The Budget cannot afford to ignore 'inclusive growth' but innovative measures can generate employment while creating economic assets.
Krishnamurthy Vijayan
Executive Chairman, JP Morgan Asset Management India
‘Our current fiscal model is inefficient. It will make projects suffer from lack of funds now more than ever and the poor will hardly benefit from it’
Inclusive growth, that is, the simultaneous development of the symbols and instruments of national economic prosperity and the symbols and instruments of economic well-being for all has become more acceptable in the current worldwide recession. Generations of the desperately poor can’t wait for the trickle down of well-being through various social strata. I believe that even if India could afford the current model, it is inefficient. Given the current fiscal constraints, it looks near impossible. We do not have the luxury to choose between sovereign expenditure on social engineering over, say, port modernisation. Yet politically, the party in power cannot afford to ignore it — a Hobson’s choice, indeed. Now more than ever, such projects will suffer from lack of funds and become political sticks to beat the government with rather than staves for the poor.
Should the finance minister, therefore, ignore inclusion, tolerate short-term economic injustice and risk political demise for the greater economic good? He need not; let him instead use the powerful tool of fiscal incentive instead of sovereign expenditure. Most of our efforts at financial inclusion have failed because the ‘process loss’ is huge and only a fraction of every rupee earmarked for social causes, reaches the intended recipient. And often budgets remain unspent. Let us instead, create a solution for the finance minister from some unrelated facts:
- Everybody loves a tax-break
Dalal Street appears to be blindly imitating Wall Street’s penchant for encouraging the use of manpower ‘down-sizing’ as a panacea for business problems. - In the past, organisations ranging from Hindustan Lever to public sector banks had established strong internal recruitment and training systems to build and manage large teams of people — teams that have been responsible for their unmatched success in retail expansion.
- The Satyams of the world have successfully ‘window-dressed’ their operations with a few thousand fictitious people.
- We want PAN to become the equivalent of a social security number — a unique identity for every Indian.
A solution to increase employment: Any profit-making listed company with over 1,000 employees will pay 5 per cent less income tax if it adds 5 per cent or more employees in that year provided every employee has a PAN card. Loss-making companies will have to pay either 2 per cent less central excise duty on their goods or 2 per cent less service tax on their operations.
One could extend this further: Provide incentives for recruiting 22.5 per cent of the staff from say SC/ST or among Kashmiri refugees. This would ensure that the benefit reaches the intended recipient without suffering the ‘process loss’ that is natural when the money is first collected and then disbursed for social good. Then the treasury can direct scarce resources on mega projects such as roads, power, ports, airports and heavy industries. This will put money in the hands of the consumer who is at the bottom of the pyramid and the government can watch the magic of economics perform the act of inclusion.
That would be ‘inclusive growth’, ‘private-public partnership’ and ‘fiscal prudence’ — all in an affordable and implementable form.
Nishid Shah
President & CIO, IDFC Investment Advisors Ltd
‘We have no option but to have a higher fiscal deficit. However, we will see political consensus building up for aggressive disinvestment’
The election results reflect the mandate for a strong government at the Centre and for the pro-poor and rural welfare schemes undertaken by the UPA government. Although popular politics and good business sense never go together, a choice will have to be made between the continuance of such schemes and the fiscal deficit. The fiscal situation needs immediate attention and one needs to get back to the FRBM targets as quickly as possible. All the same, because of the mandate and the experience over the last five years, there is no question of cutting such schemes.
The Congress party’s election manifesto reflects a continuing focus on these schemes and as such resources will have to be found for them. The 11th Plan projects a massive thrust on rural infrastructure such as irrigation (Rs 2.53 lakh crore), water (Rs 90,700 crore), rural roads (Rs 41,300 crore), electricity (Rs 34,000 crore) and telecommunications (Rs 16,000 crore). These investments will generate huge rural employment opportunities while creating infrastructure. Investments in the irrigation sector will have a multiplier effect and as such these investments are perfectly justified.
The real issue is not whether these schemes are justified but about raising resources for these without increasing the fiscal deficit. It is here that we need to look at the budgetary receipts. Two key areas, apart from the tax receipts, are non-tax revenues and non-debt revenue receipts. The 3G telecom auction will come under non-tax revenue receipts and PSU divestments under non-debt revenue receipts. In the short-term these may not be sufficient and the government would have no option but to have a higher fiscal deficit. However, over a period of time we will see political consensus building up for aggressive PSU divestment, perhaps, by retaining control if necessary.
I have reasons to be optimistic as the global slowdown and the financial problems in the western world are coming under control and India is emerging as a better option amongst the emerging markets. FII investments, which have come down to around 14 per cent in the top 75 market cap stocks from a high of around 23 per cent, may go up again thanks to a stronger government at the Centre and lack of credible growth opportunities in other large economies.
The Indian economy is a $1.2 trillion economy and assuming a nominal GDP growth of 10-11 per cent in the next five years, it will be a $2 trillion economy. This is more or less the size of economy of UK, Germany, France and Russia. If we continue on this growth trajectory, we will become $9-10 trillion economy in 20 years from now and will be closer to the size of the US economy. Reforms and infrastructure investment will help us achieve this faster.
Needless to say that one has to focus on inclusive growth, and planning has to be for the next 10-20 years. One must understand that inclusive growth is not the responsibility of the government alone; industry has to prepare itself for some amount of resource mobilisation measures. In the short-term, the fiscal deficit may go up but history will justify this if handled carefully.
