The recent Union Budget elicited the usual range of responses. Various interest groups commented on the lack of what they would ideally have wanted in terms of tax or expenditure policy changes. Many commentators decried the lack of boldness, or lack of economic reforms, or questioned the realism of the Budget?s financial projections, especially given the looming dangers of high-priced oil.
I want to make three points. First, this is a reasonably good Budget, doing what it is meant to do, laying out the broad contours of tax and expenditure policy for the next year. Second, reforms are continuing, not always smoothly, not always ones that get highlighted in the Budget, and perhaps not comprehensively enough, but continuing nonetheless. Third, the fundamental character of Indian economic policymaking has changed, and for the better.
Begin with taxes and expenditures. Tax reform, particularly the introduction of the Goods and Services Tax (GST) is creeping forward. No major constructive policy change in India has proceeded according to the schedule originally mooted, and the GST is no exception. But the forward progress is unstoppable, and the GST will come. This finance minister also displays restraint in tinkering with tax rates and exemptions, providing more certainty in the business climate. Budgeted expenditures are lower than many had projected, and this is the basis for a solid effort at fiscal consolidation. There are hints at expenditure rationalisation, but clearly these will need to follow the implementation of the massive Unique Identification (UID) project, also making progress. Fiscal consolidation may be threatened by oil and food price rises, but, on the other hand, it may be helped by tax revenue buoyancy. The Budget numbers are a reasonable middle-of-the-road projection.
Second, consider the reform process. To me, it is remarkable how much is going on. Simple liberalisation moves such as relaxing FDI limits in certain sectors, garner the headlines, with even corporate America providing its opinions as it eyes the Indian market. But the real reform is proceeding in painstaking efforts to redesign and innovate in financial institutions (including innovations to finance infrastructure) and to overhaul a range of legislation that governs the corporate sector. New laws that streamline and modernise the entry, day-to-day functioning and exit of firms will ultimately pay off for the economy, and literally re-form the private sector engine of India?s growth. Land acquisition and labour market reform remain difficult political nuts to crack but the former, at least, remains on the policy front burner. Interestingly, the government?s divestment plan, which would have triggered ideological battles at one time, continues without controversy. Perhaps opposition is softened by the fiscal imperatives behind it but surely it is also a sign of the changing perception of reform.
Third, the language and analytics of economic policymaking have changed. India has had many sophisticated economists serving the government in the past and macroeconomic management has always received great attention in the Economic Survey. This year?s Survey continues last year?s example, with Chapter 2 once again providing lucid microeconomic foundations for the concept of inclusive development and specific policies that can promote development. The analytical clarity and imagination of the Economic Survey represent a distinct improvement at the core of Indian economic policymaking and, in my opinion, validate the experiment of bringing into government a microeconomic theorist with deep knowledge of the frontier of economic thinking. No doubt last year?s struggles with food price inflation had much to do with the government?s emphasis in the Budget on reforming the agricultural supply chain. But I would not be surprised if the Chief Economic Adviser?s analytical approach to the working of markets and market institutions has also had an impact on this thinking.
Of course, nothing is perfect, in economic policymaking or anywhere else in the world. Oil is a wild card and policymakers all over the world must hope that the current crisis has at least a temporary resolution that is reached swiftly. But there are things Indian policymakers can do that have to be done, whatever happens to oil. The Economic Survey highlights the importance of human capital and innovation, but these ideas have not reached into the Budget. How will India educate and train those who represent its demographic dividend? How will the private sector, especially small and medium firms, be given the right enabling environment to innovate and create jobs for those who are ready for them?
India?s farmers need help and they may finally start getting it in constructive ways that increase their options and reduce their risks. India?s corporate titans will get a more streamlined playing field that will only help them in their global ambitions. India?s elite will continue to get the best education and jobs. But the young men and women who are growing up all across India in small towns and cities will need better access to education and training, and more chances to shape their own working futures. The policy vision for them remains to be articulated.
The author is professor of economics at the University of California, Santa Cruz