It is a bit strange to be writing about India’s Budget in July, but it is a strange time all round. Just when there was talk of green shoots of recovery, the US economy is showing renewed weakness, and the ripple effects are being felt around the world, in stock markets and commodity prices. The revelation that perhaps only 10% of federal stimulus funds have been spent so far goes some way to explaining what we are currently seeing in the US. This should all be kept in mind when assessing India’s Budget: generosity is called for.
The Good. This is my longest list, in keeping with my inclination towards generosity. There are suggestions that petroleum product prices will be decontrolled, the fertilizer subsidy made more rational and better targeted, and that introduction of the goods and services tax will be kept on schedule (put aside all the follow-through and implementation issues). The services tax base will be expanded, most significantly to include rail freight. At the same time, the rate will be reduced.
The silly fringe benefit tax and the commodity transaction tax will both be withdrawn. There will be better tax incentives for investment and for research and development, though more could have been done to foster start-ups. There are other miscellaneous tax code improvements, and, while every budget provides tax breaks for specific interest groups, there is nothing egregious in that category.
There is a specific plan for improving infrastructure financing through India Infrastructure Finance Co. Ltd, and greater outlays for roads, railways, irrigation and urban infrastructure. There is a stated intention to “remove policy, regulatory and institutional bottlenecks for speedy implementation of infrastructure projects”—again, one hopes for specific follow-up.
One can also classify as good the increased outlays for education, for rural development, and for various worthy groups and causes, though I have concerns I will return to later. Finally, there is the previously announced Unique Identification Authority of India, under Nandan Nilekani, which will work to create a nationwide identity system that improves targeting and flows of government funds to intended recipients. This is a small step towards improving expenditure efficiency in that realm.
The Bad. The praise of bank nationalization struck me as a bad sign. The idea that the dominance of heavily controlled public sector banks saved India from the worst of the financial crisis is very misguided. Macroeconomic management and regulatory supervision (both capably provided by the Reserve Bank of India) work fine with private sector banks. It was disappointing not to see any follow-up on the Raghuram Rajan committee report, which laid out a brilliant framework for inclusive financial development (separate from that report’s more controversial suggestions on macroeconomic management).
The statement on disinvestment was weaker than the run-up to the Budget had led some to expect: just a platitude that the “Public Sector Undertakings are the wealth of the nation”, and so majority ownership should stay with the government. This was made even more explicit for the financial sector. Selling minority stakes to raise quick money is a poor substitute for real organizational and institutional reform of public sector undertakings.
A small quibble is with the raising of personal income-tax exemption limits—better to keep the base broad, so more voters are direct taxpayers. Reduce rates at the lower end instead.
Finally, there was nothing substantive on improving expenditure efficiency— both through better design and monitoring of the various categorical transfer programmes and investment projects, and more fundamentally through civil service reform. The previous incarnation of this government—even though it was weaker in some respects—made bolder statements on these issues, and it is sad to see no real progress or even goal-setting. The lack of a reform programme here tempers the goodness of much of the budgeted spending.
The Ugly. The fiscal deficit and its subset, the revenue deficit, are ugly numbers. They are certainly not good, but they cannot be called bad given the fragile and uncertain economic recovery. There is a nod to returning to fiscal responsibility targets, but no indication of how. Earlier, fiscal goals were met through strong growth and resulting buoyant tax revenues. This Budget could have done more to outline steps to achieve higher growth, consonant with the Economic Survey 2008-09.
Two catalysts for future growth may come from entirely outside the Budget. My hope is that the 13th Finance Commission will offer some radical innovations for restructuring public finances across tiers, which in turn will improve efficiency and accountability. And placing foreign investment in higher education on the reform agenda by the new minister for human resource development can lead to a blowing away of this current major constraint on India’s growth—not enough high-quality higher education. It’s comforting to think that India can do so much better even without spending more public money.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at email@example.com