One of India’s most highly regarded industrialists, a former president of the Confederation of Indian Industry, and the co-chairman of Forbes Marshall says, “This was not the budget we needed”.
In a 50-minute interview to Karan Thapar for The Wire, Naushad Forbes says the first problem with the budget is that it does not publicly admit the seriousness of the problem facing the economy. Had the budget done so it would have laid the foundation for radical steps, he adds.
However, its failure to accept and admit the seriousness of the slowdown means that this is “a business-as-usual budget” and “not what the country needs”. It lacks bold steps, he says.
Forbes says that the surprising thing is that in private meetings with industrialists both the Prime Minister and the Finance Minister have fully accepted the seriousness of the problem the economy faces, sought advice, listened attentively and taken notes. This attitude, however, was not reflected in the budget.
Forbes told The Wire that perhaps the most important step the Finance Minister did not take was to pay the Rs 3 lakh crore the government owes public and private sector enterprises, social sector schemes and the state governments. Had it done so, it would have immediately boosted consumption and, therefore, in turn, demand, production and growth.
Forbes accepts that this step would no doubt have increased the official fiscal deficit from 3.5% to perhaps 5 or 5.5% but given that a lot of the government’s expenditure, which is not part of the official fiscal deficit figure, is revealed in the off-budget expenditure list, this would not have been of great concern. We anyway know the real deficit is more than 3.5%, he adds.
Consequently, the situation that has arisen today is that the Finance Minister has been transparent (because for the first time she has acknowledged the off-budget expenditure) but has not got the benefit of that transparency. Secondly, we all know that the actual deficit is higher than what the government admits – particularly if you include the Rs 3 lakh crore that has not been paid – and the government is criticised for this but the benefit that should flow to the economy because of a high deficit has not been realised because the Rs 3 lakh crore has not been paid.
So, once again, the government has been criticised for its high fiscal deficit but the economy has not got the benefit of it.
Forbes additionally tells The Wire that the second step the government should have taken is to tackle the non-bank financial companies. Had it done so, it would have had an immediate impact both on public sector banks, who are major lenders to NBFCs, and on the real estate sector, which is one of the biggest employers. Furthermore, a decisive step tackling NBFCs would also have sent a clear message of the government’s resolve to tackle the economy’s problems.
However, Forbes accepts that the government’s strategy of boosting economic growth by stressing on investment was the right one, except that the budget figures showed that not enough money had been put behind this strategy. He says that a lot depends on the details of how the Rs 100,000 crore which is to be spent on infrastructure in the next four years, will be financed. He accepts that the encouragement to sovereign wealth funds will produce foreign investments. But more clarity is needed on the public-private partnership architecture before we can judge the response of the Indian private sector.
On the government’s Rs 2.1 lakh crore disinvestment target, Forbes is sceptical if this can be fully met. He forcefully asserts that the government needs to be more honest and thoughtful about its strategic sale plans.
First, he says this should be called privatisation, “which is what it is”. ‘Strategic sale’ is not just misleading but possibly prevents the government from putting in place the right strategies for this sort of privatisation.
More importantly, he says the government needs to do what Atal Bihari Vajpayee and Arun Shourie did when they successfully privatised several PSUs. In particular, Forbes says the government needs to set up a separate ministry or department which can handle the entire procedure. It also needs a dedicated minister. Unless that happens the likelihood of achieving the Rs 2.1 lakh crore disinvestment target is very questionable.
Forbes also highlights that the tax revenue projections were “unrealistic”. It was very unlikely that GST will grow by 12.8% compared to the 5.8% last year and income tax by 14%. Tax buoyancy of 1.2 does not look likely, he adds.
Finally, Forbes says achieving a 10% nominal growth rate next year entirely depends on what the government does hereafter. If it takes the necessary steps to boost growth and ensure effective privatisation, then 10% nominal growth could be achieved. If those steps are not taken then 10% can only happen on the basis of high inflation.
Forbes makes two other strong points. First, he says the government must move away from cash-based accounting to accrual-based accounting, which is followed by all Indian companies by law and an increasing number of foreign governments as well. It will ensure that the full and true picture of the government’s accounts are readily discernible and eliminate the capacity to fudge or hide which misleads.
Secondly, Forbes adds that the government must remove or at least reduce the role of discretion in decisions by politicians and bureaucrats and set up across-the-board systems that function on the basis of well-known rules. Discretion makes for arbitrary decisions which permit corruption and cronyism.
Forbes also calls for an agricultural income tax for incomes beyond Rs 50 lakhs per annum. He accepts that he is deliberately setting the bar very high so that the government at least makes a start. He says this is a bullet the government has to bite.
Watch the full interview here: