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Updated: July 11, 2014 03:27 IST

Pragmatism and revolutionary promise

Arvind Virmani
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Arvind Virmani
Arvind Virmani

During the tenure of the UPA-II government, the emphasis on socio-economic policy had shifted heavily towards entitlement and legal rights and away from actual outcomes in terms of endowments and employment. As a result, Indian agricultural inflation had averaged an unprecedented 11 per cent per year in the last five years, and economic growth declined since the 2010-11 to an incredible 4.6 per cent average in the last two years. The budget had to break out of this stagflation.

Narendra Modi in his campaign speeches had clearly indicated a desire to restore the balance by focussing much more on economic development and improved governance. The BJP manifesto and then the President’s speech in Parliament spelt out the sectors and industries which the government would focus on. The Railway budget shows an attempt to shift the focus from the Railways’ social role to its development role by improving railway governance (e-governance) for improving the quality of service for passengers and other clients. The budget shows how tax administration and to some extent expenditure management have to be changed to provide better service.

Based on an analysis of Mr. Modi’s record as Chief Minister of Gujarat, I had written post the announcement of the election results that his government would be pragmatic and goal-oriented, without bothering much about ideological dos and don’ts. In other words, they would focus on finding out and implementing those measures that had a greater probability of achieving the desired results rather than worrying about certificates of purity from the global development community. I therefore declared on TV, before the start of Finance Minister’s speech, that I expected a good budget, but not one that would stand out as a contender for the top three budgets. The budget has confirmed this.

Fiscal Situation

The Finance Minister has signalled his determination to restore fiscal stability by sticking to the 4.1 fiscal deficit target for 2014-15, a 0.4 per cent reduction from the previous year. This is accompanied by a 0.3 per cent point reduction in the revenue deficit. Restoring the spirit of Fiscal Responsibility and Budget Management is essential for breaking out of the stagflation of the last two years and ensuring stability in capital flows. Given the realistic economic growth projection in the Economic Survey, one is hopeful that the tax revenue targets underlying this fiscal projection will be met.

Expenditure allocations have focussed on the thrust areas outlined in the President’s speech and the BJP’s manifesto, thus sending a clear signal that the government is determined to achieve the economic development objectives outlined therein. Thus allocations to Tourism, Highways and other labour-intensive sectors and to skill development are assurances that the objective of creating jobs will be seriously addressed. In my view, giving greater importance to creating a “digital” India” (e-governance, virtual classroom) and a “Swach Bharat” (clean water, sanitation & sewerage) hold revolutionary promise. At the same time the budget has signalled pragmatism by making only small exploratory allocations for some of the more expensive/ambitious schemes like bullet trains.

Governance

The taxation parts of Arun Jaitley’s speech have focussed heavily on administrative reform, reducing tax arbitrariness, and moving toward e-governance. This is another application of the belief that better governance is essential for improving the quality of service provided by a government to its citizens, and specifically to tax payers. A similar philosophy is operating on the expenditure side, though here concrete action on better targeting of subsidies, improving the efficiency of government programmes and reducing corruption, will have to await the report of a committee.

The rise of investment limits in FDI in defence, insurance and low cost housing, the indication of re-capitalisation of public sector banks through retail sale of shares, clearing the path for Real Estate Investment Trusts, the idea of Infrastructure Investment Trusts, the attempt to learn from past shortcomings of PPP agreements so as to devise more resilient models can help in supporting revival of investment. Mobile payments can transform the lives of the aam aadmi, even if carried out through the mechanism of specialised “payment banks.”

The promise of a reform of the Apprenticeship Act can be seen as part of the effort to improve skills or as a first step in labour reform. The hint of creating a competitive all-India market in food and agriculture holds great possibilities but needs further elaboration/action. Though implementation of GST has been promised, changes in direct and indirect taxes do not suggest any move to simplify them by eliminating deductions-exemptions and reducing tax rates (in a tax neutral way) to enhance voluntary compliance.

In conclusion, I believe that the measures taken in the budget will be sufficient to increase growth by about 1 per cent point over the last year. Actualisation of some of the measures indicated in the budget will however be necessary to raise growth to the 6.5 to 7 per cent range in 2015-16. Raising growth to 8 per cent and sustaining it at that level will require further policy reforms over the next 18 months.

(Arvind Virmani is former executive director, International Monetary Fund and Chief Economic Advisor, Ministry of Finance, Government of India, who advised on many economic reforms from 1991 to 2009.)

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