Structural Problems in CAD have not gone away
This year, it is not just the media but also domestic and foreign investors who are watching every move of the Narendra Modi administration as it draws up the Union budget.
Expectations are running high that the government will deliver on the reform agenda, bringing India back on an 8% plus growth trajectory. Experts believe this has to be a budget of aspirations like in 1991. A panel consisting Confederation of Indian Industry (CII) president Ajay Shriram, former deputy governor of Reserve Bank of India (RBI) Subir Gokarn, ReNew Power’s chairman and chief executive officer Sumant Sinha, former chairman and managing director of Oil and Natural Gas Corp. Ltd (ONGC) R.S. Sharma and BMR Advisors’ tax expert Mukesh Butani discuss realistic and imaginative expectations from the upcoming budget. Edited excerpts:
Before I talk to you about budget expectations, let me congratulate CII because all your persistence and your lobbying to get the Companies Act changed seem to be working, because some changes have already been announced. A draft notification has been issued by the ministry of corporate affairs, taking into consideration some of the suggestions that CII has made. So, persistence is paying off?
Shriram: I really appreciate that the government considered the views of CII and that too with a very open mind. Our objective is, how to make it workable and practical to assist business growth. Our basic point is, please don’t treat everyone, like a crook, please don’t tarnish everyone with the same brush. The reality of life is, whether it is in the corporate world, in the political world, or in any world, there will always be black sheep. So, don’t look at everyone from a point of black sheep, please look at it from the point of view of having laws by which you can take action but the premise we have suggested and requested is, move on the basis of trust and where the corporate entity or whoever does not adhere to that, take action.
More than the issue of suspicion and the lack of trust, this is really about the ease of doing business because the minister of state for corporate affairs Nirmala Sitharaman said that any changes to the Companies Act would be considered and would be taken forward only because the government believes that it will be easier to then transact and do business in India. So, do you believe that we are likely to see all of this being cleared by Parliament now that the ministry of corporate affairs has put its weight behind clarifications and possible amendments?
Shriram: As you rightly said, Nirmala Sitharaman has given it serious consideration. She has had meetings with us. Last Saturday she arranged a full-day discussion with her full secretariat with us on the same issues and what is required is clarity. Let there be clear laws, let there not be ambiguity, let there not be uncertainty as to what can be done and what can’t be done, let us know where we stand. The government has been coming out with clarification periodically, which is a very positive sign and I hope they continue coming out with more because there are still many areas to be addressed.
Is it safe to assume that as far as tax sops are concerned, it is not going to be “acche din aa gaye”?
Shriram: Industry is not looking for sops per se. We are not looking for excise duty cuts across the board.
Be honest, you have already made a representation that the excise duty sops that were granted to sectors like auto should continue.
Shriram: It should continue, we are not saying give anything more. The important point is
economic growth is required. India today with last two year’s GDP growth rate, unless we get economic growth, we won’t get jobs, we won’t get government revenues going up, and we won’t get economic activity going up across the board, which is affecting the entire economy.
So our request to the government is, please move positively for inclusive growth across the
board, improve governance, focus on infrastructure, get the manufacturing sector moving
fast, please tackle inflation because inflation is keeping interest rates too high which are actually affecting economic growth again and lets us look at it in totality. But some of the areas— if talking of tax the only thing we have suggested is for Special Economic Zones (SEZs) please give MAT (minimum alternate tax) over there, please consider something like that.
This has been a long-standing demand made to the previous government as well.
Shriram: Yes, they actually add value on the domestic front and for the export market, and
they provide jobs.
You have made certain recommendations in terms of the sweeteners-the sops that you would like to continue, what you would like to see as far as boosting manufacturing growth is concerned, which continues to be abysmal at this point in time. What does your gut tell you? Will the excise sops given to auto for instance continue, will we finally see MAT being done away with for SEZ?
Shriram:The government is sympathetic. The government has appreciated the points that unless we revive economic activity, the economy will just keep going down. They will look at these things with an open mind. They will look at all aspects to ease business activity, to increase investments, to increase a positive sentiment across the board, so that economic activity picks up across the board.
One of the other aspects that this maiden budget of Arun Jaitley is going to have to consider is the path of fiscal consolidation and insuring that that path is a credible one and that it is followed through. What are your expectations now as far as fiscal consolidation goes? Because the room for expenditure cuts is limited, perhaps it is too narrow at this point in time, especially given the fact that growth is right up there as far as their priorities are concerned, what kind of a balancing act do you envisage Arun Jaitley to do?
Gokarn: Rather than talk about expectations, let me talk about aspirations because this is a 1991 moment and in that sense, this is the first year of a virtually guaranteed five-year government. There are no risks to its survival, so you can actually afford to take a long-term strategic view of the fiscal situation and not try to achieve everything at one budget. So, rather than looking at this budget alone, we have to look at it as a process over some time as happened in 1991, when you had two or three budgets, all of which saw very significant reforms agendas implemented.
So, I have five things which have to be done. One is transparency; we need to get a fix on
what the fiscal situation actually is.
What is the number that you are working with?
Gokarn: It doesn’t matter to me, maybe 4.6 is the right number, but we need to be absolutely
24×7 electricity is a promise that power minister Piyush Goyal is making. He met with bankers, power producers association. Do you see 24×7 electricity a reality anytime soon?
Sinha: It is going to take time. It could happen within a five to 10 year time frame is my expectation. Before that, the kind of deficits that we have, especially in the peak months, can certainly be addressed. Issues really are the process issues, things like land acquisition issues, ease of getting approvals for doing business. Those are the things that cannot really be addressed in the budget but are absolutely critical issues.
Do you anticipate changes in the land acquisition Bill before the budget session?
Sinha: I would hope so. I hope that what she has touched upon is the key issue that the
whole timeline is too long. If the government can tweak that process and make it shorter
and make it much more visible in terms of total expanse of time required, I think that will be a significant win. Whether that happens in the budget session or subsequently, I hope it is the
first thing the government touches upon.
UNCTAD (United Nations Conference on Trade and Development) has recently put out a report where India has slipped in ranking in foreign direct investment (FDI) to number 4. Do you believe that we are going to see amendments, clarifications on retrospective tax in the budget?
Butani: I hope the government repeals the retrospective law. But it is a speculation at this point of time, whether they will do it or not. The question before the government will be whether they will sacrifice medium to long term for the sake of short term. A law that is passed by the Parliament, it is a real challenge. Somebody has to walk the talk. I am going to make the environment friendly and really repeal the law.
It is the right thing to do. I would put 60:40 in favour of repealing the law. The government knows very well the kind of impact it has caused. People look for stability and certainty of the law. The government’s action in the last three-four years doesn’t suggest that. It’s the larger message they have to communicate
I think it is unlikely that the government will overestimate the tax collection figures.
What are the rating agencies going to say if the government doesn’t stick to the fiscal deficit numbers laid out in the previous budget? Will they be satisfied if they lay out a clear road map for what this government intends to do?
Gokarn: The credibility of a fiscal commitment now is very high because there is no threat.
There are no factors except for external developments, example, menergy shock, that can derail these commitments. So, this is the space that this government has. It has to use it as effectively as possible.
It has the space to make longterm commitments. If there is credibility, transparency and if there is clear commitment to fiscal reforms over a period of time, I don’t think it should threaten perceptions of India’s fiscal situation.
We managed to tame CAD (current account deficit) significantly. Do you think the time has come to reverse the restriction on gold import?
Gokarn: Monsoon at this point is looking something of a threat. Iraq is uncertain and may have an impact on crude prices. It’s best not to rush to anything at this point of time. Let’s keep in mind that the structural problems in CAD have not gone away. We are still importing enormous amounts of coal. We are not seeing signs of improvement in domestic coal production. There is a big problem on the current account which has not gone away. To say that everything is back to normal and we can go our way, I think that is premature.