The Union budget is the annual financial statement of the government with detailed revenue and expenditure projections for the next financial year. Usually a dull accounting non-event in developed countries of esoteric interest, there is great popular hype in India each year as we approach 28 February. Why?

This is, first, a legacy issue, with former prime minister and finance minister Manmohan Singh setting a high bar with the big bang budgets of the early 1990s. Each finance minister has attempted to emulate these budgets, tending to lay out ambitious economic policy roadmaps for the government, extending far beyond the remit of the finance ministry. But none has come close to changing so much in so short a period.

This is partly because in the absence of a crisis as grave as the balance of payments one in 1991, political consensus over big bang reforms has been elusive; and partly because these—labour, land, agriculture, goods and services tax (GST), social sector—require cooperative federalism between the centre and states. Physical investment takes place in states, and ease of doing business within the same national economic policy architecture varies significantly from state to state. This is why much hinges on how states use the additional untied money devolving on them as recommended by the 14th Finance Commission and implemented from the 2015-16 budget.

Second, while the absence of another devastating crisis is a measure of the success of the early big bang reforms, the continuing budget hype also reflects their failure in making economic policy stable, rule-bound and non-discretionary. Changes in tax rates and subsidies keep the informed housewife interested in the budget speech that alters family budget calculations each year.

Third, fiscal policy in developed countries mostly operates through automatic stabilizers as a modern infrastructure is already in place. In developing countries, however, discretionary fiscal policy has a major role in all stages of the business cycle on account of the large requirements for public investment.

The buzz around the 2015-16 budget was amplified by the growth rhetoric of the last election campaign. Seen effectively as the first full budget of the new government, there was a general expectation of big bang reforms comparable to the early 1990s.

The Economic Survey put paid to such hopes one day before the budget. However, the sense of urgency underlying big bang measures had dissipated much earlier: first, in the wake of the fortuitous improvement in the macroeconomic vulnerability index (the sum of fiscal and current account deficits and inflation) through a sharp decline in international oil prices; and second, following the 30 January revision of gross domestic product (GDP) growth that changed the narrative of recent economic history. A fast growing emerging market stuck in a sub-6% growth trajectory with major macroeconomic imbalances was suddenly seen close to firing on four cylinders.

Near-term data on exports, Index of Industrial Production (IIP), agriculture, employment and rural wages, savings, investment, corporate profits and balance sheets, banking assets, and indeed government revenue are all out of sync with the new narrative, as underscored in the Economic Survey, and in the overall stimulative tone of the budget itself. The narrative may, however, have diminished the resolve to make big-ticket reforms more frontloaded.

A new bankruptcy law to unlock failed projects, restructuring indirect (GST) and direct (including corporate) taxes and their adversarial administration, a comprehensive social security system, freeing agricultural markets, redesigning public-private partnerships, reining in black money and monetizing India’s large private gold hoard to increase financial savings, plugging leakages in the delivery of subsidies through the JAM (Jan Dhan, Aadhaar and Mobile) trinity, etc., can collectively unlock India’s growth potential, benchmark the Indian economy to global best practices and make it an attractive investment destination. But these—some attempted earlier with little palpable success—remain multi-year plans still to be navigated rather than money in the bank.

The macroeconomic test of each budget lies essentially in how effectively it addresses cyclical weaknesses of the economy. Viewed thus, the focus on public investment in infrastructure in the railway and Union budgets, leveraging the fiscal space created by deferring the 3% of GDP fiscal deficit target under the Fiscal Responsibility and Budget Management (FRBM) Act from 2016-17 to 2017-18, is a no-brainer. This targets both cyclical (falling private investment, stalled public-private partnership projects, decline in external demand) and structural (India’s putative supply-side problems; unlike China it needs less consumption and more investment) weaknesses. Capital outlay in the Union budget is up by 25% over last year’s revised estimate. The proposed National Infrastructure Trust, tax-free infrastructure bonds and ambitious divestment targets have the capacity to not only lever this further but, along with the proposed monetization of gold, to increase financial savings.

Increased outlays, however, do not translate automatically into intended outcomes. The last budget had a similar 20% markup, but capital expenditure increased only 2%. The budget can do little about poor project implementation and the legislative logjam over land policies critical for infrastructure projects that need large land acquisitions. The efficacy of both cyclical and structural fiscal policy is subject to a common set of constraints.

Public investment can also fire a new investment cycle by crowding in private investors, both domestic and foreign, sitting on the fence. But greater ease of doing business, including a non-adversarial tax administration, and moving from prior approvals to prior regulation, both essential to revive this cycle, are non-budgetary instruments involving a changed mindset on the ground. This can occur only incrementally as and when the ambitious multi-year vision rolls out.

Alok Sheel is a civil servant. These are his personal views.

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