Race to the top

Budget 2016 promotes inter-state competition in reforming laws to generate employment.

Written by Arvind Virmani | Published:March 3, 2016 12:00 am
Budget2016, union budget 2016, employment generation, employment opportunities, india GDP, GDP, india GDP growth, 2016-17 budget , RBI, RBI Act, FDI, Kelkar Committee, highlights of union budget 2016, indian express editorial page, indian express There are a few notable policy initiatives in the budget that will help improve the competitiveness of the economy, enhance productivity and generate employment.

Sustained fast growth of the economy requires a stable macroeconomic framework, policies that stimulate growth, and institutions (including laws and rules) that support competitive self-sustaining, job-creating business and promote employment opportunities. Though India’s GDP growth rate has risen gradually to 7.6 per cent in 2015-16 (estimated), parts of the economy are being buffeted by global growth deceleration, capital market uncertainty and deflationary pressures. These have reduced nominal growth to 8.6 per cent and put pressure on the globalised corporate sector, reducing the nominal growth rates of their sales and profits. The rural economy has been weakened by two consecutive droughts, the first such dual droughts since the end-1990s. In this article, we review the budget to identify what, if anything, it proposes to do about these issues.

The 2016-17 budget implicitly recognises that a growth rate of 7.5 to 7.75 per cent does not require an expansion of government expenditure or wide tax incentives, by sticking to the fiscal deficit target of 3.5 per cent of the GDP for the next year. The decision to stick to fiscal targets enhances the credibility of the government, reduces the risk of contagion from world turmoil and sudden stops in capital flows and provides the basis for a reduction in policy interest rates by the RBI of up to 75 basis points. The proposed amendment of the RBI Act to create a monetary policy committee will formalise flexible inflation targeting, enhance the credibility of the RBI and allow better monetary-fiscal policy balance.

When the fiscal deficit target for 2015-16 was loosened to accommodate more infrastructure investment by government, the question in our minds was whether the government would be able to shift expenditure from consumption and subsidies to investment. The fact that the revenue deficit for 2015-16 is 0.3 percentage points below the revised target suggests that it has successfully achieved an improvement in the quality of government expenditures. As the revenue deficit is a rough measure of government dis-saving, this will help raise national savings and reduce dependence on foreign savings. The revenue deficit is projected to decline by only 0.2 per cent of the GDP in 2016-17 compared to the 0.4 per cent of the GDP reduction in the fiscal deficit. This is partly due to wage pressures arising from the implementation of the pay commission report. However, the budget could have done much more on reform of the fertiliser, food and kerosene subsidy. In the longer term, the proposed bill to provide statutory backing for Aadhaar for providing targeted benefits will greatly improve the efficiency of subsidy expenditure and reduce leakages and corruption.

The adoption of the Kelkar Committee recommendations on public-private partnership would also help in completing stalled projects and reducing future regulatory uncertainty. Among the proposals in the budget are a public utility dispute resolution bill, guidelines for PPP renegotiations if the external environment changes unpredictably, and a credit rating system for infrastructure taking into account the special risks involved.

There are a few notable policy initiatives in the budget that will help improve the competitiveness of the economy, enhance productivity and generate employment.

The budget speech proposes to allow 100 per cent FDI in food processing. The setting up of the previously proposed national e-market for agricultural produce could be a game-changer for agricultural marketing. For decades, we have talked about the huge wastage of food because of the lack of farm-to-market linkages and marketing.

Recommendations of many weighty commissions have been received and implemented by the government without much success. This is the only thing that has not been tried in India, though it has worked in other countries. According to the finance minister, 12 states have already amended their agricultural produce market committee acts to allow them to join the e-marketing platform to be inaugurated in April. This will set the stage for FDI in marketing.

The second significant reform is the proposed change in the Motor Vehicles Act to open up the passenger transport sector. Road transport falls in the Concurrent List of the Constitution but passenger transport has been declared the monopoly of the state government in most states. The proposed bill will allow private road transport companies to compete in states that adopt this change. This would allow the modernisation of the sector, improving productivity and generating higher quality jobs.

The third significant reform proposal is a model law amending the Shops and Establishments Act to provide greater flexibility in operation to small establishments, subject to undiluted health and safety requirements. This will provide them with greater freedom and flexibility to compete with malls and other large establishments. This law would also need to be adopted by states. The basic approach is to promote inter-state competition in reforming laws and rules to promote employment.

The finance minister reiterated his intention to carry forward financial reforms such as bringing a bankruptcy law (for non-financial companies) and proposed some new initiatives for financial firms and banks. The most significant long-term reform was a financial firms resolution bill. A number of changes were also announced regarding FDI in and taxation of asset reconstruction companies (ARCs), debt recovery tribunals, and public-sector banks that will expedite resolution of the bad-debt problem.

There were a number of small changes in personal income tax, corporate tax, and customs and excise duties. Some of these will help simplify the tax system while others will complicate it. The net effect is a bit difficult to determine at this point. The budget also carried forward the effort to improve the system of tax administration and dispute resolution based on the recommendations of two tax administration reform committees. But the proof of the pudding in bureaucracy is always in the eating. Overall, the fiscal consolidation and reforms highlighted above make this a good budget.

 

The writer, a former executive director at the IMF, is chairman of the Policy Foundation

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