Budget expectations: Streamline and go

Written by Sandesh Kirkire | Updated: Jul 7 2014, 07:10am hrs
Budget 2014Every non-strategic PSU/private entity must be able to justify itself in the marketplace by the cost and quality of its product and service
The coming budget would be important for the economy in many ways. At the fundamental level it would decide the future direction that India would pursue. The choice is whether India seeks opportunity driven development; or will the development be subordinated to political concerns.

At the fundamental level the budget is expected to target two themesGoverning Competence (GovCom) and Infrastructure-led Growth (InfraGro). Within the theme of governing competence, the vision is to implement: process-driven and non-discretionary allocations and approvals; have a transparent policy making framework; and increase administrative productivity using IT. And all this in limited cost.

Within the infrastructure-led growth theme, the idea dwells largely on reforming railways, manufacturing, energy security, water security, enhancing foreign trade and smart urbanisation.

Thus, for instance, the prime ministerial impetus to projects like the Mumbai-Delhi Industrial Corridor alone addresses four of the six elements highlighted in the InfraGro theme. This project seeks to create world-class railway infrastructure, create and integrate manufacturing clusters, improves port connectivity to suppliers; and gives rise to around 100 smart cities in its periphery. Likewise there are many such work areas that can meet multi-factorial objectives by a singular focus. But most of these projects in one form or the other require a massive scale of investment.

However, with a huge proportion of budget expenditure allocated into salaries, pension, subsidies, defence and debt servicing, the government has little resources left to invest in these projects. Yet still, such investments and expenditures which the government incurs by its own revenue and by borrowing from the market (fiscal deficit at 4.1% of GDP) has caused two structural imbalances. The high expenditure, subsidies and pilferage without similar creation of productive assets imply that there has been high money velocity in the system. That is, more money is chasing lesser and lesser goods and services. This is the primary cause of inflation.

Thus, while farm labour wages and farm acquisition costs have risen due to government schemes, farm productivity has not caught up in an equal measure. This has pushed up food prices in particular. On the other side, the high budgetary borrowing and declining savings in the economy have pushed up the interest rates. Thus, we face a double whammy of high structural inflation and hence high interest rates and high fiscal deficit. The budget would have to look at reducing the fiscal expenditure for states and the Union, and try to bring down inflation and interest rates.

But over the longer run, this structural anomaly can be fixed by budgetary impetus on GovCom. For example IT-enabled subsidy distribution (which has been implemented in Gujarat and Chhattisgarh for PDS) can reduce pilferage. Additionally, the job schemes can be integrated into infrastructure investments, and its utility and output audited.

But the most important value addition would be in creating a process-driven, transparent, and accountable system of approval in a time-bound manner. The opaque, discretionary and unaccountable form of decision-making and policy formulation must end. The cost of stalled projects due to one of the many governance issues is estimated at around Rs 15 lakh crore. Moreover, litigation and political instability due to controversial allotments also create an uncertain economic environment. Thus, the market believes that the new government must streamline the administrative procedures and remove the bureaucratic stranglehold on the economy.

To explain with an example: because of restrictiveness, India, a land of more than 120 crore people, had only 99,000 new startup companies in 2012, while Australia, a country of 2.3 crore, had 185,000 new startups. It can't be the case that Indians are far less entrepreneurial than the rest.

The point is, the budget has to work towards raising the ease of doing business. The budget would carry the day if it ensures high market competition. Such a market would imply highest possible labour demand and wages, lowest possible product cost, maximum drive for innovation, and a more suitable economic method of production and distribution.

The DTC and GST are also two eagerly awaited and much delayed initiatives that need to be implemented in right earnest. By estimates, GST implementation can improve the GDP growth rate by 100-200 bps points. Thus, providing political leadership in consensus building and getting these initiatives through would be a major achievement. GST (in discussion from 2000) would especially remove the internal tariff barriers and ease the movement of goods. Moreover, a single GST model is what must be pursued rather than settle for half-measures. Implementation of GST itself is expected to add 1-2% to GDP growth, based on various estimates.

Additionally, PSUs engaged in non-strategic commercial activities must be exposed to free competition; and limitations such as binding labour laws and political appointments must be reduced to the minimum. Professionalisation of the PSUs is essential, else such entities become a huge and repetitive liability on the fiscal balance sheet. PSUs that can be divested must be done so. Every non-strategic PSU/private entity must be able to justify itself in the marketplace by the cost and quality of its product and service; rather than seek political protection from competition or open-ended infusion of public money as capital.

For instance, the bulk of the NPAs of more than Rs 2.7 trillion by the public sector banks would in the end be borne by the general citizens. The fact remains that the available discretion and monopoly of power within the public/government sector, coupled with lack of accountability, provides a toxic incentive for poor decision-making, bad execution, and misappropriation. This results in massive losses of public money that could otherwise be used in more productive purposes.

On the financial front, the reform of the pension sector and further liberalisation of the insurance and banking sector are much awaited. The high entry barrier for private sector and FDI investment in these areas must be lowered and entry licences must be subject to transparency, objectivity and available through an open window format. Liberalisation and integration of the bond market with currency and derivatives markets to make borrowers and lenders compete is also needed. Additionally, the need for reorganising the current financial regulatory architecture to the needs of the modern environment (as envisaged by the proposed Financial Sector Legislative Reforms Commission) must be addressed in earnest.

Also, government is the sole and primary provider of law and order in society. Over two crore cases are pending with the lower courts as of 2014. The economic cost of these prolonged civil and criminal cases; and equally, the financial and time cost of managing the crumbling civic and social infrastructure, needs to be addressed in earnest. It is therefore imperative that the Indian judicial system and police system be reformed and professionalised to the highest benchmark, using information technology.

The author is chief executive officer, Kotak Mutual Fund