Author : Vivan Sharan

Originally Published 2015-02-28 00:00:00 Published on Feb 28, 2015
The premise of this Budget seems to be a market oriented growth strategy - wholly fair given that the government will struggle to fund the growth needs of the country otherwise. One should hope this budget has set the controls for a larger shift in the government's approach towards administration and efficacy.
Union Budget 15-16: Hopes for a market driven rebalance
Finance Minister Arun Jaitley read out his Budget speech on Saturday (February 28) amidst great expectations from his government to signal a progressive, non-populist agenda. With 800 million living at less than two dollars a day and one million entering the job market every month, India's myriad socio-economic challenges seem to have converged - and can prove to be overwhelming for a state which is not able to achieve targets.

In the final few years of the erstwhile UPA Government, it had become fairly apparent that a complete revision in the government's approach to the Indian economy would be required -- to build the requisite capacities to address the scale of incumbent challenges. This revision of approach is precisely what has been attempted in the 2015-16 Budget. One of the key challenges of policymaking in India is no doubt the requirement to cater two vastly different constituencies. The first is the burgeoning numbers of rural and urban poor, who also form a large part of the political base. And the second is the business elite and rating agencies that are ever watchful of the balancing act of successive Finance Ministers between populist spending and prudent management.

As a result of the shriller and louder voice of the latter constituency in the political and financial capitals of the country, much is often made of India's fiscal deficit targets in contemporary intellectual discourse. This overlooks the fact that India's public debt is largely manageable, particularly since only a small proportion is in the form of external debt. Of course less emphasis on prudent fiscal policy requires growth to be on track - which seems to be the case if the revised GDP numbers are to be believed. In fact the Economic Survey has been bold enough to proclaim that double digit GDP growth is now achievable, despite the fact that industrial production is near stagnant.

Mr. Jaitely has promised to stick to a fiscal deficit target of 3.9 per cent of GDP. This seems to be a distinct feature of his government - its actions in recent days seem to suggest that it is heavily influenced by the need to maintain positive perceptions.

What Mr. Jaitley seems to have overlooked, is the fact that the fiscal health of India's states is in fact very good - which means the government could have looked to dilute the rhetoric on prudent fiscal management and looked to jump start growth through aggressive capital expenditure in key sectors such as infrastructure. In 2013-14 the states' gross fiscal deficit was only 2.2 per cent of GDP. The average debt to GDP ratio over 2010-2014 was 22.2 per cent, a full eight percentage points lower than in the period 2000-2005 when India first began to experience rapid economic growth.

This is not to say that Mr. Jaitley has not emphasised the right issues in his speech. One of the key developments in the thinking of the government seems to be on the area of Public Private Partnerships (PPPs). The government seems to have correctly realised that the PPP model of infrastructure investments has not worked, largely because the private sector has thus far been taking the risk of such investments, which are almost never properly assessed. Mr. Jaitley has admitted, in what is a positive sign for things to come, that the sovereign will have to take on a larger share of the risk in PPP investments. After all, private sector cannot simply gloss over the investment risks that are tied to the relative unease of doing business in this country. Furthermore, low global oil prices have given the government fiscal room to manoeuvre and therefore convert excise duty on petrol and diesel to a cess of four rupees per litre towards road projects.

Another promising development is the recalibration of tax policy in the country. The government earns the largest proportion of its tax revenue from direct tax on corporates, accounting for 3.56 per cent of GDP as per 2014-15 Budget Estimates (as compared to 2.25 per cent of GDP in the case of income tax). Mr. Jaitley has rightly stated that this has made "domestic industry uncompetitive". A sustainable and resilient Indian economy would have to rest on the pillar of strong corporate performance. Given that the effective collection of corporate tax is around a lowly 23 per cent, the proposal to reduce the rate of corporate tax to 25 per cent over the next four years has been a long time coming. Likewise, so has the abolition of the Wealth Tax and the substitution of this with the surcharge of two per cent on the tax liabilities of the super-rich (who earn over one crore per annum).

While other positives include the reemphasis of the adverse impacts of retrospective taxation, liberalisation of some of the framework rules for foreign funding including "tax pass through" on 'Alternative Investment Funds', and recognition of the "transformative" role that the Goods and Services Tax can play in tax administration, a lot rests on implementation capacity of the government, which has not yet been proven.

Although Mr. Jaitley has promised a "non-adversarial tax administration", it is not quite clear how the government will deliver on this front. Indeed if the experience of Nokia or e-commerce companies is anything to go by, the day when the central government will have better policy oversight over state tax administration is still very far. Moreover, the Rail Budget, which has put additional stress on coal freight, is indicative of the fact that the government has not been able to think through some structural challenges of the Indian economy. Thermal power generation is already stressed because of the lack of coal evacuation capacity. More taxes on the coal supply chain means that the burden will eventually have to be passed on downstream.

Indeed it is unfair to expect the government to have a fool-proof budget framework - there will always be losers. However, significant implementation challenges can be reduced in the social sector in particular, if the government's vision of the "JAM trinity" -- of Jan Dhan, Aadhar and Mobile is realised in the context of Direct Benefits Transfer (DBT). Subsidies account for around two per cent of GDP,which is larger than the share of capital expenditure. If the efficiency of social spending can be improved upon in a substantive way through DBT, it may prove to be a real game-changer.

The premise of this Budget seems to have been a market oriented growth strategy - wholly fair given that the government will struggle to fund the growth needs of the country otherwise. This has already been evidenced in the slow delivery on the Smart Cities agenda - compromised because of a lack of both funding availability and more importantly,viable ideas. A lot therefore rests upon the leadership and institutional capacity of the government to deliver. One should hope that this budget has set the controls for a larger shift in the government's approach towards administration and efficacy.

(The writers are with Observer Research Foundation, Delhi)

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Vivan Sharan

Vivan Sharan

Vivan was a visiting fellow at ORF, where he supports programmes on the ‘new economy’. Previously, as the CEO of ORF’s Global Governance Initiative, he ...

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