The Budget displayed a maturity and rationality of thought and action in terms of basic public finance policies. Within the economic sphere, what India still needs is careful rethinking of the balances and boundaries between public and private; centralised and decentralised; economics and politics; and rich, poor and middle.
Life is never perfect, and Union Budgets are just one example. But in the case of this year’s Interim Budget, it does seem like the glass is at least half-full in the sphere of economic governance at the Centre, even if broader concerns about India’s direction remain. The Budget has been described as populist, but one could alternatively characterise it as providing a mild fiscal stimulus, which may not be a bad thing at this juncture, when India’s economy is still struggling to get out from under the overhang of bad debt accumulated in prior years.
The slight slippage in the FRBM (Fiscal Responsibility and Budget Management) target is not too much of a concern, and the transfers—implicit and explicit—that will lead to this slippage have been designed relatively well. The key idea here is that transfers are being achieved through cash payments into bank accounts, and through income tax rebates (an example of what economists call “tax expenditures”).
A greater concern is what is happening fiscally at the level of the states, and in the realm of state-owned enterprises. Problems there are contingent liabilities of the central government, and need policy attention, in the form of improved budgeting practices by the states, continued privatisation, and strengthening of the tax administration and tax capacity for states and for cities. But those issues could not be part of an Interim Budget.
The Budget also included measures to update and streamline archaic transaction taxes that come under the head of “stamp duty.” Further measures provided some tax relief in the real estate sector.
Prior to the Budget, there had been steps to rationalise and simplify the GST structure. The introduction of GST had involved complex political calculations and negotiations, and it is interesting to see how, once an imperfect tax structure was in place, it could be evaluated and improved relatively rapidly. The lesson here may be that this government, in particular, seems to have an eye for tweaks to the economic system that are “pro-commerce” (perhaps drawing on aspects of being “pro-market” as well as “pro-business,” as some academics have described two possible alternative policy stances).
One has to keep in mind, however, that the slow progress we keep seeing on many fronts in India is the result of a broadly shared vision of “economic reform.” The Budget speech touted liberalisation of FDI as one of its achievements, but this has been an ongoing process begun decades ago. Coming to grips with the immediate and the longer-term problems of the banking sector, and creating a modern framework for the conduct of monetary policy also have roots in the efforts of previous governments, even if there was a problem of a credit boom and associated corruption in the final years of the last government.
It is important to realise that credit and blame have to be adjusted for external factors, and that should lead one to upgrade the performance of the previous government, as well as not go overboard in praising the current one’s economic policies. It is fair to say, however, that the past few years seem to have seen an attempt to stem the rot that was creeping in from excesses of crony capitalism. What remains to be seen is if the approach to governance going into the future can strengthen state institutions so that they do not involve the exercise of arbitrary power, and are more even-handed in how the rich and the poor are treated.
The Union Budget continued the practice of bailing out farmers, which seems to be a perennial issue for India. Of course, the real problems are structural—inefficient and distortionary policies with respect to agriculture, whether in input markets, production or output markets. Pricing, insurance, procurement, credit, marketing and technology choices all need serious policy attention. And underlying it all is the failure to create jobs off the farm and away from the rural areas.
The Budget also touted India’s digital strategy. Digitisation can reduce harassment of taxpayers, improve collection efficiency, reduce transaction costs to make small business finance more effective, improve access to health and education services, and so on. It is not difficult to see that what is happening as a “Fourth Industrial Revolution.” The central government has realised the importance of these trends, but its vision and its detailed strategy seem to be inadequate, as I have argued in previous columns. Unlike health, sanitation and education, where it may make sense to push down implementation to cities and states, the creation of a national digital infrastructure may properly be a central goal. It is important, in this respect, to avoid too much reliance on large private actors for this infrastructure (implied pun intended), while pushing aggressively and intelligently for a robust 21st century digital infrastructure to support myriad new applications.
The Union Budget displayed a maturity and rationality of thought and action in terms of basic public finance policies. Within the economic sphere, what India still needs is careful rethinking of the balances and boundaries between public and private; centralised and decentralised; economics and politics; and rich, poor and middle. It will be interesting to see if the rhetoric of the election campaign debates sheds any light on how politicians think of these fundamental underlying issues.