There are no spectacular policy announcements or populist sops in the Union budget. But the NDA’s first full budget, crafted in an environment of the slowly evaporating patience of stakeholders, has taken considered steps to address many of the current points of pain while not losing sight of medium-term strategic issues.
Certainly, the economy is on the mend. With growth inching up, inflation within the RBI’s prescribed limit and the current account deficit firmly under control, India’s macros have improved. But there was a growing discomfort with the lack of big-bang reforms, the poor investment outlook and a weak manufacturing sector. Addressing these issues was critical to nurture green shoots and boost investor sentiment.
Directionally, the budget has stood up to the challenge. It presents better fiscal arithmetic, takes steps to boost public investment and makes it easier to do business. In addition, measures like higher and flexible devolution to states, commitment of resources to
social security and pension, balanced risk-sharing in PPP projects and a medium-term corporate tax strategy make it pretty forward-looking.
Budgets can be used to push growth only when a country practises fiscal prudence, that is, it generates fiscal surplus when the economy is booming and spends it when demand is weak.
Unfortunately, India does not have that luxury — indeed, it needs to trim its deficits, which are higher than those in many emerging economies. In this context, let us evaluate the budget in terms of its ability to boost investment and support growth while adhering to the path of fiscal consolidation.
The budget sets the fiscal deficit target for this year at 3.9 per cent as against the 3.6 per cent suggested by the 14th Finance Commission. The relaxation pushes back the fiscal deficit target of 3 per cent of the GDP by a year to 2017-18, but puts an additional Rs 42,000 crore in the hands of the government — money it can use to push public investments. The question is if the government can meet this year’s deficit target without cutting capital expenditure. In the last few budgets, revenue collections have been way short of target. Collections thus far in 2014-15, for instance, are 8 per cent short. The fiscal deficit target was met by cutting capital spending, which hurts growth both in the short and medium term.
The fiscal arithmetic is better this time. Tax revenues are projected to grow 15.6 per cent in 2015-16, vis-à-vis 10 per cent last year. The hike in excise duties on petrol and diesel, service tax rates and surcharge will also allow the government elbow room, despite the same nominal growth as last year.
The worry is on the divestment front. The target of Rs 69,500 crore could slip unless the government frontloads its efforts. In 2014-15 too, the government is set to miss its divestment target by a huge margin, despite healthy market conditions. Given a similar slippage, the fiscal deficit could end 2015-16 at 4.2 per cent. The Centre’s expenditures as a share of the GDP have fallen 2 percentage points over the last eight years. There is little room for overall expenditure cuts, but enough to switch government spending from unproductive subsidies to areas critical for growth, such as health and education.
For a sustainable reduction in the fiscal deficit, therefore, the focus must be on revenue generation. The share of gross tax collections in the GDP is set to fall 2 percentage points to 9.9 per cent in 2014-15 from 11.9 per cent in 2007-08. This budget aims to raise it to 10.2 per cent in 2015-16. Regaining the 2007-08 levels this year could have released an extra Rs 2.39 lakh crore. The most efficient way to raise revenue is to implement the goods and services tax that, in addition to improving tax buoyancy, can lower the cost of doing business and boost growth.
Investments needs to be revived in both infrastructure and manufacturing. Infrastructure is still a government-dominated activity, whereas manufacturing is a private sector enterprise. The Economic Survey has pointed to a subdued private investment scenario. This justifies a Crisil study of 192 firms released
last week, which projected an 11 per cent decline in private capital expenditure in 2015-16. Therefore, the budget rightly allocates more money to infrastructure while trying to create a more investment-friendly environment for manufacturing.
The budget plans a 25 per cent increase in capital expenditure in 2015-16, taking its ratio to GDP up by 20 basis points to 1.7 per cent. The focus is on four sectors providing crucial infrastructure — roads, railways, power and rural development. The fiscal space made possible by savings on oil subsidies and a hike in excise duties on petrol and diesel is not sufficient to meet infrastructure investment needs. In addition to direct budgetary support, the government nudges Central PSUs to raise resources. The innovative proposal to set up a national investment and infrastructure fund will enable the leveraging of government resources.
Government investment in infrastructure can crowd-in private investment over time. The budget has made an attempt to kickstart the investment cycle. It reiterates the government’s intention to revisit the PPP model in a way that risk-sharing between the two is more balanced. It also proposes a plug-and-play model where the private sector is asked to participate only when all clearances are in place.
For success, the government needs to build institutional capacity to carry the proposed public investments through. Equally, it needs to step up divestment efforts. Otherwise, in the zeal to meet deficit targets, budgetary allocations for capital expenditure could be compromised.
The writer is chief economist, Crisil. Views are personal
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