The Union budget of 2015 will have a special place in Indian economic history. It is the first complete budget of the new government, being prepared in the backdrop of low oil prices and current account deficit, which will give the administration headroom on both the fiscal and the external fronts.
The “Make in India” programme has recently received a boost from the successful visit of the US president to Delhi, after Prime Minister Narendra Modi called on the US last September. Globally, after more than three decades of high growth, China is suffering from a slowdown. India, on the other hand, is on a well-deserved upswing after years of liberalisation and reforms.
Thanks to the BJP’s thumping majority in the Lok Sabha, “policy paralysis” is over and there is new objectivity in government and business. The Union budget will be presented in the midst of newfound optimism and positive sentiments.
What should be the focus of such a budget? It should address the hopes of 125 crore Indians — a difficult but achievable goal. The objective of macroeconomic policy is stability and growth. The Union budget should, therefore, ensure fiscal stability, employment creation and high growth.
On fiscal stability, the finance minister has rightly been affirming that the target for the gross fiscal deficit would be met. The global decline in oil prices would imply a reduction in the fuel subsidy. And the recent recommendations of the expenditure commission and the high-level committee on the Food Corporation of India clearly indicate that there is scope for curtailing food subsidies through better targeting and use of technology.
The fiscal space created in the budget needs to be effectively used. The government could consider liberalising imports of gold and capital goods, which have suffered in previous years because of the stressed current account deficit. The decline in oil prices should not prompt the government to reduce expenditure on research on non-renewal sources of energy. Most importantly, two essential decisions need to be taken.
First, the issue of separating debt management and monetary management. Some significant steps had been taken to this end after the proposed separation was announced in the 2007 Union budget. A “middle office” was set up in the ministry of finance in 2008. But since the global financial crises, there has been slow progress on the separation.
The finance minister should take a firm decision to finally cleave these functions — as has been recommended by numerous committees over the last two decades. The separation of debt management, which is basically a fiscal policy instrument, and monetary management would enhance credibility.
Second, the issue of inflation targeting. The global practice is that the government assigns an inflation target to the central bank. In India, despite its national importance, inflation targeting, unlike debt management, has never been looked into by an expert committee set up by the government.
The finance minister must announce an expert committee to examine the feasibility of inflation targeting in India, a policy tool that was in vogue globally until 2008, but which has been partially blamed for the great recession and shunned by countries because it places blinkers on central bankers.
To create employment, the finance ministry could encourage micro, small and medium enterprises (MSMEs) by providing tax incentives and holidays. MSMEs account for only 8 per cent of the GDP in India, compared to nearly 50 per cent in OECD countries as well as South Africa and Indonesia. At present, about 30 million MSMEs in India employ nearly 60 million people. India is expected to add nearly 15 million people to the workforce every year for more than a decade. Only MSMEs can absorb such numbers.
To spur growth, a good strategy would be to encourage the housing sector. Construction is labour intensive and the housing sector has linkages with nearly 270 other industries. India suffers from a shortage of nearly 20 million houses, especially for economically weaker sections.
After successfully signing agreements with the US and Japan for smart cities, India should now pursue housing treaties that could help facilitate the import of technology to efficiently build housing complexes. Such complexes could benefit society and the environment by generating economies of scale and through the deployment of green technology. The budget could help by providing tax breaks on such construction and technology imports, which would also help in addressing the issue of increasing urbanisation.
An appropriate fiscal policy could help India become the engine of the world’s economic growth, provide opportunities to millions of youth to unleash their productive capabilities and demonstrate to the world that we have finally arrived. The Union budget of 2015 holds the key to India’s future.
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