Finance Minister Arun Jaitley’s first budget in July last year was very much a holding exercise since it came almost immediately after Prime Minister Narendra Modi’s team took the reins of power from the UPA government. So, the Union budget for 2015-16 is, in many ways, the NDA government’s maiden major policy statement. Pre-budget discussions in the media suggested that Jaitley would have to keep in mind three major priorities or goals. The first was the need to strengthen fiscal consolidation. The gap between government receipts and expenditure had grown during the last years of the UPA, and it had become imperative to reduce the fiscal deficit. The second was the need to provide a much-needed boost to the economy through an expansionary budget. In particular, the government’s attempt to go the PPP route in promoting investment in infrastructure had not taken off, and it was expected that Jaitley would provide a large infusion of funds into this sector. Finally, the recent defeat of the BJP at the hands of the AAP in the Delhi elections seemed to indicate that the government would throw in some populist measures to woo voters. Of course, these objectives are at least partly conflicting and there is a sense in which Jaitley had to square the circle.
Given this background, the budget must be given a decent score. Its strongest point is perhaps the massive allocation to the infrastructure sector. Specific projects include new power plants, highways, roads and ports. The allocation to infrastructure also includes a Rs 25,000 crore Rural Infrastructure Development Fund. The finance minister has also announced the setting up of a National Infrastructure and Investment Fund (NIIF), with initial seed capital of Rs 20,000 crore. The hope is that the NIIF will be able to leverage additional resources into the sector. Jaitley has also announced the launch of new tax-free bonds dedicated to investments in roads and railways. A particularly pleasing announcement was the initiative to move to what has been labelled as the “plug and play” mode, in which all clearances will be obtained and linkages established before projects are auctioned. The fear of the bureaucratic hurdles to be crossed before projects can take off has often put off private players from investment, particularly in projects such as power plants, which require land acquisition. This should generate new interest in such projects.
But not all budgetary allocations have been as desirable. The finance minister has also announced the setting up of a slew of new IITs and IIMs. These so-called pillars of higher education are popular with the middle-class voter. The NDA government will also win some support from the states where these new institutions will come up. Of course, one man’s populism is another man’s investment in human capital. But it is hard to get away from the fact that mere bricks and mortar do not create institutions of learning. I remember former Prime Minister Manmohan Singh declaring that his government would set up 50 world-class universities. But not even a single one exists! Moreover, there is a great deal of evidence suggesting that some of the existing IITs that have been set up recently are suffering from a severe shortage of qualified faculty. One cannot help feeling that the attempt to set up more such institutions is a waste of public money.
Jaitley has actually resisted the temptation to introduce any blatantly populist measure. Fiscal conservatives may be disappointed that one of the flagship programmes of the UPA, the MGNREGA, will continue to be funded at more or less the same scale as before. Quite contrary to the popular perception that the BJP under Modi cares only about promoting growth, the budget speech actually announced schemes for low-cost pensions as well as health insurance. These are most welcome moves towards establishing some minimal social safety nets and can hardly be labelled as populist.
There has not been any major attempt to increase tax revenue. The increase in the rate of service tax is one new source of increased revenue. The government also hopes to raise substantial funds through what the finance minister has called “strategic” disinvestment, though what is “strategic” has not been clarified. Given the failure to meet its target for disinvestment during the current year, there is an obvious question mark on the government’s ability to meet the enhanced target.
The modest increase in taxation, along with a rise in expenditure, has meant that the finance minister has not been able to stick to his earlier fiscal deficit target for the next year — it is now estimated to be 3.9 per cent of GDP, instead of the promised 3.6 per cent. However, Jaitley promises to keep to the path of fiscal consolidation in the medium term. There is, here, an obvious issue of credibility. Having relaxed the target for 2015-16, what prevents him from doing so in a later year, if estimates go awry? The other concern for worry is that the current year’s target of 4.1 per cent has been met only through severe expenditure compression. And this cannot be repeated ad infinitum.
This is not a big-bang budget. But it is unrealistic to expect major reforms to be incorporated into the annual budget every year. There are some positives — the large increase in allocation to the infrastructure sector, the beginnings of low-cost pensions and health insurance without recourse to draconian tax rates, the promise to reduce corporate taxes and remove various exemptions to the corporate sector. Of course, Jaitley could have done better. For instance, there does not seem to be any concrete plans to slash non-oil subsidies. The target of running a 3 per cent fiscal deficit in the near future would have seemed more credible if the government had provided some indicative figures of expenditure and revenue for the intervening years. The government is guilty of some dexterous machinations. It has had to increase devolution to the states in line with the 14th Finance Commission’s recommendations. But it has, at the same time, slashed funds for Centrally sponsored schemes so as to ensure that the net devolution is virtually constant.
The writer is professor, Department of Economics, University of Warwick, UK