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Finance minister’s Victor Hugo moment

Post-reform India has had three gamechanging budgets. Will Arun Jaitley’s be the fourth?

Written by Shaji Vikraman , Harish Damodaran |
Updated: February 27, 2015 9:54:50 am
Arun Jaitley, Union budget 2015, Indian Economy, Union budget, Economic growth, Indian Express column, IN column, Shaji Vikraman column, Harish Damodaran column Arun Jaitley is FM in a govt where BJP enjoys an absolute majority. But that isn’t the only reason to expect him to deliver a more than run-of-the-mill budget.

Union budgets being analysed threadbare and their presentation getting elevated to the level of public spectacle are largely a post-reform phenomenon. Budgets rarely received such attention in pre-reform India. Even if they did, it wasn’t finance ministers’ budget speeches
in Parliament, but the legendary jurist Nani Palkhivala’s elucidation of the proposals in Mumbai’s Brabourne Stadium that attracted maximum eyeballs.

Arun Jaitley’s budget for 2015-16, to be presented on Saturday, will be significant for being the 25th of the post-reform era. But it has
the potential to be more than just that. Post-reform India has had three gamechanging budgets. Manmohan Singh’s 1991-92, P. Chidambaram’s 1997-98 and Yashwant Sinha’s 2000-01 Union budgets genuinely broke new ground. Whether Jailey’s will be the fourth in 25 years — the situation demands it should be — will be clear tomorrow.

The context of Manmohan Singh’s “historic” budget is well-known. Indian foreign currency reserves, as in March 1991, were sufficient to finance barely over a month’s imports. Against this background came the swathe of announcements, from the virtual abolition of industrial licensing, opening up to foreign direct investment and slashing the peak customs duty rate to 150 per cent to establishing a statutory independent regulator for capital markets (Sebi, as opposed to the old controller of capital issues), and setting the stage for screen-based trading, compression of settlement cycles and dematerialisation/ electronic transfer of securities through new institutions such as the National Stock Exchange and National Securities Depository Ltd.

Singh’s budget helped to not just restore investor confidence, but also unleashed the era of economic reforms. The shift in policy paradigm was aptly captured in the last part of his speech: “Victor Hugo once said, ‘No power on earth can stop an idea whose time has come’… Let the whole world hear it loud and clear. India is now wide awake”.

Chidambaram’s “dream” budget of 1997-98 wasn’t as revolutionary, but a trailblazer nonetheless. First, it put a stop to the funding
of government deficits by the RBI through the issuance of ad hoc treasury bills. The end of the regime of “deficit financing” meant the central bank now had some autonomy in the conduct of monetary policy. Second, the budget talked of managerial and commercial autonomy for public sector undertakings (PSUs) as well, apart from identifying nine well-performing “Navaratna” firms that were to be supported in their drive to become global giants (as the Chinese successfully did).

Third, it introduced a new exploration and licensing policy in hydrocarbons, under which companies, both domestic and foreign, were allowed to make discoveries and sell the produced oil/ gas in the domestic market at international prices. Fourth, the outdated foreign exchange regulation act was sought to be replaced by new legislation consistent with full current account convertibility and the objective of progressively liberalising capital account transactions; the emphasis henceforth was to be more on curbing the laundering of ill-gotten money rather than regular foreign trade or capital transactions. Chidambaram also brought down the peak customs duty to 40 per cent,
as part of a move to achieve Asean-level tariffs by the turn of the century, going against the advice of his senior officials.

Sinha’s 2000-01 budget was probably the last that could be termed reformist. For the first time, a fiscal responsibility act to institutionalise financial discipline through the setting of clear medium-term goals for deficit reduction was mooted. It also set the stage for a steep reduction in interest rates. Sinha’s budget also proposed shutting down PSUs that could not be revived, reducing government equity in all “non-strategic” firms to 26 per cent and whittling down the same to not more than 33 per cent, even in nationalised banks. If these weren’t enough, it also explicitly referred to “downsizing government” by limiting fresh departmental recruitments and introducing a voluntary retirement scheme for surplus staff.

We know that some of these proposed reforms — whether to do with PSUs or rationalisation of subsidies — never really saw the light
of day. The subsequent decade, if anything, saw an expansion in entitlement programmes even as the Indian economy experienced unprecedented growth that averaged 8.3 per cent annually between 2003-04 and 2011-12. Compounding the irony was the absence of a single budget that could be called reformist or radical during a period when the same Manmohan Singh was now prime minister.

Jaitley, in many ways, is well placed to write himself into the history books. He is finance minister in a government where the ruling party enjoys an absolute majority that India’s electorate last delivered in 1984. But that isn’t the only reason to expect him to deliver a more than run-of-the-mill budget. The Indian economy today — forget what the Central Statistics Office’s new GDP estimates show — is entering its fourth year of growth and investment slowdown. This, even as the Chinese growth story is clearly over and there is extraordinary investor interest in India, which is seen as one of the few destinations offering relative political and macro stability in an otherwise dismal global economic landscape. We need a budget to leverage what is India’s true Victor Hugo moment that Singh alluded
to back in July 1991.

What radical steps can Jaitley’s budget take? For starters, it can take off from the 14th Finance Commission’s recommendation to substantially increase the share of states in Central taxes from 32 to 42 per cent. This, apart from giving the states greater fiscal space and responsibility in undertaking development schemes tailored to their needs, also allows the Centre to focus  investment in areas where it is most required: railways, national highways, defence, space, atomic energy, agricultural and basic research, etc.

A similar philosophy should guide the budget, too. The finance minister should avoid going too micro. There is no need to extend sector-specific concessions to auto, steel, consumer durables or real estate on the ground that these particularly important industries are suffering from poor demand. The truth is there is no industry currently doing well, and that has to do with a general problem of demand from
a near four-year-long investment famine. The budget’s singular focus should be on reviving investment and significantly stepping up capital spending in infrastructure projects. Once the investment demand picks ups, individual sector problems will resolve themselves over time.

The least this budget can do is restore the Centre’s capital expenditures from the present 1.7 per cent or less of GDP to the 3 per cent-plus levels last seen in the mid-1990s. The economy badly needs more government spending, but of the right kind — in infrastructure, farm R&D and rural roads, as against recurrent and wasteful subsidies — that will boost overall economic productivity and ensure “Make in India” isn’t simply a pipedream.

Jaitley has a chance that he needs to grab and not squander by claiming that the budget is “only one day in a year”. We know from the past how a single budget day — Singh’s on July 24, 1991 and Pranab Mukherjee’s on March 16, 2012 — can make or mar.

shaji.vikraman@expressindia.com; harish.damodaran@expressindia.com

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