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  • Nilesh Shah

    MD, Kotak AMC
    Shah has over 25 years of experience in capital markets. He has managed funds across equity, fixed income securities and real estate. He has studied at the Institute of Chartered Accountants of India. Shah has also co-authored a book - 'A Direct Take'. His dream is to go backpacking with his better half some day.

Budget can be pro-growth and still stick to fiscal discipline, & how!

The Budget should focus on reviving private investment, which has been lying low.

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Last Updated: Jan 23, 2020, 01.12 PM IST
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The Budget must create a fiscal situation in a manner where there is no crowding out for private sector investment.
Markets and the street are looking hopefully to the Union Budget. They expect the Budget to be pro-growth, to be fiscally prudent, and to help revive private investment, especially when the economy is growing at a dismal 5 per cent. So, how can the Budget support growth?

Well, economic growth is a function of consumption, investment, government spending and trade balance. If government spending increases, growth will be supported directly or indirectly.

First, the government must spend money on infrastructure investment, on education and healthcare and on rural India, which are all in the need of support right now. Any investment in this sector will create growth at multiple levels.

Secondly, there are two sectors which require support from the Budget – real estate & construction and NBFC. The Budget must provide pro-growth incentives so that both these sectors can see quick revival.

The Budget should also focus on reviving private investment, which has been lying low, by creating a conducive environment so that entrepreneurs are comfortable making investments in India.

In order to spend, the government needs revenue. We have seen in the past that lower tax rates have improved compliance and resulted in better tax collection. This Budget should aim to do away with certain exemptions (that have probably gone well past their expiry date) and rationalise the taxation system in a manner that improves compliance so that the tax collections go up. While collecting taxes, the Finance Minister must remember what Chanakya said centuries ago: “Tax should be collected like the bee collects nectar or honey from the flower.”

The government has stayed on the path of fiscal prudence over the past six years and must continue on this path going forward. On one hand, we demand more government spending to spur investment and on other there must be fiscal prudence.

So how does one achieve the balance among these conflicting objectives? Well, that can be ensured by raising more non-tax revenues. It could be through disinvestment, which we sadly missed this year. It can also be done through asset monetisation - one can learn from how the UK’s first female Prime Minister Margaret Thatcher privatised and divested not only equity shares in government/public limited companies, but also assets like parks, palaces, hotels and so on.

The government is sitting on Rs 100,000 crore worth of properties and other assets under the Custodian of Enemy Property Act. Those assets can be monetised to fund deficit, so that it does not stray from the path of fiscal prudence.

This Budget should also accept the reality. Our desire is to grow in double digits in order to achieve the $5 trillion GDP target. Our domestic savings, which have fallen from 38 per cent in 2008 to 30 per cent in 2018, are clearly not sufficient to achieve that kind of growth. We must augment domestic savings with global savings in order to create faster rate of growth. Today, we receive a fair share in equity inflows, but foreign investors’ participation in debt is much lower than what we deserve, courtesy self-imposed restrictions. By becoming part of global bond indices or by doing a sovereign bond issue, we will be able to attract long-term global debt capital, which can augment our domestic savings in order to create faster growth.

This Budget should also encourage financialisation of savings. In the last eight years, between official channels and gold smuggling, we remitted about $300 billion abroad for import of gold and precious stones. Had that money stayed in India, our GDP would probably have been higher by about 11%. Clearly, it is easier to buy gold than buy any other financial instruments -- be it mutual fund units, bank deposits or shares and securities. If we can improve the ease of buying financial products and make it comparable to buying of gold products, then hopefully, there will be more financialisation of savings and the money that stays back in the country will help create better growth.

The Budget should also focus on what is known as zero-based budgeting. There are certain spendings that historically keep on coming – they are probably well past their expiry dates – and we don’t get much returns on them. The Budget must take a holistic approach to zero-based budgeting to weed out those expenditures where returns on spending are not sufficient. This will create some fiscal space on the spending side and also contribute to fiscal prudence.

The Budget should focus on reviving investment, which has been on the backfoot for a few years. Investment can be revived through passing of credit, which has been in a soft patch for some time.

The Budget must create a fiscal situation in a manner where there is no crowding out for private sector investment. It should create a fiscal situation whereby the central bank can cut interest rates. Both, lowering of real interest rates and avoiding any crowding out can contribute towards revival of private investment.

Even beyond the Budget, the government needs to do a couple of things. One area to focus on is reducing our trade deficit with China, which hit the $58 billion mark last year. Taking other factors into account, like the hawala market transactions and routing through Vietnam, Bangladesh and other countries, maybe our actual trade deficit with China would top $70 billion. No other country gives such welcome to Chinese goods.

We must use all the tools in our repertoire to ensure that the trade deficit with China comes down. This isn’t related to the Budget, but is important to ensure that our manufacturers do not become traders and our jobs do not get exported to china.

To summarise, this Budget should be pro-growth, fiscally prudent and focus on reviving private investment. The markets and street are highly expectant and hopefully, the Finance Minister will please them all on February 1, 2020.

(Nilesh Shah is MD & CEO of Kotak Mahindra AMC and a member of Prime Minister Narendra Modi's Economic Advisory Council.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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