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The PPP approach, for instance, hasn’t taken off in India so far. How can that be remedied?
Union Finance Minister Arun Jaitley’s maiden budget was not an ordinary one. Prime Minister Narendra Modi’s very effective electoral campaign, along with his promise of better days to come, raised high expectations amongst a surprisingly large section of the population. There was also the feeling that since the BJP had won an absolute majority of seats in the Lok Sabha, it could carry out any set of bold policies without having to succumb to undue pressures from coalition partners. These feelings were perhaps strengthened when the government bit the bullet and raised fuel prices soon after assuming office. Surely this was a government that meant business? Since the budget was going to be the first major policy statement of the current government, these expectations resulted in most people looking to a budget that would represent a paradigm shift. Anything less would be a severe let-down.
Even his most loyal supporters must admit that the budget, seen from this perspective, has come as a big disappointment. However, they can point out with some justification that the ground realities meant that Jaitley’s options were limited. The economy is showing signs of revival but the prospects of recovery are threatened by this year’s monsoon, which is now almost certain to be deficient. In addition, the Iraq crisis has caused crude prices to shoot up, and this will inevitably result in higher domestic fuel prices. Low agricultural production and higher fuel costs both spell bad news as far as inflationary pressures are concerned. So, there are trade-offs between an expansionary fiscal policy and higher inflation.
Jaitley has decided in favour of fiscal prudence and produced a budget not very different from the interim budget formulated by his predecessor. Indeed, a common refrain heard immediately after the budget speech was that this could well have been a UPA budget. This is not totally surprising since the set of senior bureaucrats in the finance ministry, who presumably play an important role in the preparation of the budget, remains the same. And Jaitley himself has been at the helm only for a few weeks. The macro figures of receipts and expenditure are of the same order of magnitude to those in the interim budget, with aggregate expenditure slightly higher and receipts marginally lower. The composition of taxes, too, is more or less the same.
Jaitley has also decided to stick to the interim budget fiscal deficit target of 4.1 per cent of GDP. This has raised quite a few eyebrows because the overwhelming majority of people, including Jaitley himself, had felt that the interim budget fiscal deficit target was infeasible. In particular, tax revenue receipts are assumed to increase at just below 20 per cent, despite a growth rate of just slightly higher than 5 per cent and inflation hopefully no more than 8-9 per cent. So, tax receipts are assumed to grow at a significantly higher rate than nominal GDP. He hopes to cover the gap by a larger disinvestment target. Also, Jaitley has allocated relatively small sums between Rs 100 crore to an inordinately large number of projects. Most of them may be in the nature of pilot projects and expenditure on these items will probably be less than the allocation by the end of the financial year. But, clearly, Jaitley has changed his views about what is feasible and what is not. Many others remain doubting Thomases.
A distinctive feature of the budget is the relatively large allocation to infrastructure. Consistent with the prime minister’s oft-repeated statements about the need to construct an improved system of highways, the budget sets aside a sum of Rs 37,000 crore for roads and highways. Ports, rural power infrastructure and rural warehousing will also be major beneficiaries. A national electricity fund was announced to help power distribution companies. Since budgetary resources are vastly inadequate given the scale of financial resources required to construct adequate infrastructure, the finance minister has opted to go the public-private partnership (PPP) route. Both the budget document as well as Jaitley’s speech have multiple references to the need to raise funding through the PPP mode. An allocation of Rs 500 crore has been made to set up an institution that will help execute PPP projects. However, the PPP approach has not really taken off in India for various reasons. What was missing in the budget speech was an awareness of the additional steps that need to be taken in order to make this initiative a successful one.
The BJP has, of course, declared its opposition to foreign direct investment in the retail sector, perhaps in order to satisfy small traders who constitute an important vote bank. However, it was a pleasant surprise to see that the government has an open mind about FDI in general. In particular, Jaitley has increased FDI limits in several sectors such as insurance, defence production and realty. FDI flows will be a much-needed additional source of investment in the economy.
What has proved to be a big disappointment is the failure to either take a stand on important issues or provide details about future policies. For instance, Jaitley has not explicitly ruled out recourse to retrospective taxation. Indeed, some have pointed out that the current budget commits a new transgression for existing holders of debt mutual funds. There are verbal assurances to drastically reform the major subsidies on food, petroleum and fertilisers, a commitment to introduce the goods and services tax and, of course, to take the economy to a higher growth path. But, how will these be executed? Will we soon move to a regime of market-determined prices of petroleum products? Will Aadhaar be used to provide cash transfers as partial substitutes to food subsidies? Above all, neither the budget document nor the budget speech provides any clue about the government’s vision on growth and distribution. In particular, will there be exclusive reliance on growth and the trickle-down process to reduce poverty?
The writer is professor, Department of Economics, University of Warwick, UK