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Towards a roadmap for the future

There is little doubt that no country witnesses the kind of hype centred around the Central government budget that is observed every year in India. Discussions and opinion pieces about the budget figure predominantly in every newspaper, with all groups putting forth their views about what should or not feature in the budget. Our preoccupation with the budget perhaps has its roots in the regime when the government maintained a stifling hold on the economy. In those days - actually not so long ago - it mattered a great deal whether the finance minister announced any change in the levels of controls during the course of his budget speech. Today, most of the physical controls have been removed, and the tax structure too is relatively stable. Nevertheless, the budget continues to capture public attention mainly because successive finance ministers have announced major policy reforms during the course of their budget speech - although these could well have been announced at different points in the year.

By Bhaskar Dutta
  • Published 26.02.15
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There is little doubt that no country witnesses the kind of hype centred around the Central government budget that is observed every year in India. Discussions and opinion pieces about the budget figure predominantly in every newspaper, with all groups putting forth their views about what should or not feature in the budget. Our preoccupation with the budget perhaps has its roots in the regime when the government maintained a stifling hold on the economy. In those days - actually not so long ago - it mattered a great deal whether the finance minister announced any change in the levels of controls during the course of his budget speech. Today, most of the physical controls have been removed, and the tax structure too is relatively stable. Nevertheless, the budget continues to capture public attention mainly because successive finance ministers have announced major policy reforms during the course of their budget speech - although these could well have been announced at different points in the year.

Can the finance minister possibly satisfy all the demands and expectations that have been expressed? That is unlikely, simply because of their magnitude. More importantly, he should not be judged by this criterion since many of the demands are unrealistic. Instead, Arun Jaitley should be assessed by whether he has managed to provide the best possible fiscal environment within which the economy can achieve rapid growth with a human face (although the latter is not a term that has come to be associated with the current government), keeping in mind the difficulties posed by the existing state of the economy. He also needs to spell out what he views as the major constraints preventing the economy from growing rapidly enough and also the measures provided in the budget to relax if not remove these constraints.

As in most years in the recent past, the estimates of tax revenues and expenditures for the current fiscal year have proved to be very optimistic. In his first budget, Jaitley assumed that he could keep the fiscal deficit down to 4.1 per cent of gross domestic product in the current year and in fact slash it to 3.6 per cent in 2015-16. Unfortunately, tax revenues have been less than buoyant. We may find that the revised estimates are well short of the budget estimates! Fortunately, the overall deficit may still turn out be close to the target principally because there has been a huge reduction in the oil subsidy because of the steep fall in crude oil prices. There may also have been a slight degree of expenditure compression.

However, prudence dictates that the finance minister does not depend on any further fall in crude prices because they are already at such low levels. Only a dramatic collapse of the international economy can bring about a big fall in oil demand and hence a fall in prices. Undoubtedly the most important feature of his budget is going to be his stance on fiscal consolidation. Will he attempt to stick to the earlier target of the level of fiscal deficit at 3.6 per cent of GDP? Or will he give greater weight to the need to provide a fiscal stimulus to the economy and adopt a more realistic fiscal deficit target?

There is no clear-cut answer to these questions. The arguments in favour of relaxing the fiscal deficit target are straightforward - there are several areas that are crying out for large infusions of funds. Hence, any further round of reductions in expenditure is difficult if not impossible to achieve. The government's attempt to increase investment in infrastructure through the public-private route - a major USP of the 2014 budget - has not been a great success. The private sector has refused to play ball for a variety of reasons - uncertainty about the future economic environment and difficulties in land acquisition being a couple of reasons. So, it is imperative that the infrastructure sector receive a large dose of public-sector investment sooner than later. Not only will this (at least, partially) remove a major constraint on the growth process, but it will also stimulate the economy indirectly through the multiplier process. Moreover, if the government is really serious about the Swachh Bharat campaign, then it will have to make a large investment in water and sanitation to name just one item.

Many will also point out that the trade-off between fiscal consolidation and an expansionary budget should, given the current scenario, be tilted in favour of the latter. They will argue that the sizeable fall in commodity prices has resulted in a very stable price environment and so even an uncovered deficit will have a negligible impact on prices. Of course, the supporters of fiscal consolidation will argue that this is a slippery slope. Quite apart from the dangers posed by large deficits year after year, there is the problem of credibility raised once the government brazenly departs from a stated target. In other words, any departure from a publicly announced target is like a broken promise. Why should anyone believe future commitments of this kind made by the government?

Of course, the finance minister would be in a state of bliss if he could increase both expenditure and revenue more or less equally. Unfortunately, this does not seem feasible. As far as tax revenue is concerned, most of the low-hanging fruit has already been captured. The tax structure is (thankfully) relative stable, and it is unlikely that Jaitley will bring about any radical change in tax rates. Now that the services sector has been brought into the tax net, there are also no new major items on which taxes can be imposed. Perhaps the only thing he can do is to avoid following the populist route by raising exemption limits on personal income taxes or lower tax rates, although this seems to be a popular demand.

Perhaps a brighter prospect for the government is to raise resources for investment through disinvestment. It did set a very ambitious target for the current year. Unfortunately, the actual proceeds will fall far short of the target. This is almost entirely the government's fault because it did not quite get its act together. A sensible selling strategy would have been to spread disinvestment through the year. Instead, it has tended to bunch sales towards the end of the financial year, and this has resulted in depressing selling prices despite generally favourable stock market conditions.

It is very unreasonable to expect a "dream" budget or even one which contains "big bang" items. What we can demand, however, is a budget which lays out a road map for the future and a clear strategy of how the finance minister expects the economy to travel along this road.

The author is professor of economics, University of Warwick