Budget 2018: The latest Union Budget came in the context of a year made difficult by demonetisation, the introduction of the goods and services tax (GST), and the continuing challenge of dealing with bad loans made by banks to corporations in recent years. As important as the past was the future, one of several state elections, and on top of those, a national election, over the next year or so. Given these factors, it seems that the Budget is not a bad one. Several commentators have expressed concern over the acknowledged slippage in fiscal discipline in the Union government’s accounts. On top of this is the worry that the numbers may be fudged, and that fiscal outcomes may be worse than budgeted. But this is a familiar story on both counts, and India has avoided disaster for a long time. My own view is that the fiscal deficit issue at current levels is of second-order importance. Crowding out of private investment or tighter monetary policy resulting from the slippage will not be major growth reducers. Of course this is a judgement call—I have not seen any econometric model that quantifies the range of possible outcomes, just other, differing judgements.
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In the absence of publicly available quantitative models of the economy, it is also difficult to assess the impacts of various changes in the tax regime. This year, there are no major changes or surprises, as far as I could tell. The reintroduction of the long-term capital gains (LTCG) tax on equities may dampen some froth, but if the real economy stays strong, the impact of the tax may just be a little extra revenue for the government. Some increases in customs duties also seem designed to pick up some extra revenue, while protecting some domestic firms or industries. The government may be able to get away with this as well. Again, the effects on the aggregate economy and its growth are likely to be second-order in importance.
The Budget contained many relatively small initiatives to increase the efficiency and performance of the agricultural sector and of smaller firms. In agriculture, in particular, improvements in physical infrastructure downstream from the farm have great potential. The Budget also notes the increased “formalisation” of smaller firms, leading to more and better data, and potentially better allocation of finance to such firms, which are well-known to be financially constrained. In these cases and others, what will be more important than increased government expenditures is improvements in institutions, which can include new mechanisms (such as online platforms), redesign of organisations (such as those for marketing agricultural produce) and structural changes that promote entry and competition.
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One important aspect of such institutional innovations is the complementarity required for success—this can be geographical (affecting firms or farms near each other), or along a supply chain (farmers and intermediaries, or large firms and their subcontractors), or other examples. Budget speeches consist of a list of different expenditure commitments and policy changes, but it will be up to technocrats (such as in the NITI Aayog) and bureaucrats to work out successful implementations. This general point also applies to areas such as health and education, where the Budget continues an emphasis going back several years through multiple regimes, of dealing with India’s severe deficits on these two fronts.
So the big numbers in the Budget are in the right ballpark, and the ideas driving the economic policies are broadly along the right lines. In terms of these ideas, the Economic Survey also offers important insights—though these are not necessarily well-reflected in the Budget (but may still be incorporated). Here, the use of a device reminiscent of internet listicles, designed to evoke curiosity and compel clicks, is surprisingly effective, and may help when policymakers have limited bandwidth. This year, the 10 new facts include the positives associated with internal and international trade, the greater importance of raising investment versus saving, the damage done by judicial uncertainty and pendency in the economic arena, the importance of smaller firms for exports, and signs of an increase in “formalisation” of the economy. One of the other “new” facts, India’s low tax-GDP ratio, has been known for some time, but it does not hurt to rediscover it.
Income tax impact of Budget 2018. Calculate gain or loss with this Income Tax Calculator
The challenge of the next year will be to what extent continuous electoral campaigning at the national and state levels will take attention away from actual governance and implementation. Technocrats and bureaucrats in India have a major responsibility and challenge to carry out their jobs effectively in a politicised environment. One counter-balancing feature I have highlighted many times in the last year is the richness of evidence now available from many research studies carried out by economists outside the government. It will be interesting to see the extent to which insiders can effectively absorb, distil and implement the lessons from these studies, in areas such as small firm finance and growth constraints, health insurance, use of technology in education, agricultural credit and other topics, as described here. This is another important complementarity, in the varied expertise of researchers and policymakers, which India can exploit more fully.
Professor of Economics, University of California, Santa Cruz