Dr Rudra Sensarma
PSU banks require Rs 5 lakh crore of capital infusion for fulfilling Basel 3 requirements and to meet the growth needs of the economy. However, the Union Budget 2016-17 could only provide Rs 25,000 crore for this purpose. In these times of fiscal consolidation the government simply does not have any more money. It therefore has no other option than to restructure PSU banks under the Banks Board Bureau’s guidance.
I expect a battle with trade unions and the Opposition, which will test the ruling NDA’s conviction for reforms. Unfortunately, the Union Budget itself does not reveal any appetite for privatisation. The disinvestment ministry has been renamed as Department of Investment and Public Assets Management which does not raise hopes. The government has been unequivocal about the rural sector focus of the Union Budget. With back-to-back monsoon failures, rural India has been under distress and this was the right time for interest subventions on farm loans and increased allocation for NREGA. Revival of rural demand will make up for the continuing slowdown in global demand and help next year’s GDP figure. Half of our working population is engaged in the least productive sector agriculture and therefore the twin productivity boosters of rural roads and electrification will transform rural India.
This is an unabashedly Keynesian budget where the higher public spending and tax breaks such as those to the labour intensive housing sector will generate demand in the short run. In the long run, it will raise productivity and augment output of the economy. From a macro perspective, meeting the fiscal deficit target is a big plus as that assures the markets about the credibility of future consolidation plans. We need to create a million jobs a month to prevent our demographic divide from turning into a demographic disaster. The incentives for startups, new manufacturing units and government’s sharing of the EPF contribution for new employees are all going to generate employment.
However I am concerned by the emergence of a cess ‘raj’ whereby the government has avoided sharing new revenues with states by taking the cess route instead of raising taxes. It complicates the indirect tax structure and is unfair to the states. The increases in service tax and cess are bad ideas unless they have been introduced as intermediate steps towards higher rates that will result under GST. The increase in luxury taxes and super-rich surcharge along with exemption for low income tax payers may promote an egalitarian society. The government should introduce an inheritance tax next. In sum, this budget is pro-growth. Therefore, I feel the RBI does not really need to cut interest rates now unless it is absolutely confident about low inflation.
Dr Rudra Sensarma is Associate Professor of Economics at the Indian Institute of Management, Kozhikode. He takes keen interest in banking, monetary policy, financial markets, development finance and public policy