The budget season in India, with its unique hoopla and hype, is over. One of the last substantive events on the Budget was a recent seminar, bringing together heads of the five leading Delhi-based think tanks to comment on the Budget’s impact on the country’s economic and political prospects. While the seminar’s quality this year was unquestionably internationally comparable, there was, unlike in previous years, a lack of unanimity among the panellists on the quality of the Budget.
The Budget drew acclaim for showing the government’s commitment to fiscal rectitude and for making subsidies more transparent by not treating them as off-budget items in future. Several other features were favourably commented on, including its ambitious target for disinvestment; special allocation for raising agriculture yields in eastern states and for pulses; and the resolve to cut petroleum subsidies by allocating just Rs3,100 crore for the full year, portending another price rise in the near future. Raising the limits for personal income tax and broadening the slabs drew a mixed response, as there was a feeling that we may have by now exhausted the Laffer curve potential and may see a decline in revenue from lowering the tax rates. Raising the minimum alternate tax (MAT) is seen as anomalous in the light of keeping exemptions in place. It reduces the incentive contained in the exemption, and so makes the exemption redundant. Then why keep it?
In my presentation, I made clear my disappointment with the Budget, principally because I see this as a lost opportunity for pushing forward the agenda of much-needed structural reforms. The finance minister in his speech was categorical that the budget is not merely a statement of government accounts, and should contain a vision. But he fell short of his own benchmark. There is practically no measure with far-reaching or game-changing qualities in this Budget, unless one accepts the move on reducing petroleum subsidies and changing the basis for fertilizer subsidies as some. Given the absence of any political constraints, external to his own party, the Budget could have included measures to attract bigger volumes of private investment to make up for the inevitable tapering off of the fiscal expansion. This is sadly missing.
There is today practically a void in terms of strategic planning and long-term policy thinking within the ministries. The Prime Minister’s Office has also consciously given up this role; the best bet is that it is housed in the cabinet secretary’s office. But undertaking reforms requires bold forward thinking that is the realm of the political process, with the bureaucracy ensuring its implementation. Perhaps the Planning Commission, when it emerges in its proposed avatar of the government’s chief economic policy think tank, will perform that role. For now, however, it must be played by the finance ministry which, because of its official mandate, is privy to and involved in all major decisions in any part of the government.
Moreover, its function as guardian of the country’s financial and economic health is affected by what other ministries or departments do. Therefore, the budget could become the occasion for marshalling reform proposals from all the line ministries, examining their financial and economic implications, and then including at least an outline of the proposed reform in the budget. This ensures that line ministries have a target and timeline to achieve, and the proposals also go through the needed parliamentary review. This was done during the early 1990s, and there is no reason for not adopting this modality, quite suited to our political and governance realities.
This Budget seems to have given up on the move towards an outcome- or performance-based budget, which was initiated by the previous United Progressive Alliance government. Surely, that is the way forward to achieve higher expenditure efficiency. And this Budget seems to have regressed rather than moved towards a relatively more unified structure of taxation to pave the way for the goods and services tax.
I have been a bit surprised by the capital market response, due, it seems, to the Budget being on expected lines. The rising yields on government securities, however, show that bond markets have not accepted at face value the government’s commitment to bring down the level of borrowing. This will result in losses for banks and other financial players and also exert upward pressure on interest rates. This may dampen the investment demand at a time when firms are looking to expand capacity and build inventories.
Hopefully, our entrepreneurs’ animal spirits, buoyed by rising demand from higher disposable incomes thanks to the income-tax concessions, will be strong enough to take the coming interest rate hike in its stride. It would be a pity if higher capital cost and governance glitches nipped the investment boom in the bud. That is the only way to achieve the required growth rate.
Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comment at email@example.com