On the hopeful side, though, there are many changes, large and small, which seem to suggest an attention to making direct taxation more predictable, streamlined and efficient. Many of these changes pertain to new rules and to new administrative approaches which will reduce the expected costs of doing business. The extension of various tax incentives for investment is also a measure that engenders hope. For me, one disappointment was the increase in the personal income tax exemption limit (and by a large percentage at that). Despite an argument that high inflation justifies such changes, I think that is outweighed by the need to maintain and expand the taxpayer base. Indeed, there is a substantial net revenue loss in direct taxes in this budget, only a third of which are expected to be made up from increases in indirect tax revenue.
On the whole, the revenue projections are somewhat optimistic, given the expected growth rate for FY15 and the performance to date. It is likely, therefore, that expenditures will have to be squeezed to meet fiscal targets. An important announcement was the creation of an Expenditure Management Commission, not just to deal with subsidies, but also monitor the overall efficiency of government expenditure. Clearly, there was not time enough before the Budget to undertake a major overhaul of expenditure governance. The report of this Commission will be vital. Again, one is left with hope and anticipation.
The wait-and-see or hope outlook also applies to a slew of measures announced in the Budget. Some of these are major areas where change is ongoing, such as foreign investment, both direct and portfolio. There were several positive changes announced to enhance the climate and scope for these investments. Some are areas where problems have been building, such as the state of the banking sector. Here, recapitalisation, some disinvestment, and ultimately more autonomy and better management will be critical for public sector banks to come out of the hole they are in. This will be a complex and difficult process.
Programmes for rural small savings, skill building, irrigation, rural infrastructure, drinking water, sports, education, and so on, all received mentions and allocations in the Budget speechmany of these are not dissimilar to previous programmes, so design and implementation will be what matter. A set of stepped-up efforts on sanitation, and a continuation of the rural roads programme are both important, especially since rigorous empirical economic analysis has provided evidence of their positive impacts.
Major areas such as agriculture (improving markets functioning and integration), industry (providing hard and soft infrastructure) and finance (evaluating and implementing the recommendations of the Financial Sector Legislative Reforms Commission) all received prominent, if necessarily brief, attention in the Budget speech. Thus, there is really a clear sense (perhaps with a little reading between the lines) that the government has priorities and a reform agenda. But then, so did the previous government, which could often not overcome its internal problems enough to move forward effectively. The Budget speech did suggest enough symbolic measures to keep the ruling party base happy, so one again has hope that the reform agenda moves forward expeditiously.
Interestingly, labour laws and land acquisition did not receive any mention in the Budget, and this is almost certainly reflective of the contentiousness of these issues, rather than any intention to neglect them. Mostly, the controversial transfer schemes and their mechanisms did not get much attention, though the promise to improve the productivity of work associated with MGNREGA and to restructure the Food Corporation of India are both laudable intentions and complex challenges. Overall, then, it seems to me that the Budget laid out the beginnings of a programme of reform and revitalisation. It was very cautious on areas where rocking the boat might risk capsizing it, so it does come across as leaving one with feelings of lets wait and see, but it is hard to see any missteps, bombast or overconfidence, and maybe that is a good thing overall. So there is still much to hope for.
The author is professor (Economics), University of California, Santa Cruz