Tuesday, February 24, 2015

Expectations from the Union Budget 2015-16

N K Singh

It is said that no success is final, nor failure fatal- it is the courage to continue that counts.

The Delhi electoral outcome has rekindled a fresh debate on the preferred model of development. Apart from other factors, some analysts argue that the economic policies of the Government have a pro-rich bias and alienated a large voter base among migrants, slum dwellers and generally the very poor. The forthcoming budget, they argue, must course correct. This reasoning is truly far fetched. The focus of the election campaign by the successful AAP related to issues of corruption, safety of women, availability of drinking water and inadequacy of basic infrastructure. Critics overlook that the amendment of the Land Acquisition Act pertains to the onerous nature of the process and does not dilute the generous compensation. Similarly with respect to MGNREGA, based on CAG Report the emphasis rightly has been placed on capital creating assets. The approach also overlooks the more basic fact that the excessively entitlement driven policies of UPA-1 and UPA-II weakened macro fundamentals, reduced investable surpluses and smothered investor confidence. These entitlement driven rights embedded in several legislations were a major draft on shrinking resources. Coupled with weak delivery systems which had inherent leakages, they eluded improved life quality to intended beneficiaries.

Any economic strategy must be designed to create more jobs rather than offering freebies, improve outcomes of social spending than just spending more, deliver quality infrastructure and improve competitive viability to attract private investments.


All principles of distributive justice are predicated on enlarging the size of the cake. The reverse is a vicious quagmire of a low level equilibrium trap.

Prior to 1991, India served as a caricature of a closed economy with its fiscal policy gone wrong. The Budget was also predominantly an accounting statement of projected revenues and intended expenditures.


Post 1991, the Budget has also increasingly become an occasion to go beyond accounting and articulate the broader economic and social agenda of the Government. This approach in the earlier reform period of 1991 to 1994 was fostered by multilateral institutions as a pre-condition for access to their resources. It was appealing that it overcame inter Ministerial tangles even if it was an encroachment on the policy making domain of other ministries.

The process of Budget making has evolved to emerge as a process policy pronouncement in the course of meeting the standards of multilateral institutions. The budget statements in years prior to 1991 always announced increments in both direct and indirect taxes. But now the tax rates have been moderated subsequently. Budget making has become more inclusive and a consultative process to involve the stakeholders. People hold expectations for important macroeconomic policy statement coupled with structural reforms.

India’s Open Budget Index, a result of biennial survey conducted by the International Budget Partnership (that ranks countries on a scale of 100, a higher number indicating a greater transparency), has improved from being at 60 in 2008 to 68 in 2012. Nevertheless, speculation, uncertainty and excessive secrecy contribute to the mystique of the budget process. It is not adequately recognized that all over the world economic policy making is a continuing process. The Budget is hardly a panacea for either all economic malaise or response to multiple economic challenges.

In the long run, in an increasingly inter dependent world we need to adopt the best international practice in the budgetary process and its contents. The OECD Best Practices for Budget Transparency Report has suggested an ex-ante engagement than ex-post out comes. It argues that “A pre-budget report serves to encourage debate on the budget aggregates and how they interact with the economy. As such, it also serves to create appropriate expectations for the budget itself.” Keynes suggests “Successful investing is anticipating the anticipations of others.”

So what should we anticipate for the forthcoming budget?

First, continue the focus on growth, investments and employment creation. Distractions and plea for populist programmes must be subsumed as part of the broader priority agenda of the government which focuses on externalities, public goods, enhancing our competitive viability and total factor productivity of the economy. Determination towards attracting private investments and creating employment will bestow upon the individuals the power to create income and purchasing power than being dependent on the announcement of populist policies.

Second, both savings and the investment rates and investment gearing ratio need to substantially increase for transiting to a higher growth trajectory. The saving- investment ratio has deteriorated from 0.98 in 2004-05 to 0.86 in 2012-13. The graph below indicates major trends in savings and investments as a percentage of GDP over recent past. Among others, Reserve Bank of India’s ‘Long Run and Short Run Saving- Investment Relationship in India’ concludes a co-integration between domestic savings and investments.




Source: RBI Handbook of Statistics


Third, reiterating the commitment to fiscal rectitude and path of fiscal consolidation. Mechanical fixation of fiscal deficit should be replaced by cyclically adjusted fiscal deficit with latitude to reach end targets with flexibility during the intervening period. The concept of cyclically adjusted fiscal deficits now has wide acceptance. As Glenn Hubbard reminds us that “Gradual fiscal consolidation may also be stimulative in the short run.”

Fourth, improved expenditure management, reduction in the number of centrally sponsored schemes and given reported generous award of the Finance Commission coupled with subsidy rationalization, particularly Direct Benefit Transfer benefits macro management. Designing a mechanism to monitor the implementation of expenditure and transfer of benefits to the intended beneficiaries would play a role in reducing leakages from the exchequer’s funds.

Fifth, reiteration of commitment that government would abstain from retrospective tax changes and the problems of the past would be expeditiously resolved by acceptance of judicial or quasi judicial or arbitration outcomes improves investor confidence.


Sixth, in the area of tax reforms the centerpiece is the implementation of Goods and Service Tax (GST). This has been on the anvil for several years but has at last made credible progress. Persistent misgivings by the State Governments have been allayed by a categorical commitment to fully compensate any revenue losses. Also, with regard to coverage providing flexibility in regard to petroleum and other exclusions may not make this an ideal GST but one must not allow the Best to become the enemy of the Good. The Constitutional Amendment for implementing the GST would be introduced during the current Session of the Parliament. This amendment is necessary because it rebalances the power of the Union and the States in relation to taxes as stipulated in the constitution. The enactment of GST will have a huge impact on the GDP by eliminating the cascading effect of taxes on economic activity. It will, in the long run, result in creating a large common market which has multiple benefits.

In the area of direct taxes, the key question is the skewed and limited tax base. The exclusion of agricultural income which while contributes around 14% to GDP continues to provide livelihood to around 54% of population. Agriculture tax must be calibrated without regressive burden being imposed on poor farmers but innovative ways to prevent agriculture as a tax shelter and taxing the profligacy of very rich farmers.


At the same time India’s corporate and income tax rates are not aligned with the tax rates in other emerging markets. By various analysts, India is considered an overtaxed country which deters investment decision. Lowering tax rates to improve opportunity cost of investment and enlarging the base with a commitment to align our taxation rates with ASEAN rates like the earlier tariff calibration with a credible roadmap will be an important investor fillip. Adopting best international practice in respect of Treaty Shoping, seeking Tax arbitrage, Base Erosion and Profit Sharing and application of GAAR can be part of the same process.

Seventh, clearly-identified programmes that are popular but not populist and contribute to inclusive growth, like Jan Dhan, Swachh Bharat, Clean Ganga, the Digital India and Make in India campaigns should receive tax incentives to invigorate green shoots of investments and back-end infrastructure. Improving the ease of business, particularly enforcements of contracts and permissions in the construction sector as high priority, can make a difference.

Eighth, enhancing agricultural productivity, particularly supply side response, in consonance with changing consumer preference is of significance. Orderly creation of non agricultural jobs is also important, particularly owing to the mismatch between the contribution agriculture to the GDP and employment. Besides, identification of the real beneficiaries (poor farmers and not the lobby of rich farmers and rural moneylenders) calls for a review.

Ninth, based on the contemporary economic ambience, effective tapping of the exogenous low oil price prognosis over medium term to rationalise the oil subsidies is being watched by both the domestic and the international intellect. The government is expected to take this opportunity to deregulate oil prices and let the invisible hands (demand and supply) play a relatively increased role. However, preparing to cope up with the flip side of low oil price prognosis in the form of reduced remittances from Gulf Countries and the impact of reduced national income and thus the purchasing power of the oil exporting countries on India’s exports is also equally important.

Tenth, improved social infrastructure, particularly health and education need an innovative approach. In education, replacement of the key issue of guaranteed access by improved outcome, through teacher training, and undoing the debilitating feature of the Right to Education Act, which has smothered private initiative, is critical. This would be congruous to the new skill inculcation initiatives both in respect of rejuvenating existing institutions and creating new ones. In the health sector, effective provision of Generic medicines and creating awareness regarding the same and improving the delivery system of the government hospitals is important.

The expectations from the union budget for the fiscal year 2015-16 in maintaining and transforming the positive prognosis about India’s growth into a reality remain high. However, in the end, any Budget is as good as we can implement commitments and enhance our implementation capabilities. In the end, any budget is as good as our implementation capabilities. John Keats was right when he said “Nothing ever becomes real till it is experienced”.

(The author is a noted economist, former top bureaucrat and Ex-MP)

Published Date: 24th February 2015, Image source: http://www.commonfloor.com
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

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