The expectations from the Union budget were very high on the back of the significant political mandate that the government got in the recent elections. The underlying economic reality with high inflation, low growth, fiscal deficit threatening to go out of hand and the probability of a poor monsoon were enough pressures for the new government that is barely two months in power.
The government, however, has taken these challenges in stride and has defined a road map that is premised on economic expansion and restarting the capital formation cycle through public investments in infrastructure covering roads, ports, urban housing, increased spending by PSUs, enabling the banking system to fund infrastructure more effectively and focused development of industrial corridors and reviving the special economic zones.
One of the recurring underlying themes of finance minister Arun Jaitley’s speech was the emphasis on making Indian manufacturing globally competitive. This is a very critical aspiration for the country if India has to build an economic model that is sustainable and inclusive over the long term.
Jaitley’s plan to finance the growth plan is largely based on aggressive tax collections that could be at risk if the economy doesn’t step up in the short term. The government will undoubtedly keep a close watch on the tax collections but I also hope the approach to tax administration would change towards a more stable, non-litigious and transparent regime. In my view, a stable and certain tax policy and tax administration can be a great leverage to attract capital in the country both from domestic and international investors.
It was very clear from the finance minister’s speech that one of the key levers that the government will bank upon to finance the fiscal deficit is to raise revenue from the non-tax route, including divestment of government holdings in PSUs through the capital market route. I feel that if it is structured well, this can also trigger the return of the small investors to the capital market to own a part of the country’s economic assets through attractive valuations.
I was also happy to hear that the government will review the subsidy regime especially on food and fuel. Subsidies are short-term pills of long-term structural problems and keeps the issue alive for political leverage. As the evidence of the past shows, it doesn’t structurally make the use of capital more efficient nor does it make the social return on subsidies more sustainable. This is a very sensitive political issue but a meaningful and dispassionate review on how to use the scarce government resources more meaningfully would be welcome. To that effect, this budget has also managed to keep populist measures to the minimum and give a road map on the structural issues.
The other important message by the finance minister is the focus on making governance more efficient and effective. While these are not core to the budget proposals, the intent to remove the hindrances on the supply side, including expedient approval process, efficient and empowered bureaucracy and working in collaboration with the states can be significant factors in enhancing more than a few basis points of growth in GDP.
The government has been prudent in its announcement and has demonstrated its sense of purpose to make a meaningful effort to ensure the country’s economic priorities are appropriately aligned to the aspirations of the people of the country.
The budget is also used as a platform to signal to the country and externally regarding the economic agenda and the purpose of the government.
Chatterjee is group executive director (finance and corporate), Tata Steel Ltd