1. Column: Will India transform?

Column: Will India transform?

The Budget proposals are quite promising but the real challenge is the govt’s capacity for implementation

By: | Published: March 8, 2016 12:15 AM

In this year’s Budget speech, the finance minister stated that the government’s agenda is to ‘Transform India’ in a direction described by a set of economic reforms, framed in terms of ‘nine pillars:’ agriculture, rural development, health, education and skilling, infrastructure, financial sector, governance (including ease of doing business), fiscal discipline and tax reform. This list effectively covers almost every aspect of the economy, but still provides a useful framework, with the details revealing more about priorities and possibilities of true economic transformation.

The headline issue is fiscal discipline, and the Budget stuck to the Fiscal Responsibility and Budget Management targets. This has been made easier by low oil prices—in the past, Indian governments have had to resort to creative accounting when oil prices soared—but also reflects genuine fiscal caution. It puts the ball very squarely in RBI’s court for badly-needed monetary easing. Tax reform, while only one of the nine pillars, encompasses a host of actions, many of which feed into achievement of other goals. Perhaps the most striking aspect of the tax proposals in the Budget was the long list of measures designed to streamline and rationalise tax administration. Singularly important were the proposals to provide incentives to investment—to start-ups, in particular. Many measures will encourage foreign investors, who have to be drawn in if India is to invest in infrastructure at the scale that it will need to keep growing fast. There are still areas for improvement, but it seems that the tax proposals reflect a government that is listening to business people and investors. Of course, the GST still looms, tantalisingly close to acceptance and implementation.

Governance also represents an enormous range of challenges and possibilities. Improving tax policy and tax administration is an important aspect of easing some of the unnecessary burdens of doing business in India. The Budget speech emphasised better targeting of expenditures, especially through the use of Aadhaar (a massively important initiative inherited from the previous government), and using information technology to improve the internal working of government as well as the citizen-government interface. There was also a hint of plans to reorganise the government’s human resources, and this may be the most significant thing that can be done to improve governance, though it has proved the most difficult in the past. Setting a date for removing the relatively meaningless plan/non-plan categorisation of expenditures was a significant positive move.

Financial sector reform has been progressing somewhat steadily, and this Budget provided welcome notes on deepening the corporate bond market, introduction of derivatives, greater retail participation in government securities, as well as improving other aspects of financial access. The monetary policy framework also continues to be solidified. Of course, the greatest imperatives are the introduction of modern, efficient bankruptcy laws and trying to put the banking sector in order—the latter remains a major challenge.

Infrastructure and investment received considerable attention in the Budget speech, with commitments to continued or increased investments in highways, ports and airports, though the railways perhaps deserve proportionately greater public investment. Greater private participation in road transport, and general improvements in the design and implementation of public private partnerships were also highlighted, though in both these cases, the details of implementation are likely to continue to challenge governments at the state and national levels, as will effective disinvestment.

Agriculture and rural development received the lengthiest treatment in the Budget speech, as well as the largest increase in expenditure. Irrigation will receive a boost, although problems of maintenance and corruption will not be solved by increased investment. Sustainable management of groundwater, also highlighted, will be critical for Indian agriculture over the next few years. Moves to improve the efficiency and competitiveness of agricultural marketing, including liberalising FDI, development of dairy farming, crop insurance, and more sanitation and rural roads will all be important if implemented well. Of course, the rural road scheme has yielded measurable positive results, as demonstrated by the work of Shilpa Aggarwal.

Healthcare saw the announcement of enhanced insurance, and an important scheme to replace traditional rural stoves using dirty fuels with access to cooking gas. Education received some recognition of quality problems, and plans were announced to enable selected higher education institutions to reach international standards by relaxing regulation. Skilling continued to receive attention as well, but the allocations of funds and expertise may not be enough to make a rapid enough dent in India’s needs.

My sense of this year’s Budget is that it is a strong step in the direction of transforming India’s material conditions. Several items that I noted were missing in last year’s Budget have been addressed now, and the language of intellectual engagement in the Budget speech indicated to me a strong understanding of India’s needs. The problems will continue to be with government’s capacity for implementation, its ability to create the appropriate environment for the private sector to be effective where it has a comparative advantage, and its ability to check corruption and rent-seeking. One also hopes that what promises to be sound economic management is not derailed by political and cultural issues, where the government has been less than adept in its handling.

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

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