If adversity is in the air, it must be July. Twenty-three summers ago, it was in July that Manmohan Singh rose to present the budget for 1991-92 and spoke of the “deep crisis” facing the economy.
It should not come as a surprise if the “state of the economy” section of finance minister Arun Jaitley’s budget speech sounds similar to what Singh had said on July 24, 1991.
Singh, then finance minister under Prime Minister P.V. Narashimha Rao, had to take into account the impact of the Gulf crisis, while Jaitley, serving under Prime Minister Narendra Modi, will have to factor in the uncertainties in Iraq.
More than two decades have passed, but the incumbent finance minister faces the same challenge of narrowing the gap between the government’s income and expenditure. A double-digit inflation hung over Singh like the sword of Damocles while Jaitley has to deliver on the promise of his Prime Minister by reining in prices.
Jaitley, however, is luckier than Singh as the economy is not in a crisis similar to that of 1990. In 1990, the government was close to a default and was left with foreign exchange that could barely finance three weeks’ worth of imports. The government was then forced to pledge national gold reserves with the International Monetary Fund (IMF) for a loan.
Singh tackled the crisis by introducing reforms and dismantling the licence raj, which allowed the private sector to invest more.
But the two UPA governments of the past decade changed that theoretical orientation by relying on government spending, sticking to what is called the Keynsian prescription in economics.
When Jaitley will rise on Thursday to present his maiden budget, he may take the leaf out of Singh’s 1991 speech. Expectations are that he may repose faith in the private sector to achieve higher economic growth.
The economic survey tabled in Parliament today suggests that reviving growth, creating an enabling environment for investments, containing inflation and curtailing expenditure are the immediate concerns of the governments. The budget is also expected to reflect the themes.
Be it stress on a roadmap for a new tax regime or attempt to create an environment to facilitate investment, both domestic and foreign — there is bound to be a convergence in the two speeches.
There will be differences as well — on the front of inspiration. Singh’s speech was peppered with references to Rajiv Gandhi, Indira and Jawaharlal Nehru. No prizes for guessing the inspiration for Jaitley’s speech — it has to be Modi.
On the eve of the budget, the question doing the rounds is whether Modi and Jaitley can come up with a blueprint that convinces India that the time has come for a new idea. Singh had done so in 1991, summing up his speech with Victor Hugo’s words: no power on earth can stop an idea whose time has come.
Unlike in the UPA regime, which had an overwhelming presence of economists in policy circles, Jaitley — a lawyer by profession — doesn’t have the benefit of foreign-educated economists.
The post of the chief economic adviser to the government is vacant, the Prime Minister’s economic advisory council is headless and the Planning Commission is almost defunct.
The absence of the Planning Commission from the budget-making exercise is a cause of concern for some Left-wing economists. But some in the capital’s policy circles think that Jaitley will have the freedom to steer clear of theory and socialist hangover.
“It is true that the UPA regime had several top-notch economists, but in most cases, they were not on the same page and it acted as an impediment. Jaitley will not have such constraints and he will be free to implement the vision of Modi,” said an economist who has been a member of the Finance Commission during the UPA era.
Sources in the finance ministry said that a core team of officials — including finance secretary Arvind Mayaram, revenue secretary Shaktikanta Das and expenditure secretary Ratan Watal — are working on the budget under Jaitley’s instructions.
Ila Pattanaik, the principal economic adviser to the finance ministry and a professor at National Institute of Public Finance and Policy, drew up the economic survey, which reviews the developments in the Indian economy over the previous 12 months.
The budget is an accounting procedure. But over the years, the annual ritual has come to raise expectations among people.
“This time the expectations are much more and the government must be aware of that,” said Vinay Sahasrabuddhe, in charge of BJP’s good governance cell and a close aide of Modi.
The economic survey suggests reviving growth through investments will be the big idea in Jaitley’s budget proposals.
“The key to reviving investment in India lies in reviving the trend growth rate of the Indian economy. Reforms are needed on three fronts: creating a framework for sustained low and stable inflation, setting public finances on a sustainable path by tax and expenditure reform, and creating the legal and regulatory framework for a well-functioning market economy,” the survey said.
Inflation cannot be contained through budget proposals, but Jaitley can make a difference by pumping in public investments in agriculture and creating a proper supply chain to remove the bottlenecks that have contributed to food price inflation, which peaked at 11.95 per cent in the third quarter of 2013-14.
As the wholesale price inflation has stayed above 7 per cent since 2009, the UPA government tried to contain it by raising interest rates, which in turn started choking investments because of the high interest rate regime.
Since the change of guard in Delhi, the investor community is hoping for a lower interest rate regime. As the stress is on “investment” and “market economy”, Jaitley is likely to table the government’s vision on various reforms to catalyse investments. Though most of these reforms will happen outside the budget, investors will be given an idea about the reform priorities.
Nuts and bolts
As part of its plan to kickstart the investment cycle, the new government is likely to lay emphasis on faster clearance of projects and reduction in red-tape. Throwing open the doors for FDI in railways, other than operations, clearly indicates that foreign capital will be welcomed in defence, insurance and e-commerce.
On taxation, the finance minister will give a timeline on introducing the goods and services tax and the direct tax code. Jaitley may also give some tax breaks for the salaried class and tweak tax rates applicable for corporate entities.
“The industry is waiting for directions on key taxation reforms, which is pending for quite some time,” said Ravi Wig, head of BJP’s industry cells and former president of PHD Chamber of Commerce.
Industry sources said that in an attempt to send a positive signal to foreign investors, the government is also likely to settle the retrospective tax issue with Vodafone through a negotiated settlement. The markets are also expecting Jaitley to raise his target for fund-raising through PSU disinvestments.
“India typically falls short of its disinvestment targetů Between 2010 and 2014, the government could raise only Rs 1,050 billion from disinvestment though the target has been Rs 1,950 billion. That trend is likely to be reversed,” said the chief economist of a leading foreign bank.
One of the focus areas could be pruning the subsidy bill of the Centre, which stood at Rs 2.5 trillion (around 2.2 per cent of the GDP) on food, fertiliser and fuel in 2013-14.
The decision may have a political impact as it will give the Opposition a handle to attack the government, Jaitley will invoke the “tough decisions” argument of Modi to push through fiscal consolidation and retain fiscal deficit at around 4.1 per cent of the GDP.
Jaitley will try to take the sting off the Opposition attack by announcing utilisation of the savings through subsidy pruning for creation of public infrastructure, but the decision will surely keep the political pot boiling for some time.
The budget proposals will be assessed against Modi’s promise of achhe din.
If the decisions taken so far by the new government are any indication, it is almost certain that the budget will include some bitter pills. Fiscal consolidation through cuts on expenditure and raising the disinvestment target could become the cornerstone of the budget. Such measures are bound to lift the mood on the stock exchanges.
But answers will be expected for some bread-and-butter questions, too: will the unemployed get work? Will prices stabilise? Will the measures be enough to ring in the achhe din for over 363 million — around 29.6 per cent of the population — categorised as poor in the recently published Rangarajan committee report?
Most important, will the ideas in the budget be pivotal enough to be classified as Jaitleynomics, the worthy successor to the Manmohanomics of the 1990s?