BackNext mile for Modi government
A lot needs to be done outside of the budget to bring the economy back on track
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The first budget of the Narendra Modi-led National Democratic Alliance government is being analysed by commentators in various ways. To be fair, as finance minister Arun Jaitley noted, this budget should be seen only as a starting point for the government. “It would not be wise to expect everything that can be done or must be done to be in the first budget presented within forty-five days of the formation of this government," he said at the beginning of his speech. Therefore, it will now be important to see how the government moves forward in terms of economic policymaking, and markets will be able to test the intent and some real progress towards the end of this financial year.
The finance minister made a bold move in retaining the fiscal deficit target of 4.1% of the gross domestic product (GDP) in the current year, as pencilled by the previous government in the interim budget. This is an ambitious target. Interestingly, financial markets were preparing themselves for a more realistic number. It is good to be ambitious but the problem is that markets begin to lose faith if targets are missed. Now if the government actually manages to follow the path set for fiscal consolidation, which is to reach the fiscal deficit target of 3% of GDP by 2016-17, it will have a huge positive impact on the financial markets and will lead to greater macroeconomic stability.
The government has also done well to form an Expenditure Management Commission, which will look at the operational efficiency of government expenditure. The government is also looking to overhaul the subsidy regime and make it more targeted. However, talk of better targeting has been going on for a while without much success. The government will now have to clearly define how it intends to move forward. If the ongoing debate on the poverty line is any indication, targeting will remain difficult. At the end of the day, a distinction will have to be made in terms of individual households that need government support and those that don’t. This is always going to be a politically sensitive issue. The government should, therefore, set up a clear road map for this so that limitations, if any, are visible and the policy is adjusted in time.
In the budget, the government recognized the massive capital requirement of the banking system and has expressed willingness to dilute its stake in the public sector banks. This is a step in the right direction but its unwillingness to cede control is unlikely to solve the problem in the long run. The government should allow banks to raise equity capital on their own, which will, over time, bring down the government’s shareholding. This will not only allow banks to raise capital in time, which will help expand their balance sheet and help growth, but will also make them more disciplined. It will be a win-win situation.
Furthermore, in the given state of public finance, the government should define its approach towards public sector companies in general. It was encouraging to see that the government is willing to reduce its stake in banks, but what about other sectors? On 11 July, a day after the budget, communications and information technology minister Ravi Shankar Prasad said in the Rajya Sabha that the health of both Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd leaves much to be desired. He also informed the house that the government will invest 39,468 crore in these companies in the next five years. Similarly, the government has put aside 7,069 crore for Air India in the budget, which is 1,000 crore more than the allocation in the interim budget. The total investment in the airline since 2012-13 will stand close to 20,000 crore by the end of this fiscal. Now the question is: should the government keep pumping money in public sector companies in businesses where there is a vibrant and competitive private sector presence? These are big numbers and the new government needs to think differently on this account, especially when the money going into these enterprises is borrowed and taxpayers will have to service the debt.
Finally, despite a target of 58,425 crore in the current fiscal, disinvestment failed to find space in the budget speech which is being interpreted as the government’s discomfort with privatization. It should again device a longer term strategy. Selling stake to cover deficit will not help in the long run. Ideally, the government should list all companies under its control and reduce its stake in them progressively. The proceeds can be used systematically to create assets in other areas of the economy.
End note: Economic reforms or policymaking is a process and not an event, and the budget should be seen as part of the process. A lot needs to be done outside of the budget to bring the economy back on track. For example, the budget can only allocate funds to invest in smart cites; laws should permit for easy acquisition of land to build these cities.
With hope floating, financial markets will now watch how the wider economic policymaking takes shape.
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