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.
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.
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.
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
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