Much was expected, both in style and substance, from the new FM. He had been bequeathed a scorched earth economy — low growth, high inflation, a vote on account full of fudged numbers. The incoming government had the right to blame the previous regime for all its problems. But Arun Jaitley refrained from blaming his predecessor and accepted the constraint of delivering a 4.1 per cent deficit target. He acknowledged that this would pose a challenge, one he has tried to meet in a unique manner. He avoided reducing expenditure drastically as his predecessor had done. He did not even cut subsidies or reform their structure. This should put to rest the worst fears of those who expected a sharp change with a non-Congress government. The MGNREGA has been retained and will be directed to more productive areas to boost asset creation. The food security allocation has been increased. If there is a longer-run plan to convert subsidies into direct cash transfers, it must wait until February.
Here, then, is a budget more like a UPA budget from happier days. But there was also the clear signalling of change. Early on, we were warned that “mere populism” would not do. The change was in laying down a three-year projection to bring the deficit down to 3 per cent by 2017. The squaring of the circle with expenditure slightly increased and revenue not much enhanced was left implicit in the hard numbers but not in the budget speech. The gap is to be made up, as expected, by disposal of assets, or disinvestment. This will come to Rs 63,425 crore if the deficit is to be at 4.1 per cent.
The debate will turn on the feasibility of this target, which is about thrice as much as what the previous government achieved. The markets have been buoyant since the new government came to power. It should be easier to sell PSU shares. As the Nayak Committee report recommended, the government can sell part of its holdings in PSU banks and reduce its stake to 51 per cent. This is welcome as otherwise, the government will have to borrow to recapitalise them.
The government will also be helped by the decisive shift in attitudes about the public/ private balance in economic policy. The Congress has always been a reluctant liberaliser, even under P.V. Narasimha Rao. The BJP has never been a Fabian Socialist party as the Congress has. It has never had a sharply defined economic ideology. Yet, under Narendra Modi’s leadership, it has decisively entered the 21st century and recognised that FDI is, on balance, good, as are ppps.
PPPs were tried by the UPA, but without much success. The positive attitude implied in the Gujarat model should help the government achieve more than its predecessor. The bold step of allowing 49 per cent FDI in defence provides a necessary boost. While a pivotal pillar of Nehruvian economics was to use import substitution for national self-sufficiency, one sector where dependence on foreign imports remained a major factor was defence. Now we can begin to produce sophisticated weapons at home. The paradox is that even if you want to practice import substitution, it is better to do it with FDI than without.
Even so, much has been left undone. One had to work to discern the structure hidden under the dense foliage of Jaitley’s speech. When the UK budget is presented, the minutiae of departmental schemes are listed separately and not read out seriatim. Indian MPs seem to listen to a budget speech only to hear their constituency mentioned. It would be better to spend more time on a discussion of strategy, international and local economic circumstances, and then lay out the overall numbers succinctly.
Finally, the reform much overdue in public finances has yet to come. We need to transform of subsidies that are expensive and ineffective into direct transfers. We also need a massive disposal of public assets. Interest on debt is still the largest item in the budget, more than four times the food security outlay. This has to stop. We await future Jaitley budgets with great expectations.
The writer, emeritus professor of economics at the London School of Economics, is a Labour peer