Budgets are normally absorbed piping hot fresh off the griddle. They are swallowed whole yet not easily digested. First reactions are always extreme praise or criticism. It is only after some days have gone by that one can make a clearer judgement. So, what about Jaitley’s first proper Budget?
Stylistically, it was much better than his July Budget last year, which had been ghost-written by the bureaucrats. This time around, there was a stamp of his personality and also of a greater surety on part of the Narendra Modi team. There is now in place all the expertise necessary. In Arvind Subramanian, India has a Chief Economic Advisor who has worked on more than just India. Raghuram Rajan also brings a similar wide-ranging speciality. This team is well aware of global trends and pressures. They are less apt to be swayed by local debates.
This new vision was reflected in the innovations in monetary policy of the framework agreement and the setting up of a Monetary Policy Committee. Details will, no doubt, be firmed up. The important thing is that, at last, India will have a grown up monetary policy institutionalisation between the central bank and the treasury.
The idea of setting up a Debt Management Office is also welcome. The burden of debt servicing is abnormally high, even at one-fifth, rather than one-third of total tax revenue, as used to be the case. Here again India needs a grown-up approach so that government borrowing does not crowd out corporate debt market. The government should not claim primacy for its borrowing needs.
These are developments to come but nonetheless they are important, as is the promise to implement the goods and services tax (GST). It has taken India 68 years before establishing the preconditions of a single national market. The mentality during the Depression and the Second World War, which the British had, has been a burden which Independent India has carried with myriad restrictions on the movement of goods and services. The suspicion of markets and the idea that traders profit mainly from hoarding have been at the root of the love of restrictions. Now, at last, we can begin to develop a single economy not just in statistics but also in real economic life.
Jaitley spent quite a bit of his time discussing the new proposals about the recall of black money from abroad and even some moves for domestic black money. I remain sceptical that this will yield much money because it is only the evaded tax which is illegal. Of course, the Bill has to be introduced and passed. Given the troubles the government already has encountered, it is anyone’s guess what shape the Bill will finally have. My guess is that there will be a race to make it more and more draconian and it may risk becoming unconstitutional.
Control of domestic black money is more challenging and better pursued. The idea that we are moving to a cashless society and that will curb the spread of black money is just a hope. Cashless transactions will be the small ticket items. Bigger items like houses and jewellery, even election campaigns, will continue to be in cash. The saving of transaction costs in these areas is far too great for people to give up the use of black money. The answer may be to tax commodity purchases more rigorously. Thus, if it is true that there are more luxury cars owners than income-tax payers, tax luxury cars heavily.
The general macroeconomic picture is obscured by the problem of the new CSO numbers. The direction of GDP growth rate will be upwards as a result of the policies laid out. But it is anyone’s guess what the true growth rate will be.
Hopefully, analysts will begin using proxy data as one does in checking Chinese growth rates. My practice is to shave off one percentage point. Thus, the growth rate for 2014-15, which was revised up from 5.1% to 6.9%, can be shaved back to just 6%. Even so, this is higher than I believe will happen, but it is within plausible range of revisions.
The CSO claims that data from the ministry of corporate affairs have led to the upward revision, but that would mean that manufacturing in MSME has done much better than we thought. The CSO has to re-establish the credibility of the data before we lose all signals.
There are no big bangs. Narendra Modi is a middle-of-the-road moderate reformer after all. The Indian economy would be taken on to a sustainable higher growth path incrementally and not radically. This is not a cautious stance as the government may think. This is risky, especially in face of external shocks. Once again we will wait for the Fed to shock us. How we then react will be crucial.
The author is a prominent economist and Labour peer