Showing posts with label Revenue Deficit. Show all posts
Showing posts with label Revenue Deficit. Show all posts

Tuesday, March 1, 2016

Budget 2016-17; Macro highlights



Introduction

   India's real economic growth  is projected by CSO at 7.6% for 2015-16.  This is a respectable growth rate, despite two specific sectors that do not appear to share this prosperity. The agriculture sector is clearly distressed given two contiguous drought years. The other sector that hasn't seen the increase in growth anticipated two years ago. The excess capacity and deflationary conditions in the global metals and commodity is a major reason for this low growth.  The global growth slowdown and heightened risks in the global environment form a critical background for the budget

Fiscal Consolidation

   The most important and critical part of the budget is the fiscal balance. Despite suggestions  by many economists,  business men and corporates to let the fiscal targets slip for another year to finance higher  government infrastructure investment in 2016-17, the FM has rightly decided to stick to the 3.5% of GDP, fiscal deficit targets for 2016-17, outlined in the 2015-16 budget.  This will also bring the Primary deficit down to 0.3% of GDP in 2016-17. This is the best insurance against heightened global uncertainty.  The pleasant surprise is that the Revised estimate(RE) for Revenue deficit is 0.3% point lower than projected in the BE for 2015-16. The revenue deficit is an approximate measure of the dis-saving of the Government.  A reduction in this deficit adds to National savings and thus provides the most effective way of raising the National saving rate and reducing dependence on foreign savings.

Subsidy

   The most important subsidy reform in the budget is the decision to introduce a bill to give statutory backing to the use of Aadhar for providing benefits, transfers and subsidies to the targeted population of the poor and needy. This disconnects the general problems of secrecy & confidentiality and connects it to the governments duty to ensure that government's social expenditures reach the intended beneficiaries without being lost in administrative waste or corruption. A few small administrative steps are also being taken to reform the subsidy system. One is the program to provide LPG to BPL women so as to eliminate the health hazards of wood fueled open Chulahs. The second is a proposed test in a few districts  of a shift in provision of fertilizer subsidy from the current wasteful approach to a Direct Benefit Transfer (DBT) system successfully tried in LPG. Reform of the food procurement continues to make very slow progress through greater use of online & digital technologies. Disappointingly there was no mention of reform of the kerosene subsidy based on the previously started  DBT experiment.

Infrastructure Investment

    The budget also remains firmly on track with the infrastructure investment programs announced in the last two budgets and in the interim periods. This includes roads, electricity, ports, waterways,  airstrips and digital connectivity. To this has been added a greater emphasis on irrigation and on infrastructure connecting rural areas to State highways. The attempt to provide an integrated program for development of agriculture and rural areas has attracted more focused attention to irrigation & other inputs and processing of agri products. There also three proposals related to PPPs: A Public Utility Resolution of Disputes Bill, Guidelines for PP renegotiations and Credit rating system for Infra projects, which will help in resolving legacy issues while imparting greater regulatory clarity to bidding for new projects.

Tax Reform

        The picture on the tax reform front also remains mixed as in the last budget. Budget takes the first steps to reform the Corporate Income tax, by giving notice of phasing out of some exemptions and lowering the tax rate for new manufacturing firms that opt out of use of remaining exemptions to 25%. There is also a commendable effort to expand the presumptive tax effort including to professionals. However there are also a number of small tax changes that are an irritant to tax payers and slow progress on simplifying tax administration, even though the intent is reflected in adoption/acceptance of Administrative Reform Committee & Justice Eswar committee recommendations.  Numerous changes in excise and customs duty also suggest a move back from simplification to industry specific (dis)incentives.

Policy Reform

    Policy reforms are essential for sustained fast growth. There are three or four  policy reforms that are noteworthy. One is a reform of the Motor Vehicles Act to open the passenger bus transport service sector to private competition. So far this sector has been a monopoly of the State Govts. The proposed reforms will allow private sectors and even State companies from other States to provide bus transport service. This will be a model law which can be adopted by the States.  The second reform is the permission of 100% FDI in the Food Processing sector, for processing and storage of Indian agricultural produce and manufactures based on these products. This is a very important opening, that one has recommended for many years, after trying many other schemes without achieving the desired result of reducing the wastage of Indian grown agricultural produce. The third important reform is the Financial Firms resolution Bill, and related reforms of ARCs plus the amendment of the RBI Act to formally set up a Monetary Policy Committee (MPC). Even though this has been expected, the formalization of monetry policy system in the RBI Act will enhance the global credibility of the monetary system.
Over all it was a good budget, because of the fiscal consolidation and the policy reforms discussed above.
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An version of this note appeared in the Economic Times, under the Banner, "Fiscal Balance best Insurance against global knocks," on  March 1, 2016 at,
http://economictimes.indiatimes.com/news/economy/finance/budget-2016-fiscal-balance-best-insurance-against-global-knocks-says-ficci-mentor-arvind-virmani/articleshow/51201750.cms

Tuesday, February 10, 2015

Budget 2015-16: Some Suggestions



Introduction

    This note makes suggestions on issues that either come directly under the purview of the Ministry of Finance or are closely related to it.  These include Fiscal Deficits, Taxation, Expenditures and Subsidies and Financial Sector.  Though “Big Bang budgets”  have sometimes had policy announcements outside these areas, this is only successful if there is a great deal of confidence that the policy announcements will reach fruition & implementation. Otherwise they can do more harm than good.

Fiscal Deficit & Revenue Deficit

    The budget needs to stick to the Fiscal deficit targets (glide path for reducing FD) outlined by FM Arun Jaitly in his maiden budget, or risk losing credibility. It is equally, if not more, important however to achieve the original FRBM target of zero Revenue Deficit by 2016-7. These two together imply an improvement in the quality of central government expenditures with a shift from subsidies and current expenditures to investment-capital expenditures: In other words the reduction in revenue expenditures can provide room to increase investment in infrastructure while meeting the old fiscal deficit targets.[1]
    This will also create the confidence in the RBI to move aggressively on Repo rate reductions an easing of monetary policy to complete the “Macro Pivot” that the Indian economy desperately needs to stimulate demand for consumer durables (like automobiles, housing & home goods).[2]
   As a reduction in the revenue deficit represents an increase in public savings, this will help increase national savings and thus help slow down the rapid accumulation of foreign liabilities [increasingly negative Net international Asset (NIA) position of India] that has occurred since 2010 and minimize the probability of sudden stops in capital inflows.

New FRBM & Credit Rating

  India’s high fiscal deficit has been the major reason for its marginal credit rating (lowest investment grade: Moodys Baa3/S&P’s BBB-). Government may consider targeting a further reduction in the Fiscal deficit to zero by 2019-20 with the objective of raising India’s global credit rating. FM could announce his objective of raising India’s global rating by three notches to upper medium investment grade [Moodys A3 or S&P’s A-] over the next five years or so.  This would also need to be supported by a new FRBM with new FRBM targets to establish credibility and ensure a credit rating upgrade of this magnitude.

Tax reform

Administration, Appeal & Settlement

       What has been called “Tax Terrorism” by some and “harassment” by others, has been one of the contributors to the collapse of economic growth from 2011 to 2014. There is an urgent necessity for a dramatic overhaul of the entire system of tax administration, tax procedures and tax rules and of the review, appeal and rectification mechanisms. Based on the recommendations of previous committees on tax administration reform and the Government’s  E-Governance ideas, the FM’s budget speech could outline a credible road map for reform of the revenue administration and speeding up of the appeallate system. For instance recording of every decision of each tax officer, including those relating to tax demands, success of legal cases and years spent, would help analysis of outcomes of these decisions with a view to continuous improvement.  It is important to demonstrate quick, fair & effective tax justice for all actual & potential tax payers.

Goods & Services Tax

  The FM can spell out a road map for GST and set in motion any changes in administrative structures/systems that will be required for the GST. He could also start modifying Central Excise/ VAT/ Service tax rates to close the gap with rates that will be required under GST.

Customs Tariffs & Duties

     Inverted duty structures arise whenever selected products are allowed below the average/median rate which is currently close to the general peak tariff rate of 10%. The IT zero agreement reduced tariffs on many electronics final goods to 0% and therefore created an inverted structure in electronics. To the extent it is legally possible an effort must be made in the budget to move to a uniform 10% tariff rate by raising import tariffs that are below this rate and lowering those which are higher than this rate. This is the best structure for the “Make in India objective”
    Textiles and Agriculture are two major sectors of the economy, for which customs duty reforms lagged far behind the others. Textiles still has a complex mix of Specific and Ad valorem import tariffs that is a source of enormous corruption. This undermines/defeats any objectives that such a complex structure was designed to achieve. It would be far better to drastically simplify these rates. The ideal solution would be to eliminate specific duties and unify Ad velorem rates at 10% (which is the general peak rate). The second best solution would be a uniform rate of 15% to be reduced to 10% in a few years. The third best would be to reduce the specific rates to 2-3 at most and eliminate them in next few years.
Agriculture is the only sector subject to Ad hoc bans on import and exports. I know from experience that these bans and their removal always come too late to benefit the farmer. These Ad Hoc changes usually benefit some favored intermediary. The consumer is usually saved from the worst excesses. The farmer can only benefit if there is a stable regime of import tariffs and export duties on the basis of which he can plan future crop patterns and investments for productivity improvement. The FM could announce his intention to eschew import-export bans (in future) and announce a committee to work out a structure of import tariffs & export duties that would balance the interests of farmers and consumers. If some reports/studies exist in the Ministry he could even announce some rationalization of tariffs & duties, for instance a move to reduce tariffs on all agricultural inputs (cotton, wool, silk etc) into manufacturing to 10%.

Income Taxes

   The Income tax law and rules are a ramshackle structure built over decades with new extensions added every year.  The original version of the new Direct Taxes Code, which I saw in 2009 as CEA, came fairly close to a simplified structure based on sound economic principles. There were a few minor items which could have easily been corrected. I understand it has lost some of its economic soundness and simplicity as it went through Parliament. However, the need for a new Income Tax law and simplified rules remains.  Some effort needs to be made to simplify the income tax on the basis of the principle of reducing ‘exemptions and deductions” and reducing marginal rates to produce revenue neutral change. 
The complexity and harassment is even greater with respect to business and corporate taxation, and a good budget must show some effort at simplification, particularly with respect to cross border entities and transactions.
One uniquely Indian anti-entrepreneur tax rule introduced in the last 3 years needs to be eliminated: That is to treat issue of shares of Start-ups to funders at a price above the face value (at which they are held by the start up entrepreneur) as short term capital gains on which a tax must be paid at time of issue.

Non-Tax Revenues

  Finance Ministry must continue to pursue the change in system for leasing national assets like spectrum, minerals, and land is done through transparent, competitive auctions. In the case of spectrum, this requires removal of artificial stipulations of minimum price (price of rural spectrum in many states is zero), freedom to trade or sub-let the spectrum to other qualified bidders and to ensure open access in areas where spectrum is surplus (e.g. many rural areas)

Expenditures

    With the abolition of National Planning and the Finance Commission recommended transfer of higher share of gross taxes, the Central Government should increasingly focus on subjects in the Central list and on public goods(& service) aspects of those in the Concurrent list. The division of expenditure into Plan & non-Plan should be re-classified into the economic categories of “consumption” and “investment”. These overlap broadly with the budgetary categories of “current” & “capital” with the major exception of expenditure on maintenance and repair of capital assets(which is a form of capital formation).  A serious effort must be made in this budget to change the expenditure mix from current to capital and thus reduce the revenue deficit.

Investment Expenditures

    The Central Government must focus its limited resources on classic “Public goods infrastructure”. These are parts of infrastructure in which social benefits far exceed private benefits or from which it is difficult or impossible to collect user or service charges on a sustained basis. Highways and roads, carefully selected rail lines & related signaling equipment and critical bottlenecks in Ports and waterways are already identified focus areas on which greater budgetary emphasis is needed. However, to successfully bring in complementary or supplementary private investment in “private goods infrastructure” the policy & regulatory environment must simultaneously be made more transparent and free of policy and regulatory risks.

Consumption Expenditures

        On the consumption side the focus has to be on the subsidy and other reforms already identified by the government should be pushed along by this budget: Drastic reform of Food Corporation of India and the entire procurement-PDS system can reduce wastage & corruption and make more funds available for investment. Initial steps could also be taken for shifting all metros/urban areas (given competitive supply of food grains) from physical supply to cash subsidies for food grain purchase.  Similarly, NREGA reforms to increase capital component and pay wages directly through Aadhar linked accounts could also change the mix.
        In Education and Health, Central Government should focus on preparing and propagating E-education and E-health systems and platforms that can be used in any/every State, it should focus on educating the educators, teaching the teachers, training the trainers and managers of (public & private) education and health systems across the country. It should focus much more on “Public health” & eradication of Communicable diseases and on “Public Education,” than on personal health & education. The “Swach Bharat” and “Beti Padhao, Beti Bacha” campaigns are good examples of this approach. The Skill Development Mission, including the need for Standardization and Certification of the thousands of certifiable skills, is another initiative that requires a much greater urgency and thrust to be imparted to it.

Subsidies

   The decision of the Govt. to increasingly transfer subsidies directly to intended recipients (without distorting prices of products and services) by linking them to the UID/Aadhar number is a very good one. Government has also accepted the advice to make the (cash) transfer payments through bank accounts.  If all subsidies including kerosene to the poor & fertilizer/Urea subsidies to farmers can be given directly, it will be a signal achievement of the government. The funds saved through reduced administrative costs and elimination of corruption can be used for job creating, productivity enhancing, infrastructure development.
The Aadhar authority needs to start analyzing all its records to eliminate duplicates and identify incomplete coverage. For the latter, one way is to compare with the digitized electoral roles with Election Commission. Second way is to aggregate UID Nos issued, by blocks and compare with population records from the last census, to identify areas that need special effort.
There are two non-conventional ideas that are worth considering & adopting. First is the use of cell phone based subsidy/transfer payment systems for reaching the poorest of the poor, given that 80-90% of the population has cell phones. In fact it would probably be cheaper to give all the ultra-poor a free cell phone than to ensure that they have usable bank accounts.[3]
Second, adopt a UID linked multi-application smart card (MASC) as a single unified platform for all subsidies, welfare and social schemes. Such a card can easily have slots for the poor’s entitlement to public education and government healthcare facilities or Govt. funded credit/debit limits for use in private facilities.[4]

Financial Sector

          The rise of NPAs in Public sector Banks (due to forced lending for infrastructure projects subject to Govt policy & regulatory risk) and the imminent necessity of introducing Basel III capital adequacy norms, makes capitalization of PSBs an urgent problem. The funding required has to be raised from the market. One possible solution is to set a dual limit: 51% for SBI and a few of the strongest & most profitable PSBs and 26% for the rest. Then sell shares in the latter to capatilise all PSBs to required levels (Many years ago a committee headed by Dr. Bimal Jalan had recommended lowering the limit for Govt. shareholding in PSBs to 26%).

Conclusion

    In his speech to the ET Global summit, the PM has laid out the elements of a New Development Paradigm, of Employment Generation and Empowerment of the Poor and Middle Classes.  The forthcoming budget should flesh this out and give it a more concrete shape.[5]

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[1] During 2005-2008  an argument was made that subsidies for health & education should be classified as “capital expenditures” (as “human capital”) contrary to the accepted budgetary practice all over the World. The result of this exercise was not better health & education but a large increase in consumption expenditures that helped create the 2010-11 bubble and subsequent bust in economic growth.
[5] 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

Saturday, January 31, 2015

India's new GDP series (base 2011-12)

Past Data

  When constant price GDP is re-based we need 5-10 years of backward data to determine growth trends as per new series. This is because all growth rates will change (in principle). It is impossible to make judgements of trends with only 2-3 years of data. Thus it is going to be very difficult to predict likely GDP at 2011-12 prices(new series) for 2014-15 or to make projections for 2015-16.
     Certain analysts in the media have taken the two new growth rates available for the new series and combined them with growth rates for earlier years from the old series to produce five or ten year averages. This is not only technically incorrect but can produce completely wrong results (for past real average growth rates). The DOS must produce the back series, as they have always done in the past. Such back series are never perfectly consistent with the new series because of less data, but are much better than using the old series for earlier years (spliced or otherwise).
    Two short term conclusions can however be made from the growth data for two years. There seems to be the start of a recovery in Private Consumption Expenditure(PFCE) and in Fixed Capital Formation(GFCF). If these are confirmed in the 2014-15 data, to be published shortly (February 9th ), this will confirm that we have passed the trough of the investment cycle and are firmly on the path to recovery.
    Incidentally there is little change in the nominal value of GDP for the last two years for which data has been made available. Consequently ratios, such as Fiscal deficit and Revenue deficit (as a per cent of GDP) are highly unlikely to change (ie changes will come within the rounding error).

Advance Data(PS 9/2/15)

 The advance data for 2014-15 came in on February 9, 2015 as expected. These data show an increase in the growth rate of Gross Value Added at basic prices (GVA) by 0.9 per cent point. The GVA is the equivalent of what was earlier called GDP at Factor Cost. In my post-budget forecast in July 2014, I had projected that GDP FC would grow approximately 1% point faster in 2014-15 than in 2013-14.  A few months ago, one had suggested that the delay in monetary easing by RBI, despite the dramatic downtrend  in inflation, would likely result in under shooting of this target. Thus a 0.9% point increase in the growth of GVA confirms our prediction, despite the re basing of the GDP to 2011-12.
     The advance data also confirm the revival of both private consumption and fixed investment. Thus Private Fixed Consumption expenditures (PFCE) growth has acelerated to 7.1% in 2014-15 from 6.2% in 2013-14. similarly the growth of Gross Fixed Capital Formation (GFCF) has accelerated to 4.1% from 3.2%. Thus one can be reasonably confident that the investment cycle has bottomed 2012-13 and is now firmly on the upswing.
   The third point to note is that inflation trend has clearly reversed. The most widely used and accurate measure of inflation globally is the private consuption price deflator. This shows a dramatic decline in inflation rate to 5.4% in 2014-15 from 8.5% in 2013-14 (and 9.4% in 2012-13). 
  The fourth noteworthy point is that Govt consumption growth has accelerated further in real terms from 8.2% in 2013-14 to 10% in 2014-15. This highlights the urgent need for fiscal consolidation through a reduction in the revenue deficit that will make space for funds to be transferred to  govt investment.

Forecast for 2015-16

 In my post budget review I had forecast a further increase in the growth rate by 0.5% to 1% point in 2015-16 above the growth rate in 2014-15. Given the new GDP series and the focus on what used to be termed GDP MP, I know expect GDP growth to accelerate by 0.5% to 0.75% point above the final 2014-15 number. 

Interview

You may also see my Rajya Sabha TV Interview/discussion on You tube at  https://www.youtube.com/watch?v=rWecsNj7CRc&feature=em-uploademail

Friday, July 11, 2014

Maiden Budget of FM Arun Jaitley



Introduction

     During the tenure of the UPA II government, the emphasis of socio-economic policy had shifted heavily towards entitlement and legal rights and away from actual outcomes in terms of endowments (e.g. ability to read and write) and employment.  As a result, Indian Agricultural inflation averaged an unprecedented  11% per year during the last five years, and economic growth has declined since the bubble year of 2010-11 to an incredible 4.6% average during last two years. The budget had to break out of this stagflation.  
    The BJP’s PM candidate’s campaign speeches and the BJP had clearly indicated a desire to restore the balance, by focusing much more on economic development and improved governance!  First the BJP manifesto and then the President’s speech to the new Parliament spelt out the sectors and industries which the government would focus on. The Railway budget applied this approach to one sector of the economy, by trying to shift the focus from railway’s social role to its development role and by spelling out its approach to improving railway governance (E-governance) for improving the quality of service provided to passengers and other clients.  The national budget translates into hard budget allocations the government’s approach to economic development and fleshes out how tax administration and to some extent expenditure management is to be changed to provide better service.

Budget Expectations

    An analysis of PM Modi’s record as CM of Gujrat had led me to write after the election results came out, that his government would be pragmatic and goal oriented, without bothering much about ideological dos and don’ts that had hobbled earlier governments.  In other words they would focus on finding out and implementing whatever had a greater probability of achieving the desired results rather than worrying about certificates of purity from global development community.  I therefore declared on TV, before the start of FM Jaitly’s speech, that I expected a good budget but not a revolutionary one or one that would stand out as contender for the top three such.  The budget has confirmed this forecast.

Budget

   The budget is very much along lines one would expect from a first time FM who has been in office for only 45 days (not enough time to plumb the depths of revenue bureaucracy) and who has no Chief Economic Advisor (to give a broader perspective to his speech or provide non-bureaucratic perspective on macro-economic & tax policy issues) or eminent economist as “Advisor to FM”(to ferret out information & raise searching questions for FM to seek answers to)  Among the noteworthy feature of the budget are the fiscal balance, expenditure allocation, tax administration, financial and other promised reforms.

Fiscal Situation

      The FM decided not to shift from cash accounting (with its non-transparent rollover of expenditure allocations) to accrual accounting.  This allowed him to retain the fiscal and revenue deficit (RD) estimates for  2013-14- 4.5% and 3.2% of GDP respectively. The FM has signaled his determination to restore fiscal stability by sticking to the 4.1% fiscal deficit (FD) target for 2014-15 and 3% for 2016-17. The projected 0.4% point reduction in fiscal deficit is accompanied by a projected 0.3% point reduction in the revenue deficit.  The FM’s speech gives an indication that FRBM will be restored in letter and spirit. This is essential for breaking out of the stagflation of the last two years and ensuring stability in capital flows over the next five. Are the 4.1% FD and 2.9% RD targets realistic? The revenue targets, though lower, are still ambitious.  On the other hand the disinvestment targets (60,000 cr), though higher are easier to attain given capital inflows and the rise in stock markets.  There also higher cash balances that can be drawn on. The fact that an FM cannot start missing targets, from the first year of his tenure as FM, means that they are likely to be met.

Expenditure Allocation

        It was necessary for the Finance Minister to show the governments seriousness of purpose, by translating the objectives of the Modi led government and the sectoral thrust areas that it had identified for achieving these objectives, into budgetary allocations.  The expenditure allocations reflect a realistic mix of what can be achieved during the rest of the year by accelerating ongoing programs of interest and therefore merit higher allocations and what needs time to study, plan and implement and therefore merits token allocations. Though some commentators have criticized the large number of small new programs, I think it is wise for a new, relatively inexperienced council of ministers, to take some time to get a realistic picture of the capabilities and limitations of a Central Government.  When viewed from an overall perspective the expenditure objectives signal the government’s resolve to achieve its economic development objectives along the lines indicated in the President’s speech and the BJP manifesto. Thus allocations to Tourism, Highways and other labor intensive sectors and to skill development ("Skill India": integrated national multi-skilling mission, teacher training) assure that the job creation objective will be seriously addressed. In my view the much greater importance given to creating a “digital” India” (e-governance, 'virtual classrooms'), and a “Swach Bharat” (clean water, sanitation & sewerage) hold revolutionary promise for overcoming the challenge of pervasive corruption in government and child “malnutrition”(stunting, wasting) respectively.  At the same time the budget has signaled pragmatism, by making only small exploratory allocations for some of the more expensive/ambitious schemes like bullet trains. The one noticeable gap is in recognition of the revolutionary possibilities of using e-medicine/e health to deliver better health in rural areas

Better Governance

     The taxation parts of FM’s speech have focused heavily on legislative and administrative reform, reducing tax arbitrariness, and moving to e-governance. This is another application of the belief that better governance is essential for improving the quality of service which government provides to its citizens, and specifically to tax payers. Given the deeply entrenched “Inspector raj” mentality of the tax departments, the FM will have to drill much deeper to achieve significant change. A good place to start would be the report of the committee on reform of tax administration chaired by Dr Partha Shome. 
    A similar philosophy is operating on the expenditure side, though here concrete action on better targeting of subsidies, improving the efficiency of government programs and reducing corruption will have to await the report of a committee. There are similar references to management of government owned financial institutions. However, my experience of 20 years of reforms in India is that very upright and determined leaders can improve governance during their own tenures, but such improvement is not sustained unless backed by policy and institutional reform that changes the incentives under which the political bosses, administrative managers, officers and staff operate.

Financial Reforms

     The rise of investment limits in FDI in Defense, Insurance and low cost housing, t allowing “pass through” for Real Estate Investment Trusts (REITs), the idea of Infrastructure Investment trusts(IITs), the attempt to learn from past shortcomings of PPP agreements so as to devise, improved,  more resilient models, can help in supporting investment revival.
    The required re-capitalization of Public Sector Banks is to be done only partly through retail sale of government shares, as the earlier government's policy of majority (51%) government ownership of Public sector banks (PSBs) has not yet been dropped. I am also saddened that industry associations managed to keep Defense FDI from being raised to 51%, which is the minimum needed by a defense company (in US) to set up an Indian subsidiary and transfer technology to it, without it being treated as sale of technology to a foreign company.
     There are also references in the FMs speech to a “single identity number” and specialized “payment banks.”  These can transform the lives of the Aam Aurat if, “mobile payments” from cell phones and genuine “mobile banking” is allowed and encouraged.

Other reforms

       It is encouraging that FM expects to bring in legislation for implementing GST within the current financial year.  However, changes made in this budget in direct and indirect taxes do not suggest a return to the successful tax reform policies of the 1990s & early 2000s, to simplify them by eliminating deductions-exemptions and reducing tax rates (in a tax neutral way), to enhance voluntary compliance. They still appear to reflect the approach of the 2010s, that was partly responsible for the collapse of corparate investment and FDI. Fortunately there is enough time before the next budget to bring in both tax policy expertise, and legal-administrative expertise to devise a more comprehensive reorganization of tax policy and administration. 
        The promise of a reform of the Apprenticeship Act can be seen as part of the effort to improve skills or as a first step in labor reform. The hint of creating a competitive, all India market in food and agricultural holds tantalizing possibilities, but needs further elaboration/action.

Conclusion

    The measures taken in the budget will be sufficient to increase growth by about 1 per cent point over the last year’s 4.7% to 5.7% (though down side risk from monsoon failure and oil shock remains). Actualization of some of the measures indicated in the budget will however be necessary to raise growth to the 6.5 to 7% range in 2015-16.  Raising growth to 8% and sustaining it at that level will require further policy reforms during the next 18 months. Similarly, fiscal consolidation (on the projected path), will need to be supplemented by more comprehensive reform of policies affecting the entire food supply chain if agro inflation is to be brought down and sustained below 6%.

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     A version of this article appeared in The Hindu, July 11, 2014 under the banner, “Pragmatism and Revolutionary Promise”:  http://www.thehindu.com/opinion/op-ed/pragmatism-and-revolutionary-promise/article6198610.ece .