The new series GDP data has confounded the scene as there are difficulties in reconciling the growth performance with other variables such as index of industrial production and tax collections or saving and investment ratios. The estimated growth of 6.9% in FY14 and the estimate of 7.4% for FY15 looks overly optimistic. The jury is still out, and we need to wait until we have access to the detailed methodology, likely to be put out later in the month. Despite this, one safe inference could be that the economy has bottomed out and is on the path of revival.

There is no doubt that both saving and investment ratios have steadily declined right from the high levels reached in FY08. The savings ratio has declined from 36.8% in FY08 to 30% in FY14 and the decline in the investment ratio was from 38% to a little over 30%. Equally worrisome is the decline in households’ financial savings, from almost 13% to 7.1% during the period, and this is the direct consequence of the high rate of inflation and negative real rate of return on financial assets. With inflation hopefully under check—thanks mainly to the decline in global commodity prices, particularly oil, and also perseverance of RBI—there is a hope of households changing their portfolio away from gold and real estates in favour of financial assets.It is important that the budget should initiate measures to revive savings and investment cycle in the country. Raising more resources and containing current expenditures are keys to increase government savings. Increased governmental savings can also help to increase government’s investment expenditure. However, government is faced with the basic dilemma of achieving fiscal consolidation in the face of stubbornly stagnant or often declining revenues. The past legacy leaves very little room for expenditure compression. In addition, the government will have to deal with the report of the Fourteenth Finance Commission. In the light of these, the government should try to achieve the following.

First, it is important to increase tax revenues by doing away with tax exemptions and concessions. In the case of excise duties, there is a need to simplify and rationalise rates on cigarettes, convert the rates into ad valorem and levy the tax at a uniform rate which is equivalent to the highest rate. It does not make sense to levy the tax based on the length of cigarettes. Similarly, on items like cement there is no need for retaining the specific duty. It is also desirable to increase the general rate of tax to 14%, which was the rate that existed in FY08 before it was brought down to give stimulus to the economy. There are wide-ranging exemptions which need to be done away with and on items like homogenised vegetables fruit juices, breakfast cereals, etc, the tax is levied at a lower rate. A comprehensive revision towards unifying the rates is called for. In the case of service tax, it is necessary to prune the list of exemption—the prominent one, with significant revenue potential, is levying the tax on railway fare and freights. It is also important to desist the temptation to have more earmarked taxes by levying additional cesses and surcharges as these are supposed to be temporary. The government should also put a roadmap for doing away with area-based exemptions.

The second set of reform should be on the rationalisation of expenditures. The interim report of the Commission headed by former RBI governor Bimal Jalan can be an important base for rationalisation. There are measures like rationalising subsidies in gas cylinders using the Aadhaar platform. The budget must address the important issue of decontrolling the price of urea. The most important reform on the expenditure side will have to be on centrally-sponsored schemes. The Union government simply does not have the fiscal space to continue with all those proliferated over the years, particularly on the subjects in the state list. The NITI Aayog in its first meeting has entrusted the task to a group of chief ministers, but the announcement to rationalise them, limiting the total fiscal space available for such schemes to what is affordable, could be made in the budget.

The third important set of measures relates to prioritising public enterprises. The policy of disinvestment must be based on the principle of prioritisation, and not simply on one of milking public enterprises for money. The extent of disinvestment should be based on prioritisation which will also provide clarity for the functioning of the enterprises in the future. Similarly, the policy on dividends from public enterprises should be based on clear principles. There is no clear policy on transferring the profits to reserves and it should be based on the requirement for additional investment. Those with excess reserves have to pay higher dividends to shareholders, which includes the government.

The fourth set of measures to revive the investment cycle is to create some special purpose vehicles for undertaking investments, particularly in sectors like the railways. Perhaps, the government can work on a time bound plan of corporatising the railways, but for the present, it may be worthwhile to start a special purpose vehicle. Railways has suffered the lack of investment enormously over the years due to heavy politicisation. At the present rate of investment, completion of the works already initiated will require 150 years to complete! In fact, it has not only eaten up the reserves but also consumed even the contributions by the states for creating additional lines, and has gone back to them for more, on the plea that the costs have gone up. The only way to revive investment in railways seems to be to create separate special purpose vehicles. But that would surely increase the contingent liabilities of the government. Therefore, it may be necessary also to create a fund for dealing with the risks arising from contingent liabilities.

Front-loading public investment in infrastructure holds the key to reviving the investment cycle in India. At the same time, given the low level of financial savings of the households, fiscal consolidation is imperative for RBI to reduce the interest rate. In this context, the government will have to find new ways of funding the infrastructure both from domestic and foreign sources and in this context special purpose vehicles seem to be the only way forward.

By M Govinda Rao

The author is emeritus professor, NIPFP, and former member, Fourteenth Finance Commission. E-mail: mgrao48@gmail.com