Budget should be an avenue to employment

By Roopen Roy Feb 17 2015

Tags: Op-ed

The 2015 budget is round the corner. The expectations from finance minister Arun Jaitley are sky-high. He can meet all those expectations only if he is a deft combination of Santa Claus and Houdini. He will certainly meet some of our aspirations by being a bit of both. Let us look at the economic backdrop in which he will rise to present his budget proposals.

The plunge in oil prices is a boon for India. At the time of writing this column, our foreign currency reserves have soared to $328 billion. Our trade deficit has shrunk to $8.32 billion in January, its lowest since February 2014 and from $9.43 billion a month earlier. Nifty 50 is soaring. Inflation has moderated. Even if you quibble about the change in methodology of computing GDP, our growth rate is, by any method of computation, heading north. Although we have miles to go before we can catch up with China’s GDP, our growth rate will surpass China.

Yet we have storm clouds around the globe. Europe is clearly having its Hamlet moment. Greece already has a defiant government which is unwilling to put its people through more austerity and pain. If Germany and the rest of the ‘have more’ economies dig their heels in, Greece might bolt with uncertain consequences for the euro and the eurozone.

Switzerland, meanwhile, has unpegged its currency from the euro. It understands currency well. It cannot afford to put its ‘safe haven’ customers through the extreme anxiety and fear of the oscillations in euro. The US economy is not just holding up, it is growing.

While the aam aadmi in the US is reaping the bonanza of fallen oil prices at the gas stations, oil producing states like Texas are affected. The oil producing countries of West Asia, including Saudi Arabia, are feeling the pinch of the drastic fall in oil prices. Certain parts of the Indian economy will be affected by the belt-tightening of global oil companies and oil exporting nations. The slowing down of China has already impacted extractive industries and commodities. Neither Ru­s­­sia nor Brazil are showing any great promise of propelling global demand. To sum up, we are cautiously pessimistic about the global economy.

The fundamentals are well-known. India’s tax-GDP ratio is a low 10.6 per cent. The tax base must be widened. Of course, the sale of PSU shares will help us bridge the fiscal deficit. But it is a Houdini act that cannot be sustained forever. On the other hand, we have emaciated PSU banks, looking to Santa Claus for a capital infusion of as much as Rs 1 lakh crores per year to meet Basel III norms by 2018. Thus, what will be won in the swing of PSU share sales, will be lost in the NPA cleaning round-about. The FM must, therefore, work closely with the RBI to checknew NPAs particularly those generated by the ‘cronies’.

This budget must make a big bet on ‘make in India’. If we are to harvest our much vaunted demographic dividend and not experience a demographic nightmare, we have to transfer millions of under-employed and unemployed youth to industries and manufacturing. One piece of that puzzle is to invite FDI into large-scale job-generating manufacturing. We have to unleash skill-imparting programmes on a massive scale and make it easy to do business in India. But what should the FM do in this budget?

While every Ram, Rahim and Harry is providing unsolicited advices to the FM, I have a only three suggestions :

n Investors, particularly foreign investors, do not want the FM to play Santa Claus. They are happy with our tax rates and exemptions. They want predictability. The last thing they want is a change of goal posts while the game is in progress. Their worst nightmare is retroactive legislations with a ‘heads I win, tails you lose’ attitude of the revenue authorities. What scares the living daylights out of foreign investors is the prospect of endless and expensive litigations in courts. A president of a major foreign chamber of commerce told me that India’s finance ministry ‘budgets’ for tax collection and assigns quotas to its revenue officers. It is similar to ‘sales quotas’ of marketing professionals. Thus, revenue officers raise frivolous demands on tax payers in the full knowledge that they will be overturned by courts in appeal. But by the time this happens, the officer has been promoted and is gone. The foreign investors believe that removal of this irritant will have a magical effect on new investments. The other less talked about issue is corruption in the revenue department. A massive change management programme is required in the revenue gathering activities with greater transparency, trust and fairness.

n Without infrastructure, ‘make in India’ will remain a grand idea whose time has yet to come. Thus, building of roads, railways, water transportation facilities, industrial parks, power plants, freight corridors and manufacturing hubs must receive special incentives in this budget. The infrastructure sector itself will generate a huge employment.

n Make in India should not be narrowly interpreted to mean becoming ‘sweat shops’ for foreign brands using India’s low-skilled, inexpensive labour. We should encourage companies, both foreign and domestic, to build innovation hubs, create intellectual property, invest in R&D and build brands by using the vast scientific, technical and creative talent pool that India has. Therefore, there should be fiscal incentives for innovations, research, creation of IP and brand-building.

The central goal of this budget should be to spur the economy to create employment for our young people on a massive scale. That should be the over-riding consideration of the 2015 budget.

(The writer is the managing director of Deloitte Consulting, India)