The Union budget of 2014 assumes significance as it would be the first major policy document of the new government. Its first budget is being presented when the coffers are empty, rains are failing and the geopolitical situation is rather grim, impacting oil prices. In such a situation, inflationary pressures are expected to persist, partially because of the long-pending hard decisions that had to be made in the first month of assuming office. The ruling party’s landslide victory is providing a significant goodwill buffer, which should be further utilised to sweep away the Fabian Socialist model of development that had given rise to the licence raj. Therefore, many existing policies need to be reviewed and some more need to be formulated. Indeed, the budget offers a rare opportunity for the government to initiate strong growth-oriented and innovative policies.
The gigantic task of pulling the economy out of the abyss would require larger fiscal resources, which may not be easy in the current year, given the low growth and dismal fisc inherited by the new government. Then the crucial issue is garnering resources for fulfilling the welfare-oriented promises made for the aspiring young India. In this context, the government’s first budget is crucial and it would need to strategise in terms of short- and long-term policy measures, prioritising expenditure in the current budget and raising resources to meet urgent requirements.
First, the budget deficit is already high and fiscal profligacy, though politically justifiable, may not make good economic sense. To undertake policy reforms and new initiatives, some of which were already announced by the ruling party in its manifesto, would require higher outlays. Rather than expanding the fiscal deficit and raising debt, the government should establish the credibility of its intentions by fiscal prudence and consolidation. To begin with, the need is to make fiscal space in the budget by rationalising subsidies, especially food and fuel subsidy, to pave the way for more productive expenditure in the economy.
India needs to urgently address some specific maladies to enhance the welfare of its citizens. Some of these problems, like malnutrition and undernourishment, can be tackled by ensuring the distribution of fortified food, barley, oats, rye, canola oil and flaxseeds through the public distribution system (PDS). To ensure better health, the PDS could be used for the distribution of mosquito nets, malaria and diarrhoea medicines. To encourage sanitation facilities and actively discourage open defecation, a major cause of child mortality, a subsidy for pit and flush toilets can be offered. To encourage higher enrolment and better performance of students, in addition to the mid-day meal scheme, a school breakfast scheme could be considered. To help the nearly 11 crore elderly, the majority of whom are women, universal pension and universal insurance could be considered. Finally, a tax relief to medium, small and micro enterprises could help spur employment in the immediate future.
To raise financial resources, the need is to strengthen the tax collection machinery and to incentivise tax collection rather than use coercive methods. Also, efforts underway to use technology to increase the tax base, improve tax collection and identify unaccounted money needs to be intensified. In view of the large fiscal requirements to lift the economy out of the difficult situation, the government needs to consider an avenue for domestically unaccounted money — estimated at nearly half of the official GDP — to flow into official channels and contribute to bridging the fiscal gap. Similarly, as the focus of the new government would be on employment-generation, given the unemployment rate of more than 20 per cent among youth in the age range of 15-24 years, the private sector’s role assumes significance. The government should seek the active participation and partnership of the private sector, including deployment of funds under CSR, for specific projects.
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There is still another way to finance development and create employment, and that is through strengthening local governments. The bottom-up approach of planning, emphasised by the 73rd and 74th Amendments to the Constitution, holds a promise. In the last two decades, nothing significant has happened to strengthen local bodies except higher allocations by successive finance commissions. The crucial issue is encouraging financial empowerment rather than financial dependence of the panchayati raj institutions (PRI) on Central and state budgets. As PRIs are the closest to the consumer, the financing of development projects through borrowings can be easier. India probably needs a national local body financing authority and a state local body financing authority to meet the financial needs of developing semi-urban and rural areas. As the projects would have been conceived at the local level, the investors’ level of confidence would ensure subscription and consistency in financing local body bonds.
Finally, identifying and articulating policy stances on measures to be undertaken in the medium to long term would also help in retaining the confidence of markets in India’s development plans. Issues like the separation of debt from monetary management, government’s approach to FDI, inflation-targeting by the RBI and addressing corruption need clarification. And there is a need to initiate deliberations and build consensus on the next generation of reforms in agriculture, industry, labour, power and the financial sector to unleash the growth potential of the young and dynamic demographic of India.
The writer is RBI chair professor of economics, IIM Bangalore. Views are personal