The Budget is the subject of much debate both before and after its presentation. The hysteria surrounding this event indicates that it has grown to be synonymous with the announcement of major governmental policy. This of course is only to be expected twenty years down the line from the historic budget speech that changed the course of India’s economic policy. Much has changed over these two decades, and yet it is interesting to note that the word ‘reform’ still dominates the landscape in the context of State policy.
An assessment of the expectations and deliverance of the Budget need necessarily consider the macroeconomic landscape before plunging into normative analysis. The economy has been recovering rapidly from the economic slowdown owing primarily to strong fundamentals in terms of savings and investment (with an incremental capital-output ratio of 4), a rebound in the agrarian sector, and continued momentum in manufacturing. (The slowdown in industry reflected by November’s IIP is seen as a temporary setback rather than a prediction of medium term trends). There has however been a slight setback in the services sector. The trade gap narrowed to $82.01 billion in April-December, 2010 with a substantial rise in both exports and imports.CSO figures point to 8.6% GDP growth in 2010-11. The economic survey pegs growth at 9% in 2011-12.
‘Enemy no.1’ in the past year has clearly been inflation, which has continued, for some time, to stubbornly remain in the double digits. This has been spearheaded by food-price inflation-owing primarily to demand-side factors. The volatile situation in the Middle East threatens to augment the problem further by fuelling a rise in crude oil prices. Second on the list of problems for the government has been that of reigning in fiscal deficits. Gross fiscal deficit now stands at 4.8 per cent of GDP, down from 6.3 per cent last year. The high realization of non-tax revenues from the 3G/BWA auctions has contributed significantly towards fiscal consolidation. Social sector spending has been stepped up significantly over the past 5 years, and it stood at 37% of plan outlay in 2010-11.
Given the aforementioned circumstances, what can one rationally expect of the budget? The first move of the government should be to tackle inflationary pressure- particularly that of food and primary articles, as it impacts the aam aadmi. Since the causal link lies in demand-side factors, the solution should be to focus on better supply-chain management. This calls for not only better infrastructure in terms of roads and highways, but also a revision of procurement and distribution policies. Food mismanagement has been one of the prime governance failures of the present administration.
Addressing the supply-side would also involve substantive reforms in the agrarian sector. The economic survey calls for a ‘second Green Revolution’ which is an interesting phrase to have used as it might indicate a pro-GM crops stance. While my personal views do not in fact concur with such a move, it is worth noting that the only crop that recorded a 40% growth in the past year was cotton, which in fact uses the BT variant of seeds. That aside however, the need of the hour for effective agrarian reform, that can in fact be addressed by the budget, is greater outlay for research and development. The proportion of GDP dedicated towards this end has in fact been embarrassingly low in the past. Unfortunately such a move is more likely to remain part of the budget wish list than of the list of expectations.
Fiscal consolidation has two aspects- increasing revenue receipts and decreasing unproductive expenditure. The former involves rationalization of the tax structure, a convergence towards GST (Goods and Services Tax) rates and broadening of tax base. An increase in indirect taxes should not be resorted to in the current inflationary scenario. It is hoped that the government policy will grant incentives in the form of tax holidays to encourage investment in infrastructure by private players in key projects including roads, power and telecom.( The greater efficiency of the PPP model will in all probability hasten implementation, unlike purely governmental projects. The challenge lies in capacity building in a qualitative and time bound manner-particularly in priority sectors.) At the same time there is a need to reduce the subsidy bill. This is a politically sensitive issue and is thus unlikely to be addressed. It is however true that the greater percentage of subsidies goes towards helping the middle class, as opposed to the truly needy (e.g. fertilizers). A distortion of market price moreover has contributed towards inefficiency and wasteful use of resources.
The second challenge lies in reducing expenditure. The government is attempting a phased withdrawal of fiscal stimulus in the interests of monetary tightening to combat inflation. The pressure on the FM is usually to cut unproductive expenditure such as salaries and defence expenditure. This is an unrealistic expectation in the face of inflation and border threats. A truly productive move on part of the government would be to cut funding from central govt. schemes that are not operational. Funding schemes of this nature only goes towards lining the pockets of middle-men, a move not exactly in consonance with the objective of inclusive growth.
I was mildly surprised to note that Climate Change was a section listed under the first chapter of the Economic Survey. Hopefully the budget will make provisions to incentivize greener initiatives and sustainable development. Importantly, there is a need to streamline the procedure of granting environmental clearances with infrastructure projects.
What the budget will and will not deliver remains to be seen. Although this document has come to embody the general skeleton of governmental policy it should not be viewed as the be all and end all of the coming year. A lot of developmental initiative rests upon the State governments. Given this, it is strange that there is hardly any hype about the presentation of the respective state budgets. Furthermore, although I have spoken of the need for investment in infrastructure and so on, there is also a need to concentrate on ‘reforms’ (yet again!) with respect to India’s several institutions. The Achilles’ heel of most developmental projects in India lies in the inability of institutions to effectively implement them. Although this is the subject of another article altogether, it would be nice if cognizance of this fact was taken in the definitive speech of Indian policy.
