Budget signals change for those who voted in Modi: business and overseas investors, entrepreneurs and youth.
After the mind-blowing economic item number promised by the Narendra Modi electioneering machine — fix the fragile economy, tame the inflation tiger, rein in the deficit, reform those inefficient populist programmes and tax structures, attract overseas investment, get back to those go-go growth years — the budget was a tame affair. Apart from sticking by his predecessor’s target of 4.1 per cent (of GDP) for the fiscal deficit and promising a reduction to 3 per cent by 2016-17 while lifting overall growth back up to 7-8 per cent, there was a single word to describe Finance Minister Arun Jaitley’s budget: modest.
If this is the first major exam for the government in its fresher year, Jaitley’s overall performance was a solid B. Some individual grades follow.
His speech was a C, too long and a laundry list with a little bit, it seemed, for everybody. For a while it seemed unclear where it was going and if there was any vision driving his recitation; the stock market rolled its eyes, went into a swoon as he spoke, only to recover and surge a bit after he was done when it realised that Jaitley had actually scattered quite a few meaningful nuggets after all.
On the issue of making progress on fundamental reforms, I would give him a C. There were no drastic overhauls to curb inefficient spending — perhaps Jaitley was a little too mindful of upcoming state elections. His promise of ending the era of populist budgets lacked any real detail; he just kicked the can down the road by deferring them to an expenditure commission report to be released later in the year. Much-needed reforms that affect the labour market, bureaucracy, supply and distribution of food, and any real measure to catalyse the lagging manufacturing sector were missing. But, realistically, all of this would be too much to expect from a budget speech. We should get away from expecting budgets to be instruments of revolutionary change and a one-shot annual unveiling of grand policy. In light of this contextual detail, I will bump Jaitley’s performance on a reform agenda up to a B.
On the stability of his arithmetic also, I would give him a B. Jaitley’s projected revenues were 1.9 per cent higher than his predecessor’s and his projected expenditures were higher by 1.8 per cent. Given the knife-edge he is walking in sticking to a 4.1 per cent deficit target, these declarations do come with plenty of risk. There are many factors outside his control. He doesn’t really have a credible plan to boost revenue. If, despite all the government’s signalling, investors do not pick up the pace, equity markets do not remain buoyant, the monsoon disappoints, the ISIL crisis in Iraq spooks the oil markets and inflationary pressures mount, all bets are off. But, folks, this is a budget, not a numerologist’s predictions. It is all about projections by pointy-headed economists, based on spreadsheets filled with assumptions and a multitude of crossed fingers. And, of course, there is a large dose of political salt added to the recipe.
I am reserving my failing grade for the silliest part of the budget: allocating a taller stack of rupees for the tallest statue in the world than to so many other pressing priorities.
Ultimately, the significance of this budget is in its content as a signal of strategic intent. India’s challenges are far too complex to be addressed in one gigantic move. Budgets should not be designed to change the country’s economic destiny overnight. Besides, the Modi government is too new and the principle of campaigning in poetry and governing in prose is generally a good one to follow: the administration needs to take time to assess the multifaceted issues within India and abroad. As a pure signalling device — and this is important, given that a virtuous cycle of expectations is essential for an economic recovery — the budget scored an A. It conveyed the sense that Jaitley was, indeed, mindful of the campaign promises, he had checked the major boxes and, importantly, there was more to come. While it left one hungry for more specifics, it is wise to credibly signal change and systematically follow through rather than rush towards revolutionary change just because newspaper columnists will harass you for lacking in boldness.
Why do I think Jaitley did well on the signaling front? Consider that he will be heard by the electorate that voted in Modi, businesses and overseas investors, entrepreneurs and India’s youth. Consider the reasons why each of these constituents have something to hang onto.
The electorate should feel good for now. Jaitley resisted throwing the food, fuel and employment subsidies out. You cannot pull out of redistributive measures to address poverty if you do not have a clear path to sustained inclusive economic growth. He announced plans to make a small beginning in closing the rural-urban gap with toilets in elementary schools and expanding rural electrification, and a Rs 500 crore allocation to rural internet connectivity. He announced spending on 100 smart cities — whatever that means — and promised investment in factories, roads and ports, enough to keep the ball in play for now.
Businesses and overseas investors should find some reason for cheer in the promises on infrastructure investments, intent to open up certain industries to foreign ownership and streamlining the Byzantine tax regime. Specifically, the lifting of caps on foreign ownership in the defence and insurance sectors from 26 per cent to 49 per cent along with the albeit vague plans to introduce a uniform countrywide goods and services tax should both be well received. A plan to recapitalise India’s state-run banks, and partially privatise them will be welcomed as it could help address the fragility of the banking sector.
I am particularly heartened by the moves towards boosting human capital and jobs development opportunities through education and support for entrepreneurship as this affects the country’s largest untapped resource: its vast population in the solidly productive age group and its youth in particular. This is a start and, at least, shows signs of the government thinking about removing the obstacles to business-building.
A modest performance when compared to his boss, but Jaitley has shown clear intentions that he is ready to keep trying and go much further.
The writer, senior associate dean of international business and finance at The Fletcher School at Tufts University, is the author of ‘The Slow Pace of Fast Change’