Assessing Budget 2017: Narendra Modi govt has vision, political space to act on economic front

The initial reaction to this year’s Union Budget, presented a month earlier than in past years, was one of relief: there were no announcements that spelled trouble for India’s growth story.

Arun Jaitley (PTI)

The initial reaction to this year’s Union Budget, presented a month earlier than in past years, was one of relief: there were no announcements that spelled trouble for India’s growth story. A further reaction was one of positivity and cautious optimism, since there were also many proposals, none major, but welcome overall, that seemed likely to improve the business climate and future growth. Perhaps, on the “doing business” front, there was less than the corporate sector might have hoped for—no cut in tax rates except for the smallest firms, and little in the way of new incentives for start-ups. But, there were other places in the budget where, on reflection, there may be the beginnings of a massive change in the Indian economy. Let’s look at these positives, then consider some cautions.

In my view, the move to facilitate greater investment in affordable housing by giving it infrastructure status has enormous potential. India’s real estate sector has been tilted toward the well-off. Other policy moves have been aimed at choking off the use of high-end real estate as a vehicle for tax evasion or laundering the gains from such evasion, and demonetisation had severely impacted the sector. But this budget combines planned improvements in the design of infrastructure contracts, the ability of foreigners to invest, and this move in affordable housing, implying greater access to financing. If implemented well, with effective coordination, a massive construction programme of working-class housing can transform the lives of the majority of Indians. One major coordinating policy will be with respect to sanitation infrastructure, and I will return to that.

The second potentially transformative move that was signalled in the Budget was the promise to rationalise labour laws. A brief statement in the Budget speech summarised the vision very well: “Legislative reforms will be undertaken to simplify, rationalise and amalgamate the existing labour laws into 4 Codes on (i) wages; (ii) industrial relations; (iii) social security and welfare; and (iv) safety and working conditions.” If something can be achieved here in a relatively short period of time, it will mark one of the most significant steps in India’s decades-long reform process. The statement signals concern for worker rights and welfare, but it is widely recognised that the current legislative regime does a poor job overall of protecting worker welfare, while it simultaneously raises the costs of hiring workers in an inefficient manner.

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Of course, drafting comprehensive new sets of laws is an enormous task, but the experience of the Financial Sector Legislative Reforms Commission shows that it is feasible. One area where financial sector law reforms may have an edge in terms of successful implementation, however, is that labour protection is a more emotive issue, and the courts have, in the past had a tendency to take very expansive views of worker rights. Legal reforms in labour law will have to pay close attention to a set of issues revolving around constitutional and other broad rights, requiring a very high-quality intellectual effort. Still, the announcement of the plan is a major political step forward.

As noted, there are also many small steps in the Budget that will also help India’s future growth. What are the cautions? Implementation is always going to be a challenge, as noted for labour law reform, but also for many other reforms. And in the case of both affordable housing and labour law, the role of state and local governments will be crucial. Building and maintaining the necessary sanitation infrastructure to go with the new housing will challenge the existing capabilities of sub-national governments. As noted in the Economic Survey of India (ESI), in the last, but not least of its “Eight Interesting Facts About India,” the country’s property tax potential is unexploited, one can add, distressingly so. Also, speed will be as important as success. Again, the ESI provides an insightful analysis, noting that India’s demographic dividend will start peaking soon, but also very unevenly across the country. Combine that with other aspects of regional divergence, in economic performance, and there will be increased strains on the nation’s social and political fabric.

Issues of the evenness and speed of the gains to different parts of India’s population are old ones, being the heart of efforts to focus on “inclusive growth.” What has been interesting, and in some ways heartening, about the events of the last few months in India is that the current government seems to have overcome a major misstep in implementation of an economic policy, namely, demonetisation, without much political damage (though the results of recent and current state elections will provide a clearer signal). If the national leadership can maintain this level of belief among the citizenry, that short-term pains will lead to long-term gains, it may be able to move forward in ways not seen since the external crisis of 1991 that spurred the first major economic reforms. One can remain concerned about the national government’s social agenda, while recognising that it seems to have a rational vision and political space to act on the economic front.

The author is professor of economics, University of California, Santa Cruz

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