By Nirvikar Singh,
This year’s Union Budget was almost simultaneous with several events that have significance for its economic future. A formal trade deal with the European Union came just before the Budget, and an announcement of a trade deal with the US soon after. The deal with the US may still evolve, given the capriciousness of current policymaking in that country, but the underlying factors such as changes in the global oil market and where India buys oil suggest a respite on the trade front. For now, the US administration is focusing more on terrorising its own people and undermining its electoral institutions than further damage to the world trade system. Overall, if India becomes more open to trade, that will help its economy. Diversifying its trading partners will also be beneficial.
Finance Commission tilts toward performance incentives
The day of the Budget speech also saw the tabling in Parliament of the report of the 16th Finance Commission (FC). Much of the report follows recent precedent, but overall, there is a greater emphasis on fiscal “responsibility” for the states, greater rewards for strong economic performance, and performance incentives for local bodies as well—including support for India’s broad urbanisation process. Often, such changes make only marginal differences to outcomes that are mostly determined by larger structural factors, but if those differences are in a positive direction, that has to be a good thing. FC transfers within the constitutional structure of Indian federalism struggle with an unresolvable tension between equity across states on the one hand, and their growth performance on the other. The latest report tilts towards the latter, but overall, on a scale of “how full is the glass?”, “well over half full” seems to be a reasonable assessment of the FC report.
For the Budget itself, one might be somewhat less enthusiastic. Like many recent Budgets, this one is fairly unremarkable. There is a clear push to reduce administrative frictions, simplify taxes, increase the “ease of doing business” (especially for smaller firms), increase investment (public and private), and to keep strategic goals in mind, including promoting new technologies such as artificial intelligence (AI), and facilitating a green transition for a country especially vulnerable to climate change. All these are good things and have elicited positive reactions from commentators. But it is not clear if the measures in the Budget will do more than keeping India growing at close to 7%, when 8 or 9% growth seems within reach. With the current situation of financial sector and macroeconomic stability, one wonders if more could have been done. For example, more radical improvements in institutions for financial access for smaller firms and fixing the input tax credit system within the goods and service tax to stop hurting such firms could improve India’s industrial dynamics and even contribute to employment generation.
Tinkering with institutional reforms rather than designing them thoughtfully is a persistent problem in Indian policymaking, although one might argue that tinkering is better than poorly thought out or hasty changes. India has had some of those examples as well. In this context, the tax breaks for investment in AI data centres seem to be questionable when many companies are ploughing ahead without such incentives while not bearing any of the environmental and social costs of their rush to dominate the AI space. Perhaps such policy changes are motivated by political lobbying—a feature of any country’s public expenditure choices. India’s government also remains somewhat prone to favouring policies with too much built-in bureaucratic discretion, despite some progress on this front.
Budget needs deeper analysis
The details of the Budget require more lengthy analysis, which others have offered. One thing that such analyses sometimes miss is that seemingly large sums are often not significant—a Rs 10,000-crore outlay is less than 0.02% of central government expenditure. Analysts are better, though, at pointing out inconsistencies and coordination gaps in the Budget, which, perhaps unavoidably, has the flavour of a laundry list rather than a strategic document. But that may be unfair—strategic documents should be prior to any Budget. In this respect, the Economic Survey has provided some of that intellectual foundation. This year’s Survey is a long and ambitious document, highlighting ideas such as resilience and the importance of an entrepreneurial state. The latter is meant to address the problem of limited state capacity and draws on East Asian examples. The concluding two-part chapter of the Survey may be the best indication of how government policymakers and advisors envisage India’s economic trajectory. The Budget and the FC report are broadly aligned with the tone of these chapters.
To some extent, what is envisaged is a transformation of governance and society that will put India on a path to advanced country status. There is a large dose of pride in India’s past as a model for its future. All of this deserves careful analysis. An economist might caution that rhetoric translates into reality only when resources and incentives are aligned with goals. From that perspective, it is still unclear if India’s economic policies through the Budget and beyond are doing enough to build human and social capital in ways that will accelerate or even sustain economic growth.
The author is Professor of Economics, University of California, Santa Cruz.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.