Saturday, Nov 01, 2014

What the budget didn’t say

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 to take the economy to a higher growth path. But, how will these be executed? Source: CR Sasikumar 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 to take the economy to a higher growth path. But, how will these be executed? Source: CR Sasikumar
Written by Bhaskar Dutta | Posted: July 24, 2014 12:16 am

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 continued…

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