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Saturday, July 31, 2021

Many small bangs

A reformist budget was tripped up by short-run pressures.

Written by Yoginder K. Alagh |
Updated: March 4, 2015 3:57:32 am
union budget, arun jaitley, arun jaitley budget The budget seems to badly want to be reformist but was tripped up by short-run pressures.

The budget is a pot pourri of schemes and projects without a unifying theme. This is perhaps understandable given the somewhat difficult economic situation, which is made more complex by the shifting of the base year of GDP data. I am not surprised by the large difference in the service sector numbers — perhaps the CSO did not undertake the necessary culling of trade margins from sales revenue data in order to arrive at company-level output figures.

The budget seems to badly want to be reformist but was tripped up by short-run pressures. It begins well by laying out the goal of increasing investment for growth — by raising resources and controlling inflation in the benign context of short-run price stability and a fall in energy prices. Some tax rates have been raised. Service tax, Central excise duty and direct tax on the super rich have all gone up. Apart from making Indian-finished products more competitive by tackling duty inversion, the side benefit of the reform in the customs duty rates for 22 items will be to raise resources. However, the finance minister also gallantly volunteered that his successors will reduce the corporate tax rate and review exemptions over the next four years. He also rightly postponed hitting the 3 per cent fiscal deficit target by a year. I was looking forward to the Centrally sponsored schemes being cut.  In 1996, as planning minister I had done this and given the money to the states. In fact, this budget has many new Central schemes.

This writer, as well as the chief economic advisor, wanted public investment to be boosted to crowd in private investment. But the main instrument for that, an increase in plan expenditure, has not been announced. The aim of using public investment to trigger private investment is perhaps the guiding light behind several announcements of new funds and the emphasis on PPP projects. There are funds for micro units, livelihood training for educated minority youth, national investment and infrastructure, etc.

Additionally, innovation missions for start-ups have been announced, as well as the incorporation of ports. Even post offices will get into the act. There were so many small announcements that one can get a bit lost. At the end of the day, it is not clear whether the sum of measures will manage to push the country forward. One can only hope for the best.

Two announcements deserve particular attention. One was a break from the past and a gamechanger. The second left me cold. The gamechanger first. The government announced a social security scheme for all Indians. I know there are difficulties, and the sceptics will pillory it. But there is no going back — just like the MGNREGA, it is here to stay. This, along with the fact that Arun Jaitley introduced producer companies to India when he was corporate affairs minister, will be his claim to fame. There will come a day when every Indian can hold her head high. That day will be traced back to this announcement.

Now for the negative. It is wrong to club FDI and FII together, even though this has only been done for alternative investment funds. FDI adds to our capital stock. FII adds to our foreign exchange reserves but also leads to volatility. Billions of dollars can move in and out in a week or less. As the world, apart from the US, shows nervousness, the finance minister should have shown more sensitivity.

As far as black money is concerned, applying FEMA strictly to foreign asset declarations is correct. But it is surprising that a government that swears by market-based reform would not swear by FEMA or show the jailor’s visage. I expected it to show us we can move towards capital account convertibility, so that the Indian rupee can move freely across the world. We are perhaps far from that day.

There were, unfortunately, a number of announcements that didn’t belong in the budget speech. The issue of a public debt management office outside the RBI is controversial. To make a decisive statement on monetary policy in a budget speech is also not kosher. We can only hope that discretion will take precedence over valour and the finance minister and RBI governor will make a joint statement soon. There should be public debate before any legislative changes.

The writer is professor emeritus, Sardar Patel Institute, Ahmedabad

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