. Time may be running out.