With the 12th Plan passing into history when the current fiscal year ends on 31 March, India will, for the first time since the early years of independence, no longer be a planned economy, but a market economy
In advanced economies of the West—in parliamentary democracies, at any rate—the budget speech by the minister of finance is an important annual ritual. But it is usually just that—a routine affair, in which the government budgets for the year ahead. Perhaps, in the run-up to an election, or in bad economic times, the public may receive sops, in the form of tax cuts or other goodies.
By contrast, in India, the ritual of the annual budget speech has assumed outsized importance. On my regular drive from home to office in Mumbai, many of the billboard hoardings were advertising the budget coverage of major media houses (not this media house, so far as I could see). And for the next few days the opinion pages will be replete with commentary pieces on the 2017-18 Union budget (yes, indeed, including this one).
Yet, perhaps the most important feature of this year’s budget, even in the aftermath of the exchange of old for new high-denomination currency notes, is, ironically, the aura of routine. There are three good reasons for this, all noted by Arun Jaitley, minister of finance, at the very beginning of his speech.
First, for the very first time since the onset of the planning era in 1951, the distinction between “Plan" and “non-Plan" expenditure has been abolished. With the 12th Plan passing into history when the current fiscal year ends on 31 March, India will, for the first time since the early years of independence, no longer be a planned economy, but a market economy.
One could argue that this transition is largely symbolic, a footnote to the abolition of the Planning Commission and the creation of its successor, Niti Aayog, but, in politics, symbols are important. Nor is it entirely symbolic, since the increasingly artificial distinction between Plan and non-Plan expenditure, which became decreasingly relevant after the 1991 and subsequent economic reforms, needlessly distorted the budget-making process.
Second, as Jaitley also noted, the railway budget, for the first time in independent India, has been merged into the regular Union budget. This distinction was a colonial-era relic, and getting rid of it was a long-overdue rationalization of the budgeting process.
Third, rather than being presented, as was conventional, a month before the end of the ongoing fiscal year, the budget has for the first time been presented two months ahead, allowing a smoother transition in terms of revenue and expenditure from one fiscal year to the next.
There is an additional reason, more fundamental. This is that, except in times of economic crisis, the annual budget statement is no longer a natural vehicle for the announcement of major economic reforms, structural or otherwise.
Thus, the exchange of old for new high-denomination bank notes was announced by Prime Minister Narendra Modi in a televised address many weeks before the budget, and some relief measures for those most affected by the short-run liquidity crunch were, again, announced by him at the end of the “demonetization" phase of the reform.
For those looking (mistakenly in my view) for anything further on this front in the budget, it would have been a little like watching Hamlet without the Danish prince.
Yet, as India becomes a more normal economy, and the annual budget statement becomes more of a ritual and less of a spectacle, what, in my judgement, will grow in importance is the annual Economic Survey for the year gone by, traditionally tabled by the minister of finance after the President’s speech which opens the budget session of Parliament, a day ahead of the budget speech.
Authored by a team led by the chief economic adviser in the ministry of finance, at present Arvind Subramanian, the Survey is a treasure trove of policy-relevant ideas and is rich with data, more than enough to entice scholars and researchers and provide them with fodder for countless papers, reports and commentary pieces.
This year’s Survey features several innovations, including the use, for the first time, of “big data" analytics to study patterns of intra-India trade and migration. And this analysis throws up its own interesting puzzles, too. Thus, if it is true that India is more genuinely integrated an economy than we have believed, as the Survey suggests, and less a patchwork quilt of separate regional markets, then, as a matter of economics, we should expect, other things being equal, more rapid wage and income convergence among states. Yes, as an analysis by my IDFC Institute colleague Praveen Chakravarty and myself shows, income per capita has diverged in a big way since the economic reforms of 1991, making us an outlier compared to other major advanced and emerging economies.
Of course, one could argue that this divergence would have been greater in the absence of such inter-state goods and factor mobility as India currently enjoys, but this begs the question of benchmarking our current level of mobility with what we observe in other emerging and advanced economies, and requires also correctly setting up the counterfactual scenario for any such thought experiment.
And it is this larger question—of persistent and even rising divergence in income per person and other social indicators among states—which is sure to increase in salience in the coming years.
Vivek Dehejia is resident senior fellow, IDFC Institute, Mumbai, and a Mint columnist.
Comments are welcome at firstname.lastname@example.org
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