Dismay, Disappointment, Distrust: NDA's Smoke & Mirrors Economy

Dismay, Disappointment, Distrust: NDA’s Smoke & Mirrors Economy

A lot of tides have come and gone on the Ganga since the full budget was presented on July 5^th    . It was delivered by an eager Nirmala Sitharaman. She, who is educated at the Leftist citadel JNU, and joined the Party only in 2008.

The freshly minted Finance Minister didn’t, as Modi himself put it, pause for a sip of water during her two hours plus read out of the most free form budget ever presented by the Government of India.

It initially bamboozled quite a few with its covering fire statements about a $5 trillion economy by 2024 based on a likely $ 3 trillion economy by the end of this very fiscal.  

It has been only about three weeks since then, but, it seems like an interminable age of realization. This government has begun with a sharper left turn than all the five Jaitley budgets and the interim one presented by Goyal.

The Modi 2.0’s roadmap for the future- is a dusted off update of Indira Gandhi style socialism. There is scant attention to revenue generation through growth. It resorts to welfare spending on the poor, grown up with additional zeros better suited to 2019. There is emphasis on taxation of the rich and disdain for “money making”.

The central idea is to blatantly reward the nearly 50% of the voters, cutting across caste and creed, that enabled a better win for the BJP than 2014. This amalgam of urban and rural poor is the new BJP vote bank.

That the Modi government has thought it best to focus on this constituency by providing it tangible benefits, ignoring all others including foreign investors, business and industry, the services, exports, real estate and even agriculture, is the strange thing.

How does Modi 2.0 expect to pay for its welfarism and baton twirling on the international stage? India has even become a “donor nation”.

The FIIs have already pulled out a couple of billion in less than a month. FDI has stopped in its tracks. The foreign exchange reserves have dipped by a like sum. The stock market, the first to give the thumbs down to Modi 2.0, has plunged continuously since July 5^th.  

That the poor have done the BJP proud, is understood, but the BJP used rich people’s money to win this election. It took the support of the middle class that cheered Narendra Modi’s honesty, dedication and nationalism.  So how is it legitimate to promote  a vote bank, numerically heavy as they are, at the expense of all the other stakeholders?  

The BJP has developed an arrogance overnight. It is no longer worried about the middle class opinion or vote. It has cunningly decided they have nowhere else to go. Shekhar Gupta quipped the middle classes have become the BJP’s Muslims.

 The Opposition, such as it is, was decimated, not once but twice, and the remainder, particularly in the provinces, is rapidly defecting to the BJP. So future elections to be won are being supplemented already with “inorganic growth” - both at the assembly level and in both houses of parliament.

Modi 1.0 was no great shakes at the economy either, despite the expectations raised in the 2013-14 campaign.  Acche Din was a great, if empty, slogan in 2013, and it remains so in 2019. Except now it is being selectively applied to the denizens of the ruling alliance, and their vote bank.

It is proudly counted in gas connections, toilets, rural roads, echoupals, electricity and healthcare leavened with Mudra loans. The rich, of course, are expected to continue filling the BJP coffers, and not those of the opposition, whether they want to or not.

The NDA has still got a lot of sympathy for its line that it needs more time to implement its grand vision for India. This vision is to take it to the top three economies in the world, with $10 trillion in GDP. But this is apparently designed to beguile the chattering classes.

 What is going on is somewhat different. Not only is the growth plunging, throwing lakhs of people out of their hard to come by jobs, but the BJP is still concentrating on mopping up more votes. In a parliamentary appearance shortly after winning  in 2019 , Narendra Modi extended his other much used slogan Sabka Saath, Sabka Vikaas into Sabka Saath, Sabka Vikaas, Sabka Vishwas.  

That “Sabka” has been reworked to exclude those who are not electorally important. So now, and the  passing of the Triple Talaq bill for the third time in the Lok Sabha is a case in point, the Muslims,  mainly Muslim women,  are next  in the BJP’s sights.

Sabka Viswas is a call sign to India’s Muslims.  Whether it works or not, it is an astute political move. It wards off criticism by firing the first volley for inclusiveness. It blunts the charge of those who call the NDA a purely Hindu nationalist government.  

In the 2019 general election, Modi was helped, in no small measure by a whiff of grapeshot from Balakot. Modi owes Pakistan and its terrorist organizations, as well as the Indian Armed Forces for contributing handsomely to his victory. 

Those factors, and the risk- taking ability of his own decision making. It let him pull off and milk the surgical strike in 2016 using crack ground troops. In 2019 he did it again using precision air strikes. There is nothing like jingoism to make people forget their troubles and project oneself as the great and decisive leader. It won George W Bush and Obama their second terms. So why not Modi?

But that prompt military decision taking ability and nerve, is never, it appears, applied to fostering the growth of the economy. The backfiring of the “Shining India” campaign cost the NDA the government in 2004. The “Suit Boot Sarkar” jibe early in Modi 1.0 has turned Modi into a shade of red ever since.

So Modi sticks to masses of process improvements. And banking on infrastructure, inclusive of a modernization of the railways designed to provide a long term boost to the lives of people.

In the short term, the government may have calculated, spending Rs. 150 lakh crores in five years on infrastructure and the railways will contribute  8% growth per annum. But, Modi is already backing away from the foreign borrowing announced in the 5^th July budget. The scrutiny and accountability that the government may be subjected to seems to be the problem. This, even as the domestic banks are almost maxed out with government debt already. And tax shortfalls from all sources are rumoured to be a third  down.

Any other global headwinds like a conflict involving Iran and the Western powers could further queer the pitch.

But, why is the Modi government 2.0 not promoting overall growth instead of a quixotic backing for hobby horses like electric cars that will not only further damage the automobile sector, down 20% already, but sequester the fuel tax the government collects?  Perhaps it is thinking of lower oil imports.

FMCG and Real Estate too have shown a collapse in consumer demand. But instead of doing anything to revive these sectors, and others, including Services that clocks up more than 50% of the economy, the government has chosen to increase taxes to make up for its shortfall in collections.

But these higher rates of taxes may not see better realizations as people restructure and take evasive action.

There is a sharp slow-down in consumption in rural areas too, suggesting the paucity of spending money.

That the Modi government has been covering up and fudging economic data for at least the last couple of years is alarming. Avoiding a public gaze prior to the elections is understandable, but inaction even after a thumping win is inexplicable.

This sharp economic slowdown is now being highlighted by all quarters but the government is ignoring it. The thinking may well be that there will be a cyclic upturn in the economy in two or three quarters. The IMF continues to give India a 7% GDP growth for this whole year and again for the next, down from an earlier prognosis of 7.3% p.a.

A counter argument is to allow some slippage in the fiscal deficit to say 5%  from the present 3.3% ,and use the proceeds, helped partially by higher  inflation than the present 4%, to get things going again.

Meanwhile, there is nobody to challenge the government.  The BJP is busy harvesting defections and targeting a number of state governments such as Karnataka, West Bengal, Madhya Pradesh and Rajasthan.  

Modi 2.0 can, if push comes to shove, brazen it out, and we have to get used to our tribulations in place of the promised Acche Din.

(1,453 words)

July 26^th, 2019

Gautam Mukherjee

Union Budget: Infrastructure Stays The Ticket To Ride

Union Budget: Infrastructure Stays The Ticket To Ride

The Finance Minister Nirmala Sitharaman wore a shade of auspicious crimson on Budget Morning. And the document she read from was wrapped like a traditional ledger, a Bahi Khataa- in red cloth, tied with golden string, embossed with a gold Ashoka Stambha.

It was a visual jettisoning of ideas, sequences and straightjacket that came  with the erstwhile colonial era briefcase.  The budget itself was not an allocation of funds under different heads with an attempt to balance both sides of the ledger anymore- it was a things-to-do list that the money must be found for. Former FM Jaitley, in his five budget presentations, hadn’t gone into free-form but Sitharaman did.

Nirmala Sitharaman said, in a press conference that followed, that this budget was “A ten year vision with a five year target”.  It was, as in Modi 1.0 where various things were time-lined for 2022, India’s 75^th year as an independent nation, a typical Modi government move. It seeks perhaps, to blur the edges of one term of NDA in office into another via its transformational agenda.

It was a different kind of budget speech too, taking on from the optimism of  the “Blue Sky Behavioral Economics” and Nudge Theory mentioned in the Economic Survey. That cited the voluntary giving up of subsidized cooking gas cylinders by the better-off in Modi 1.0. It also cited a number of economic inspirations from ancient India alongside the Asian universe. This, in a departure from ideas solely emanating from the “East Coast of the United States”.

The budget speech which had its share of wisdom quotes, was artful too- It covered an enormous amount of ground while being audaciously low on specifics and time-lines. But it was steroid-strength high on intent and thematics. It upended the order of emphasis. It made a concerted effort to inspire fervour, belief, Esprit de Coeur.

However, it did not neglect substance in a bewildering kind of way, with hundreds of modernist tweaks to how this country must act and see itself going forward with little allocations in its wake. The elephant in the room was how will India pay for it all without runaway inflation or fiscal hara-kiri. But if most things are multiple year endeavours, then the slicing and dicing in a given year’s balance sheet usually takes care of the fiscal prudence.

The stock market, made up of prosaic money men, ducked its head, wondering why it still had to pay irksome capital gains tax when we were on the $ 5 trillion bus.

There were some moves, not very substantial, to recapitalize the banks and bail out the NBFC sector. Housing Finance, like a naughty boy, will now be supervised by the RBI. Divestment will continue to be something the government wants to do. The Railways will get massive investment indicated as an ask, via off-budget methods, esoterics like PPP, and so forth.

For a government big on national security, there was practically no mention of defense, except to say that defense equipment imports will be free of customs duty. This implies that all purchases will be conducted off budget. Allocations in the fine print are to run the administrative expenses of the armed forces.

The presentation was thick with dozens of procedural improvements towards promoting greater efficiency and ease of usage, such as interchanging Aadhar with PAN and “faceless Income Tax scrutiny”.

However, there were a few announcements that stand out. And these, for their potential to be transformational. The government will permit 100% foreign investment in the leasing and financing of aircraft – a virgin area domestically. It will also do so in animation, media, and in insurance intermediaries. It will further encourage FDI into real estate, aviation and single brand retail, setting up huge manufacturing for all manner of relocated things from China.  It will also encourage the setting up of massive operations and maintenance infrastructure. The domestic finance market does not have the heft to invest in most of these new thrust areas.

 The current maze of Labour Laws, and even the archaic rental laws are going to be reformed.

In a possible recognition of high domestic government debt of  $2 trillion against a present GDP of $2.7 trillion, the Finance Minister pointed towards India’s very low external borrowing. This, even as the fiscal deficit target was still being capped at 3.3%.

She said India’s hard currency external borrowing was some 5% of the total, and amongst the lowest in the world. Then she announced the government’s intent to borrow more in foreign currency, to the delight of the domestic debt and bond markets.  

This will be good, when combined with foreign collaboration in infrastructure development. If the announced Rs. 100 lakh crore for infrastructure in the next five years comes, it could flow substantially from external sources. This, of course, is also the glide path to the $ 5 trillion economy in one go, even if all else flatters to deceive.

The budget speech showed consistent concern for improving the lot of the  rural and urban poor. This, mostly with missions and infrastructure development, rather than the doles favoured by the UPA. The latest mission, launched even before the budget, after electricity, cooking gas, and toilets, in Modi 1.0, is piped water for all.

The emphasis on housing for all, but not real estate, and indeed all the other last mile provisions as yet incomplete, is carried over into Modi 2.0. There will also be very many more rural roads and other facilities. This approach has gone down well with the voting public of all castes and creeds, as the massive winning mandate has shown, and it makes great political sense to continue with it.

The smaller corporate entity, up to a turnover of Rs. 400 crores per annum, is now included in a tax rate capped at 25%. This was hinted at in the interim budget, when only those under Rs.250 crores were qualified, and has been delivered now. That it thereby brings over 99% of companies within its ambit is the remarkable thing. There are just 0.7% of companies in India which are bigger than this.

Perhaps now, many of the smallcaps and midcaps will march on into the big league and make space for the new entrants and start-ups. This budget dwelt on incentives and motivations for the start-up space. It is clearly seen as a priority area though Indians living in India are not the most innovative of people.

There are no changes in direct tax rates from those that were announced in the interim budget. They exempt over 80% of income tax payers, who earn no more than Rs. 5 lakhs per annum. The broad-based fuel using public has  been served with a single rupee in additional excise duty per litre. And this, predictably, excited a great deal of comment.

This budget also introduced another couple of taxes on the rich, but mercifully stayed away from the reintroduction of unworkable Estate Duties. A higher surcharge on income tax of 3% up to 7% will apply to those who earn taxable income of Rs. 2 crores per annum or above, and there will be a 2% TDS on cash withdrawals of over Rs. 1 crore p.a. from a single bank account.

There was a great deal on electric vehicles - incentives for manufacturing them with an ambition to become a global hub. There will be subsidies for buying them, and a big push to the setting up of Electric Charging Stations,  the manufacture of Lithium Ion batteries and Solar Photovoltaic Cells  and other “green” equipment. If the idea catches on with the automotive sector it could do well, even though nascent electric vehicle technology, high cost and no charging infrastructure as yet, are daunting.

The Budget, like the Economic Survey before it, glossed over all the problem areas. It made no mention whatsoever of a severe economic slowdown and shortfall in targeted revenue collections. Instead, it talked up a rise of 78% in direct tax collections over the last two years.

Sitharaman elaborated that the economy had grown by $1 trillion between 2014 and 2019. And that it would reach $ 3 trillion in the course of this financial year. India is already the 5^th biggest economy in the world at $2.7 trillion, and 3^rd , if its status is calculated in PPP terms. So, $5 trillion, here we come, and never mind the impediments in between!

 (1,401 words)

For: The Sunday Guardian

July 5^th, 2019

Gautam Mukherjee