ET Now
Mythili Bhusnurmath, Consulting Editor, ET Now, caught up with Subir Gokarn, Head of Research, Brookings India, for his take on the Budget. Excerpts:
Mythili Bhusnurmath: How does the budget look to you the morning after? Does it look better or does it look worse as in most mornings after?
Subir Gokarn: I am not sure it looks any different from what it looked yesterday and my main reaction to it was little bit of a letdown. In fact, I would say a significant letdown because I was expecting a kind of five-year roadmap to be laid out as a precursor to getting into the specific details of proposals and expenditure, taxes, and other policies.
But we did not see that. So at the end of the speech, one actually had to look at the details to try and discern a strategy and in a sense there are lots of little things in it which add up to something resembling a plan.
By now we have had this government in place for a month, about a month five weeks and this is starting to look like an approach which is no big bang, no big ticket, no sweeping statements, just looking at individual issues, problems and trying to put solutions together.
Now whether they all hang together to solve these large problems that we are dealing with is of course a question, but that is the way I saw it and this is where the expectations issue becomes quite significant because the campaign raised expectations about a new room sweeping clean, a new wind and so on and what we have got in terms of an operating style is very nitty-gritty, down to earth, pick up a problem, try and find the solution; pick up another problem, try and find the solution, it may work.
I am not questioning, but the communication may prove to be a little bit of letdown because people have been conditioned when thinking that big bang is the order of the day and clearly this budget was anything but big bang.
Mythili Bhusnurmath: Even though the economy does not really show any signs of revival and we have the possibility of a near drought like situation. So what is your take on that? Are these numbers feasible? Should he have taken this opportunity to recast the numbers and to restore integrity to those budget numbers?
Subir Gokarn: Absolutely, he should have. I do not think the stakeholder community, the broad range of stakeholders who watch the fiscal deficit number with an eagle eye, would have been too concerned about moving back to about the 4.5 range for example and the minister made perhaps what was a Freudian slip in his speech.
I heard him say at the end of the speech 4.5. So maybe that was somewhere in the back of his mind, but this opportunity to recast numbers to bring element of both transparency and realism to those numbers was an important one. He would not get it again because he owns the numbers from now on, should have been taken. The disinvestment proceeds of 65000 crores, we are already in the fourth month of the year.
So we only have eight months left. Looks very, very challenging and the risk that there will be some slippage is quite high. Also, the monsoon risks were mentioned, the oil risks were mentioned.
All of these kind of eventually play on the growth numbers and if the base on which revenues are to be collected slips from an already relatively low growth expectation, that has gone to add some more burden to overall fiscal position. So the risks are tangible. It is difficult to say how high they are because we are still waiting for the monsoon scenario to play out, but that is clearly something that will detract from the overall positivity of the budget.
Mythili Bhusnurmath: Another item which I thought was fairly significant in the budget speech was numerous initiatives taken in the area of infrastructure. How do you look at all these initiatives and will they really make a difference as far as infrastructure is concerned?
Subir Gokarn: There is an important dynamic in the infra financing area and this comes in by linking up two separate stances. On the first, as you said, now banks will be relieved of the prudential requirements -- SLR and CRR -- if they have to finance infrastructure through the issuance of long-term bonds. I believe that is the mechanism.
So you have created in essence an incentive to issue bonds. On the other side, the withholding tax on corporate bonds has been brought down from the old level, I think, of 20% to 5%, which now makes it uniform with the government securities and what that does is to create an incentive for investors to invest in bonds. So by creating in fact or incentivising both the demand and the supply of bonds here, you have actually created a mechanism for the emergence of a bond market. There are many other things that are needed to be done to get it up to speed.
This is happening gradually, but this is an important initiative in terms of bringing into play a more feasible kind of a bond market scenario which allows banks to issue bonds and then use that money to finance infrastructure.
Over time I expect this to develop into more direct bond financing kind of environment, a kind of ecosystem and that is a very positive change. So what this reflects, a couple of other things I want to get to also, is this sense of trying to address the constraints on both sides. There is no point in addressing the constraints on one side if the other side remains binding.
So this is a good example of that problem solving approach that we have been hinting at. The other issue I want to emphasize is agriculture where a number of initiatives, all of which add up to the need to diversify into crops other than cereals and the specific reference to proteins.
I am very pleased with that, but in essence creating incentives for production of other things appears to be very ambitious national level reform of the Agricultural Produce Marketing Committee Act, the APMC.
That is a state level issue. So I am not sure how it plays out, but bottom line is the combination of agricultural initiatives does offer some solution to the kind of inflation, the food inflation problem that we have really not been able to get the grips with over the last several years.
So when we look at this approach, while it looks very pragmatic and I agree, I accept that it is a pragmatic approach, the risk associated with the implementation grows because you have to bring many more stakeholders, many more constituencies into play to get things to work. So that is where I am sounding a little bit of cautionary note on this approach.
Mythili Bhusnurmath: Not on the same page as the predecessor NDA government. How do you react to that? Were you surprised by the absence of any mention of second generation reforms or do you think this was neither the time nor the place?
Subir Gokarn: No, it was very much the time which is what was the basic source of my less than enthusiastic response to the budget and at least in the communisation sense, not as I said necessarily in the detail sense.
This is the first budget of a new government. After 10 years, we have had a change. Lots of problems with the economy, you can attribute them to various causes, but we do need to have a diagnostic which in essence the Economic Survey did provide reasonably sort of balanced diagnostic and based on that diagnostic what are the solutions that the new government offers.
So the survey and the budget in this context had to dovetail with each other. May not agree with everything that the survey says, may not accept everything as being feasible, but to the extent that they have identified a number of factors and there were some of them in the capital markets and so on.
I am not denying that there were some linkages, but the strategy that emerges from that diagnostic needed to be articulated in the first budget and my judgement is that it was not.
So we had to actually glean the strategy from the various initiatives. That is the communication challenge. So somewhere soon, the government must use an appropriate opportunity, maybe the August 15th, but that is really a mass audience kind of speech.
So it may not be easy to break it down into very explicit strategies, but something like that needs to lay out a sense of direction on all of these fronts in infrastructure, agriculture, employment, capital markets, land acquisition, education, health. Everything requires some clear goalposts and I do not think we have seen that. Perhaps the budget could have started the process.
I do not think it did adequately, but now we have to wait for another occasion when these goalposts start to get articulated and I hope that is done fairly soon because otherwise, there is a danger that the government is not seen to be acting in sync, acting in coordination and that is a very strong message that came out with the campaign that this government believes in this kind of intense coordination.
Mythili Bhusnurmath: How does the budget look to you the morning after? Does it look better or does it look worse as in most mornings after?
Subir Gokarn: I am not sure it looks any different from what it looked yesterday and my main reaction to it was little bit of a letdown. In fact, I would say a significant letdown because I was expecting a kind of five-year roadmap to be laid out as a precursor to getting into the specific details of proposals and expenditure, taxes, and other policies.
But we did not see that. So at the end of the speech, one actually had to look at the details to try and discern a strategy and in a sense there are lots of little things in it which add up to something resembling a plan.
By now we have had this government in place for a month, about a month five weeks and this is starting to look like an approach which is no big bang, no big ticket, no sweeping statements, just looking at individual issues, problems and trying to put solutions together.
Now whether they all hang together to solve these large problems that we are dealing with is of course a question, but that is the way I saw it and this is where the expectations issue becomes quite significant because the campaign raised expectations about a new room sweeping clean, a new wind and so on and what we have got in terms of an operating style is very nitty-gritty, down to earth, pick up a problem, try and find the solution; pick up another problem, try and find the solution, it may work.
I am not questioning, but the communication may prove to be a little bit of letdown because people have been conditioned when thinking that big bang is the order of the day and clearly this budget was anything but big bang.
Mythili Bhusnurmath: Even though the economy does not really show any signs of revival and we have the possibility of a near drought like situation. So what is your take on that? Are these numbers feasible? Should he have taken this opportunity to recast the numbers and to restore integrity to those budget numbers?
Subir Gokarn: Absolutely, he should have. I do not think the stakeholder community, the broad range of stakeholders who watch the fiscal deficit number with an eagle eye, would have been too concerned about moving back to about the 4.5 range for example and the minister made perhaps what was a Freudian slip in his speech.
I heard him say at the end of the speech 4.5. So maybe that was somewhere in the back of his mind, but this opportunity to recast numbers to bring element of both transparency and realism to those numbers was an important one. He would not get it again because he owns the numbers from now on, should have been taken. The disinvestment proceeds of 65000 crores, we are already in the fourth month of the year.
All of these kind of eventually play on the growth numbers and if the base on which revenues are to be collected slips from an already relatively low growth expectation, that has gone to add some more burden to overall fiscal position. So the risks are tangible. It is difficult to say how high they are because we are still waiting for the monsoon scenario to play out, but that is clearly something that will detract from the overall positivity of the budget.
Mythili Bhusnurmath: Another item which I thought was fairly significant in the budget speech was numerous initiatives taken in the area of infrastructure. How do you look at all these initiatives and will they really make a difference as far as infrastructure is concerned?
Subir Gokarn: There is an important dynamic in the infra financing area and this comes in by linking up two separate stances. On the first, as you said, now banks will be relieved of the prudential requirements -- SLR and CRR -- if they have to finance infrastructure through the issuance of long-term bonds. I believe that is the mechanism.
So you have created in essence an incentive to issue bonds. On the other side, the withholding tax on corporate bonds has been brought down from the old level, I think, of 20% to 5%, which now makes it uniform with the government securities and what that does is to create an incentive for investors to invest in bonds. So by creating in fact or incentivising both the demand and the supply of bonds here, you have actually created a mechanism for the emergence of a bond market. There are many other things that are needed to be done to get it up to speed.
This is happening gradually, but this is an important initiative in terms of bringing into play a more feasible kind of a bond market scenario which allows banks to issue bonds and then use that money to finance infrastructure.
Over time I expect this to develop into more direct bond financing kind of environment, a kind of ecosystem and that is a very positive change. So what this reflects, a couple of other things I want to get to also, is this sense of trying to address the constraints on both sides. There is no point in addressing the constraints on one side if the other side remains binding.
I am very pleased with that, but in essence creating incentives for production of other things appears to be very ambitious national level reform of the Agricultural Produce Marketing Committee Act, the APMC.
That is a state level issue. So I am not sure how it plays out, but bottom line is the combination of agricultural initiatives does offer some solution to the kind of inflation, the food inflation problem that we have really not been able to get the grips with over the last several years.
So when we look at this approach, while it looks very pragmatic and I agree, I accept that it is a pragmatic approach, the risk associated with the implementation grows because you have to bring many more stakeholders, many more constituencies into play to get things to work. So that is where I am sounding a little bit of cautionary note on this approach.
Mythili Bhusnurmath: Not on the same page as the predecessor NDA government. How do you react to that? Were you surprised by the absence of any mention of second generation reforms or do you think this was neither the time nor the place?
Subir Gokarn: No, it was very much the time which is what was the basic source of my less than enthusiastic response to the budget and at least in the communisation sense, not as I said necessarily in the detail sense.
This is the first budget of a new government. After 10 years, we have had a change. Lots of problems with the economy, you can attribute them to various causes, but we do need to have a diagnostic which in essence the Economic Survey did provide reasonably sort of balanced diagnostic and based on that diagnostic what are the solutions that the new government offers.
So the survey and the budget in this context had to dovetail with each other. May not agree with everything that the survey says, may not accept everything as being feasible, but to the extent that they have identified a number of factors and there were some of them in the capital markets and so on.
I am not denying that there were some linkages, but the strategy that emerges from that diagnostic needed to be articulated in the first budget and my judgement is that it was not.
So we had to actually glean the strategy from the various initiatives. That is the communication challenge. So somewhere soon, the government must use an appropriate opportunity, maybe the August 15th, but that is really a mass audience kind of speech.
So it may not be easy to break it down into very explicit strategies, but something like that needs to lay out a sense of direction on all of these fronts in infrastructure, agriculture, employment, capital markets, land acquisition, education, health. Everything requires some clear goalposts and I do not think we have seen that. Perhaps the budget could have started the process.
I do not think it did adequately, but now we have to wait for another occasion when these goalposts start to get articulated and I hope that is done fairly soon because otherwise, there is a danger that the government is not seen to be acting in sync, acting in coordination and that is a very strong message that came out with the campaign that this government believes in this kind of intense coordination.
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