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I would hate to be in Arun Jaitley's shoes. The burden of expectations are enormous
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An editor, who I shall not name, had once famously boasted that he would dismiss the annual budget coverage with one story. The person was wrong then and wrong today (mercifully the editor recanted and the newspaper reverted to the norm of exhaustive coverage).
With all due respect, the Union Budget will continue to be a centrepiece of economic policy for a developing country like India. It is a very important moment to provide guidance on the economic strategy—especially for a country that is so overwhelmingly integrated into the world economy.
Yes, it is true that it is not that for the rest of the 364 days the government in power will not tweak policy. But the annual exercise on the last day of February—a hand-me-down practice from the British; thankfully, the National Democratic Alliance (NDA) in its first avatar dumped the other part of the legacy, presenting the budget at 5pm—is the occasion that a government showcases its vision for the economy.
And this year, more so than others, this occasion is of particular significance. The Indian economy, which logged an important milestone by achieving a size of $2.1 trillion, is in the middle of making a very important transition to ready for the next phase of growth. To put it simply, the existing edifice has outlived its time and needs to be rebuilt; which is why everyone, including me, keeps harping on the need for structural reforms. Actually, they have been due for a long time but have been conveniently ignored.
After the lost decade, which ended with the exit of the Congress-led United Progressive Alliance (UPA), the new government has returned in earnest to simultaneously unclog the processes and put in place the architecture for a new Indian economy. Without this, business can’t grow, meaning jobs, the new index for aspirations, cannot be created.
In the much derided first budget, the Bharatiya Janata Party (BJP)-led NDA had expended its social capital in looking to firefight the macroeconomic challenge it had inherited, fix the processes and accelerate fiscal decentralization—giving more fiscal room to states. Somehow commentators didn’t find this sexy enough.
Later this week, finance minister (FM) Arun Jaitley will present his second budget in less than nine months—the first for a full fiscal year. I would hate to be in his shoes. The burden of expectations are enormous. Not only do domestic and foreign investors seek deliverance from the finance minister, the expectations of India’s aspiration-driven 1.2 billion populace is staggering. It is almost impossible to please everyone.
In a few days, we will know for ourselves when the FM unveils his budget proposals. Till then, it will remain a mystery. Regardless, here are a few, hopefully, suggestive metrics to measure the efficacy of the budget.
First, the budget has to signal a credible path for fiscal consolidation. The fiscal deficit is nothing but gross borrowings—and debt, as all Indians know, is a bad idea. Don’t be fixated with specific numbers like 4.1% of gross domestic product (GDP). They are meaningless given the smoke and mirrors played by various FMs with their dodgy fiscal math—the worst kept secret. Similarly, ignore commentators who claim there is a good and bad fisc—like the Americans telling us, when it suited them, that there is a good Taliban. The Vijay Kelkar-led 13th Finance Commission had recommended such a blueprint that is still relevant.
Second, closely linked to the above is the FM’s plan for expenditure reforms. We have had enough signals from the FM that there will be a sunset to the open-ended nature of the present regime of subsidies—targeting, initiated by the UPA and promptly abandoned, is one such means to ensure that only the deserving get it (think of car owners out there who still claim the LPG subsidy). We should wait and see how the FM proposes to practice what he preaches.
Third, we should watch for the FM signals on tax reforms. Everyone is aware that the idea of a single goods and services tax (GST) has been on the anvil for a long time. Somehow, successive governments have been unable to traverse the last mile. So, one big takeaway from the budget speech should be a specific date for the rollout of the GST regime, which will, for the first time, economically unify the country. Similarly, the budget should clarify on some of the disconcerting trends that have crept in on the direct tax side, even while putting out the future direction—fewer exemptions and lower rates—to guarantee better compliance.
Fourth, this budget should reset the fiscal relations between the centre and the states. Future action on the policy front has to emanate in states; and for this to happen, local governments need greater fiscal room. It is a process—transferring funds for centrally administered schemes directly to states—that was initiated by the UPA and accelerated by the FM in the interim budget.
Now the 14th Finance Commission is recommending another round of major reordering. The share of states in gross tax revenue of the centre is to be increased from 32% to 42%. We need to see if the FM follows through and transforms the states from a passive to an active stakeholder in policy change for the future.
Finally, we need to see what else the FM has in store of easing processes. Essentially, what does the government intend to do to ease doing business in the country. We already know that the government is in the middle of extinguishing redundant laws (a list that had been put together by NITI Aayog member Bibek Debroy nearly two decades back). Now we need to know about the next big steps to ease red tape (India ranks 140 in the world) for business, domestic as well as foreign.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. His Twitter handle is @capitalcalculus.
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