The Union Budget due to be unveiled on Monday is being awaited with more than the usual anticipatory thrill that the recipients have gradually become accustomed to. There is more riding on this Budget than the normal cheers and groans that accompany announcements of tax exemptions and levies, of the monotone detailing of mind numbing rates of countervailing duties and excise exemptions and the declarations of intent of increasing social sector spending.
Only occasionally do budget proposals need to be made keeping in mind a wider array of potentially conflicting objectives, more so that these might actually define the course and character of our nation in the years ahead. On the cusp of a nascent and still uncertain recovery after a virtually unprecedented episode of global financial turbulence and economic slowdown, where the slightest policy mis-step can have extended adverse consequences, the consequences of profligacy will be felt more than in many other previous years.
Reams of material have been written on the expectations from the Budget?social sector spending, infrastructure, the usual litany of requests for tax changes from industry and professional bodies, economic stimulus, etc. But what are some measures that the Budget should address? In other words, what are key risks that need to be addressed, what are the phasing priorities for taking on these risks and what might be the best instrument for mitigating these risks?
The Central government?s expenditures account for about 16 percent of India?s GDP. Therefore, accounting for these expenditures, as well as the income sources for funding these, defines the levers that determine the quantum and nature of growth. The role of the Government in defining the nature of growth has been particularly important in the past year, given the sharp slowdown in private sector consumption and investment. The centre itself has spent an estimated 4 percent of GDP through various means (direct expenditure increases, tax exemptions, agricultural debt waiver, salary increases and so on) and even more through protecting consumption levels through off-balance sheet means like oil and fertiliser bonds. The RBI?s monetary policy measures will have added another 6-7 percent of GDP as liquidity support.
Is there, then, a need for further measures to stimulate economic activity? It appears that the danger now is any further significant increase in government expenditure (and consequently the fiscal deficit and the market borrowing programme) are likely to have more adverse effects on the cost of funds to private borrowers than the offsetting effects of a fall in private demand. For instance, interest rates along the sovereign yield curve have risen by 100-150 basis points over the past three months. And there seems to be a recognition of this danger; there is talk of clawing back some of the exemptions granted to specific industries. Granted that export oriented sectors will probably not have much cheer for the foreseeable future, but continuing small reductions in their cost structures is not likely to help them. The scope and canvas of the Budget is vast, but I want to focus on a couple of areas.
Food costs have emerged as a major concern. India is now one of a handful of countries with high CPI inflation, largely led by continuing high prices of staples. The only palliative to this is, over time, to increase agriculture productivity. The budget can obviously provide limited inputs into incentivising water management, and a few other aspects, but this requires activity into other more fundamental issues. One immediate priority in this area is to minimise the extent of food wastage, through better storage and transport facilities. This is a leak that can be plugged relatively easily.
This brings us to the other critical area that the budget can provide some direction: infrastructure. The budget is the most effective lever for using public funds to ?de-bottleneck? infrastructure. Making the whole logistics chain, including transport, storage, freight management, inter-modal facilities, and access mechanisms more efficient will be a major component of taking India?s growth to a higher sustained level.
Other than facilitating efficiency in the production chain, implementation of the uniform Goods and Services Tax structure will be both a beneficiary and a driver of logistics improvement. This is probably the single most important fiscal reform measure and far outweighs the incremental rationalisation and tinkering of tax rates that will be evident in the Budget.
Any government will have its task cut out in managing reform of the systems that underlie India?s growth potential. It is not just a matter of spending money, but deciding which expenditures will leverage private capital pools to the hilt. There will be no shortage of capital funds if investors perceive that India?s growth programme is sustainable. Managing the risks will be a long term process, but here?s to the Budget initiating the process of sustainable reform.
The author is vice-president, business & economic research, Axis Bank. These are his personal views