The budget presented yesterday marks a paradigm shift in multiple ways. For one, it seeks to reconcile the consequences of international headwinds with domestic economic compulsions. The international headwinds of rising protectionism, reinventing globalization and interest rate behavior by leading central bankers necessitate adherence to continued macroeconomic stability. Mitigating the consequences of demonetization particularly employment in the informal sector and lifting sagging investors’ sentiment would, inter alia , need fresh stimulus. Stimulus both in terms of regulatory framework, ease of doing business and enhanced public outlay. Seeking synergy between agriculture and the corporate sector is an important initiative. A sharp decline in corporate rate taxes for Small and Medium industries, which covers 97 percent of all corporates, would enhance their profitability and trigger investment green shoots. This would be supported by enhanced agricultural credit, crop insurance, rural Skill Development leading to significant rise in rural demand.
At any rate, markets have applauded the budget package in no uncertain way. Perhaps after a long time sentiments have improved so decisively after the budget speech.
What does this imply? First and foremost, it is a thumbs up for adherence to the path of macroeconomic stability. This is also a coherent response to some debilitating features of adverse exogenous circumstances. The centrepiece of the macro stability is adherence to the path of fiscal consolidation. However, there is a paradigm shift. Debt and not Fiscal Deficit, is being recognized as the principal stabilization anchor. Indeed, this was the quest during the debate in the constituent assembly to place fetters on executive discretion and borrowing. Ambedkar had finessed the debate by saying “we hope that Parliament will take this matter seriously and keep on enacting laws so as to limit the borrowing authority of the Union. I go further and say that I not only hope but I expect that the Parliament will discharge its duties under this Article” . In essence, the new approach can be a seen as the realization of Ambedkar’s vision.
In the new fiscal framework it is recognized that India in relation to other emerging markets is among the most debt ridden nations in the world, with a debt to GDP of 70%. The Finance Minister mentioned the FRBM Committee's recommendation on optimum debt to GDP ratio for India of 60%, consisting of 40% for Central Government and 20% for State Governments. The fiscal deficit is only an enabling instrument for achieving this optimal debt GDP target. The Finance Minister has not resorted to the provision of ‘escape clause’ suggested by the Committee which has an upper ceiling of 0.5 percent of GDP in any fiscal year. He has preferred a fiscal target of 3.2 percent instead of 3 percent to provide for “higher public expenditure in the context of sluggish private sector investment and slow global growth”. There is, however, a clear commitment of returning to 3 percent and thereafter. Markets have perceived this as government’s decisive commitment towards macroeconomic stabilization. This has spurred investor sentiment, found favour with rating agencies and augurs well for congruence of monetary and fiscal policy.
There are other initiatives too like, encouraging labour intensive industries, going beyond leather and textiles packages, by taking a fresh look at the regulatory framework for labour and to harmonize their conflicting regulations. Similarly, Public Private Partnership was a breeding ground for crony capitalism. The recommendations of the Vijay Kelkar Committee on a new act for dispute resolution as well as an ombudsman is sought to be implemented through an amendment to the Arbitration and Conciliation Act, 1997. This can rekindle innovative financing and public private partnership.
We know that the budget is not a panacea for all economic ailments. Policy making must be a continuing process and equally, the agility to readapt policy responses to new challenges. Overall, this budget is a decisive response to our sagging growth sentiment and prospects. When supplemented with a multiplicity of initiatives, both outlined in the budget and those whose thoughts are embedded in the budget statement, can make a transformative difference. It is an important initiative towards the triple agenda of Transform, Energize and Clean India.
(N.K. Singh is chairman of the FRBM Committee and a former Revenue Secretary )
