Political uncertainty to inclusive growth?

The first trade-off is so tricky that politicians and researchers are both carefully burying their choices in vague words. Since the restoration of democracy in 1990, we have unknowingly established a trend where the economy slows down before the election amid political transition and uncertainty, and then takes an upturn soon after the election.

Graph-1 shows how major indicators such as large and medium scale industries, insurance, mining and quarrying (gas), and import duty moved along with ups and downs of GDP growth rates during pre and post-election years. So when time came for another election, the finance minister warned us of slowing down of the economy during his budget speech last year.

In the end, the GDP growth target for FY2014 was downward revised by a percentage to 6.12%. Now that an awkward election time is over, private investors are at a cross-road — whether to treat the upcoming fiscal year (FY2015) as post-election rejuvenating period, or continuation of political turmoil.

It’s not that easier a call for political parties or civil society members. Call by many “civil society” members ranged from direct call for another election to an inexplicit call for “conducive political environment.” Political agitation will surely hurt the economy and the poor people.

Then again, will the out-of-parliament opposition BNP just wait-and-see for five years or will they go back to political programmes to push the government for an immediate election? Apparently, BNP has moved on from street-protest for now. Their political talks have also moved on from demand for election or caretaker government to various historical debates. Yet, it’s strategically difficult for BNP to announce that they have actually moved on from political agitation now, which may continue to keep the investors hesitant.

That hesitation is clearly visible in recent economic indicators as shown in graph 2. The graph shows monthly point-to-point growth rates of selected economic indicators. Export growth came down from 36.3% in September 2013 to 6.4% by February 2014; flow of remittances experienced negative growth rates during August 2013 to January 2014; and private sector borrowing from the banking sector took a gradual downturn during the last fiscal year.

However, after February 2014, the investors are probably entering into the economy again, albeit hesitantly. Growth in export, import and remittances are showing upturns. High growth in LC opening, particularly in raw materials, also indicates future import and export potentials.

At this juncture, the finance minister needed to propose enough fiscal incentives to promote post-election growth, yet to have a big enough public investment outlay as a backup plan, in case the private sector steps back facing potential political violence.

In this background, the budget for FY2015 has been proposed with an estimated expenditure of Tk2,50,506 crore. Compared to the original and revised budget for FY2014, this new budget stands respectively 12.6 and 15.9 higher. This includes a Tk80,315 crore outlay for the Annual Development Program. With a planned deficit of 5% of GDP, the budget sets the revenue earnings target of Tk1,82,954 crore. Around 36% of the deficit is planned to be financed from foreign sources, while the remaining 64% will be financed from domestic sources (see Graph 3).

Most pre-budget discussions have already highlighted financing of the “big budget” as a major concern. In fact, over the years the reactions to national budget has taken a very typical form which would say — the budget is bigger than capacity but smaller than necessity; financing will be difficult as bank borrowing will crowd out private sector investment; and ADP will not be implemented as targeted. This is partly due to the fact that budget problems have also become very typical.

Ideally, the government first sets the target for expenditure based on needs and capacity, and then plans for revenue earnings. And lastly, when there is a deficit, financing is ensured through local and foreign sources. But a closer look at our budget trends makes it apparent that our budget expenditure is not being determined by earning and financing, and not just by implementation capacity.

During the last 12 years (FY2003-FY2014), on average, total revenue earnings registered 6% shortfall from the target, while foreign financing fell short of targets by about 43%. Despite reduced earnings and foreign financing, actual budget deficit remained lower than targets by 0.8% of GDP! This is mainly attributed to underperforming budget expenditure, where on average development and non-development expenditures fell short of targets by 19% and 3% respectively. Yet, the government had to cover over 10% of its annual targets from domestic sources.

If similar trend continues, one can already predict that total development expenditure at the end of FY2015 will come down to Tk70,000 crore, and government borrowing from the banking sector will cross the already high target. If the private sector continues a go-slow approach, this will not cause much of a problem. However, if the finance minister really hopes to revitalise private investment, major drive will be necessary for revenue collection to offset the necessity of bank borrowing.

The second trade-off for this budget has been growth vs equaliy, amid growing inequality. BBS’s preliminary estimation of GDP revealed an average national income of $1,190. This figure might spread an essence of promising development; however, the true picture may differ by far. Household Income and Expenditure Survey (HIES 2010) reveals a high level of income inequality within the society. Here, 35.8% of household income is accrued from the top 10% of the richest, while the bottom 10% of the poor earns only 2% of national household income. Since the poor cannot accumulate wealth with such a small amount, the actual wealth difference between the rich and the poor are much wider than this.

Thus, there have been calls for this budget to take necessary fiscal measures to rebound the election-struck economy, but in an inclusive manner to reduce inequality. To this end, we can assess the budget against four indicators:

Decentralising economy

With the goal of decentralisation, the finance minister has declared to provide much higher tax rebates for industries to be built into the least developed areas and places other than the city corporations. This would give a chance to enhance industrialisation and generate employment in the least developed areas. The proposed scheme includes tax rebates for those industries from 10% to 20% depending on their eligibility and time frame.

The finance minister has also mentioned District Budgets for Tangail and six other districts. If implemented effectively, these are indeed positive steps towards achieving decentralised governance.

Direct tax

As the economy is shifting away from its dependency for revenue on import taxes and duties, more emphasis will now be given in direct tax as mentioned in the finance minister’s budget speech. So, for high income earners with an annual income of more than TK44.20 lakh, income tax has been raised from 25% to 30%. Thus we see that a progressive tax rate is now being imposed which should in turn help to reduce inequality. A much neglected area under tax scheme has been taxation of land owning and selling. From this fiscal onwards — considering the possibility of high capital gain and redistribution of income, the government is going to increase tax on land starting from its deed value to registration value and will implement a katha based tax regime.

Regrettably, alongside these probable positive proposals on taxation, the finance minister remained silent about black money whitening issue in his budget speech and by default will be continuing the outgoing fiscal’s black money whitening mechanism by section 19E of Tax Ordinance. This means, by investing in real estates and paying some penalty, people will have the scope to legalise their possession of black money.

Sectoral allocation remains okay

The budget for FY15 contains allocation worth Tk1,500 crore to eradicate extreme poverty. According to the estimates, 52.2% of the total budget is directly or indirectly poverty linked, which was 51.8% in the original budget for the previous fiscal year. From the trend in poverty reduction, the finance minister has mentioned the target of bringing down the poverty rate at 10.2% by 2021.

To extend the support to the physically challenged towards building an equitable and inclusive society, a target has been set to increase the number of such beneficiaries to 4 lakh in the safety net programmes. Besides, the extended safety net programme is to cover 50 thousand students with disabilities in FY2014-15.

Investment opportunities

The government has promised to continue its facilitation projects to help SMES through financing, providing infrastructure facilities as well as by undertaking skill development training projects. The finance minister mentioned that to eradicate poverty, particularly among the hardcore poor, there will be provision for micro-credits for creating employment and self-employment projects. Also as a part of women empowerment project, the minister promises to not only continue but also expand the micro-credit supports to women.

Moreover, the micro-credit providing institutes will continue to be exempted from paying any tax on their income from interests. Unfortunately, amid prospects for recapitalising the corruption-sickened state-owned banks, no visible safety mechanism has been suggested against growing banking scams.