Budget 2015-16: What to expect

Introduction

     The forthcoming budget is expected by some to be ‘make or break’  or ‘path breaking’ , by others to provide a legislative or economic road map for the remaining term of the Govt.  Most likely it will focus on issues under the purview of finance ministry, namely macro management, taxation, expenditure, financial sector and Balance of Payments.

Federalism

   The abolition of the Planning Commission and Finance Commission recommendations on tax devolution, together makes it possible for this budget to initiate a structural movement back to the principles of Federalism embedded in the constitution and its Central, State and concurrent lists. Though the Concurrent list gives overall policy responsibility to the Central government for many sectors, the administrative responsibilities have been fairly well defined.  Thus the States are responsible for the basic Health, Education, Social Welfare (poverty) and Security (police) of the general population.

    The Finance Commission recommendations to increase non-discretionary tax devolution by 10% points to 42% from 32%. This calculation accounts for the actual & potential revenue receipts and expenditures of the States on all sectors that are the administrative & financial responsibility of the States. This effectively means that instead of an extra 10% being channeled through the Central Govt and the (erstwhile) Planning commission into Centrally Sponsored Schemes (CSS) on Health, Education, Social Welfare, these funds will go as untied funds to States to allocate in the manner that they feel is most appropriate for their State. The budget will inform us how quickly the old schemes in these sectors are to be phased out or abolished. This is the essence of Federalism: Financial funds, allocation rights and administrative  responsibilities must be located in the same level of Govt., whether it is the Center, State or Local Govt..

   The fiscal recommendations of the Finance Commission, a constitutional body,  has removed some of the uncertainty about government’s fiscal stance. The government now has clear backing to ignore demands for a fiscal stimulus beyond earlier targets of 3.6% in 2015-16 and 3% in 2016-17. It can also focus more strongly on reducing the Revenue deficit (RD), something I have argued for years. The RD mirrors the net dis-saving of the Central Govt. A reduction in the RD is therefore critical to raising the National saving rate. This in turn is linked to India’s net international asset position (NIA), stability of capital flows and the international credit rating of the country. The budget is expected to spell out its approach to Fiscal responsibility legislation and possibly to raising India’s credit rating over a decade.

Growth Imperative

   The Growth rate of the Indian economy has accelerated  by about 0.9% point in 20014-15 (compared to 2013-4). This is accompanied by (or partly due to) an acceleration in growth rate of private consumption growth and gross fixed capital formation.  However, available indicators also show that the growth of demand for the corporate sector is weak.  In the case of Automobiles, housing &  other consumer durables, high real interest are an important contributor. A clear and credible fiscal consolidation path will make it imperative for the Central Bank to reduce high nominal policy rates that are partly responsible for choking consumer demand.

Expenditure Priorities

  The budget is also expected to lay out a clearer approach to and road map of the Government’s new flagship programs, namely Jan Dhan Yojna, Sagar Mala, 100 cities, Digital India/e governance, e-health/education, Make in India, Skilling India, Swach Bharat(S) and  Beti Bachao-Beti Padhao. The move from price distorting subsidies to direct transfers to deserving poor will gather steam and help reduce corruption & admin costs. The consequent fiscal space will be used to increase spending on public goods infrastructure that can attract complimentary job creating  private investment.

Eliminating Tax Terrorism

    Tax administration and appellate procedures, their speed and effectiveness, are known to be an important focus of the Govt., since the BJP manifesto used the word “tax terrorism”. Both domestic and foreign tax payers are looking for more concrete measures to further these objectives and end the anti-deluvian practices of the tax administration and their replacement by a more modern, accounts based customer focused approach. Business is also looking forward to Initial steps towards GST implementation, a clear statement on the simplification of Income taxes and the Direct taxes code.  I am also hopeful the interrupted journey to a simple, uniform customs duty structure will resume. For instance the elimination of dozens of specific duties on textile products is overdue. Some steps towards rationalization of Agricultural import & export duties would also be welcome.

Minor Tax Sops vs Simplification

      An interesting question is the extent to which, government will go back to the pre-1990s practice of using deductions & exemptions to stimulate demand for or investment in, certain sectors like defense, electronics, real estate and automobiles.  I expect it to follow a middle path of some simplification coupled with modest incentives, which many budgets since 1991 have done. An increase in the housing (interest) deduction in the personal income tax can probably be justified on grounds of inflation adjustment and is likely to occur. Electronics suffers from an inverted customs duty structure because we bound ourselves to an IT0 agreement that eliminated tariffs on many final goods, but not on imported inputs. Tax incentive may be used for incentivizing job creation and employment opportunities in labor intensive sectors like tourism

Financial Reforms

     As financial and external sectors come directly within the purview of the Finance ministry, I would expect the budget to address the legacy problems of the Public Sector Banks, such as the NPA’s incurred by them due to Govt. forced lending by PSBs to unviable infrastructure projects. These projects were recognized by private banks to have excessive policy and regulatory risks to be viable for debt financing.  On the positive side one expects new policy and institutional reform initiatives relating to the financial and external sectors. For instance the stalled proposal for creating a global financial center in India, is likely to be revived in a new form.  Similarly, some reduction of controls on the external/BOP account can also be expected.

Conclusion

Overall I expect the budget to give us a sense of the Govt’s approach to fiscal and financial policy and to give an indication of economic reforms to accelerate and sustain the growth of the economy, jobs and employment opportunities.

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A version of this article appeared on the Op Ed page of the Indian Express on August 28, 2015 under the banner, “No Clean Slate.” http://indianexpress.com/article/opinion/columns/no-clean-slate-2/

NITI AYOG

Introduction

     The “Yojna Aayog” or “Planning Commission” has been replaced by the “National Institution for Transforming India” or “NITI” for short.  From “Yojana” to “Niti” what is the difference?  First and foremost a sharp break from Soviet inspired National Development (Five Year) Plans to “Niti”, that is “Policy” and Institutional change for ‘transforming India’.  Para three of the cabinet resolution states that, we “require institutional reforms in governance and dynamic policy shifts that can seed and nurture large-scale change.”

Policy And Institutions

“Development” is one of those words that everyone thinks they understand but means many different things to different people. It covers a multitude of possibilities as well as a multitude of ideological sins and special agendas. The cabinet resolution constituting the Niti Aayog approvingly quotes Mahatma Gandhi “Constant development is the law of life, and a man who always tries to maintain his dogmas in order to appear consistent drives himself into a false position”. The Planning Commission took its first tentative steps towards “policy” 28 years ago, by creating a post of Advisor Development Policy. There was so much resistance, that the Advisor (yours truly) had to be designated Advisor-Development Policy Research.” Despite decades of effort, policy solutions always played second fiddle to increasing Plan allocations and expenditures without any ‘social benefit-cost analysis’ or ‘Macro-economic models’ to back the decisions.[i]

   Three other points in the introductory part of the Cabinet resolution setting up Niti Aayog are noteworthy: First is the assertion that “our aspirations have soared and today we seek elimination, rather than alleviation, of poverty” The second is the important role given to governance in achieving desirable social outcomes:  “The people of India have great expectations for progress and improvement in governance, through their participation. They require institutional reforms in governance and dynamic policy shifts that can seed and nurture large-scale change (para 3).” Subsequently there is an indication of how the institutional reforms in governance can be brought about: “Government and governance have to be conducted in an environment of total transparency – using technology to reduce opacity and thereby, the potential for misadventures in governing(para 6 g).”

   An EPW (2002) paper had raised the issue of corruption & governance and to bring policy-institutional reform into the development debate, to no avail.[ii] A debate on Poverty elimination, as against alleviation, was sought to be initiated in 2005-06 through a Planning Commission paper, but was stymied.[iii] It is therefore very encouraging that this is an important part of the mandate of the Niti Aayog.

Third, is the recognition of a changed reality of economy, society and Government functioning and its implications: “India needs an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”. The role of the government as a “player” in the industrial and service sectors has to be reduced. Instead, government has to focus on enabling legislation, policy making and regulation (para 6a)” Many old style development planners refused to accept these changes ( even if they paid lip service to it), though this issue was raised first in 1990s & subsequently in the 2000s.[iv] A recognition of this reality by the Union cabinet provides a sound basis for closing the technology gap between India and Advanced countries, that is correlated with the large income gap between us. The reference to the role of Urbanization (para 6g) as an aid to technological catch-up, suggests an understanding of the links between technology gaps and per capita income gaps. This further links to Welfare gaps through the statement, “Equality of opportunity goes hand in hand with an inclusiveness agenda(para 8c).” The open discussion of the global environment and its two way interaction with India, also displays a degree of self-confidence vis-à-vis foreign countries (para 6c) that bodes well for building a competitive fast growing economy.

Niti Aayog

So what is the specific role of Niti Aayog in this changed environment: Its primary/central role is to, “Serve as a Think Tank for the Government”.. “to give “strategic and technical advice across the spectrum of key elements of policy. This includes matters of national and international import on the economic front, dissemination of best practices from within the country as well as from other nations, the infusion of new policy ideas and specific issue-based support.” (para 11). Several of us have argued for a long time, without much success, that the Old Planning Commission should evolve into a “Think Tank” with a primary emphasis on policy and institutions, rather than on expenditure programs and projects. By its bold move to abolish the Yojna Aayog and set up the Niti Aayog the new Government has set the stage for a wholesale transformation in this direction. Given the absence of any formal social benefit-cost analysis of programs and projects and the limited capacity for appraisal of outcomes, one had also suggested to the Deputy Chairman a decade ago that the Planning Commission develop a data base of best practices to guide future decisions.  It is hoped that a full fledged division will be set up in the Niti Aayog to translate this into reality, with all such information digitally accessible to experts and policy makers.

   Some of the specific objectives of the Niti Aayog are, at the level of generality of the Cabinet note, not significantly different from those of the Planning Commission or other organs of Government. However, the following objectives suggest a greater priority and emphasis on the issues mentioned in them: 

  1)    To design strategic and long term policy and programme frameworks and initiatives, and monitor their progress and their efficacy. The lessons learnt through monitoring and feedback will be used for making innovative improvements, including necessary mid-course corrections

   2)    To provide advice and encourage partnerships between key stakeholders and national and international like minded Think Tanks, as well as educational and policy research institutions

   3)    To create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and international experts, practitioners and other partners

   4)    To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best practices in sustainable and equitable development as well as help their dissemination to stake-holders

   5)    To focus on technology up gradation and capacity building for implementation of programs and initiatives

      In the first of these, the emphasis on “lessons learnt” is very important. Experience confirms a great reluctance to modify or junk programs when they don’t work. Vested build up and become so strong that it becomes impossible to overcome them.

 In the second the emphasis on interaction with international think tanks and Indian educational and policy research institutions, though expected from a ‘Think Tank for the government,’ would be a departure for Indian bureaucracy.

In the third, the emphasis on support systems, rather than funds/subsidies is an important departure.

    The fourth reinforces what was said earlier about good governance and best practices and suggests that improvement in governance will be seriously pursued to improve delivery of government social & welfare programs.

In the fifth the recognition of weak capacity and need for “capacity building” for implementation is critical to success of all new initiatives and many failed/failing old ones. For instance Urban development won’t work properly, unless we train hundreds of Urban planners. Similarly, setting up of traditional “Bric and Mortar” educational institutions (as against e-learning/education) will be quite ineffective unless we have scores of highly trained professors.

Conclusion

   The abolition of the Yojana Aayog and its replacement by the Niti Aayog, by the new government, is a bold and long overdue initiative.[v]  It will help change the emphasis from Projects and programs to Policy and institutions, from expenditure inputs to real outcomes through better governance and from political disputation over Incremental allocations to new challenges and opportunities in a global environment. The discussion of India in a global context also reminds one of Gandhi ji’s saying, “Let the windows of my mind be open to winds from across the World, but let me not be blown away by them.” Like all new institutions, it will be an extremely challenging job for Niti Aayog to fulfill its high objectives.

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A version of this article appeared on the OpEd page of The Hindu of 18^th January 2015, under the banner,” The New Name of Planning”: http://www.thehindu.com/opinion/lead/niti-aayog-the-new-name-of-planning/article6799483.ece

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[i] When I first arrived at the Planning Commission I was shocked to find no sign of “Social Cost-Benefit analysis” (as against Economic appraisal/cost-benefit analysis), the original justification & Sina-Qua-non of “Project appraisal”. The “models” that were sometimes said to be used in Planning Commission were of US undergraduate level.  In 2000s we did commission 3-4 Indian think tanks to build macro/CGE models suitable for policy analysis, but these were quite separate from five year or annual expenditure allocations, which were done by traditional methods.  

[ii] Arvind Virmani, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6MjQ4ODc3YWI2ZDcxZmE5NQ .

[iii] Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006.

[iv]  Arvind Virmani, “Size and Role of Government: Quality vs. Quantity of Intervention”, Indian Economic Journal,  Vol. 37, No. 4, April-June 1990; and Virmani(2002) op cit

[v] See, http://dravirmani.blogspot.in/2014/08/bharatiya-vikas-niti-sansthan-bvns.html for more on what will happen to planning and what  “Niti Ayog” may do in future.