In most countries the Budget is a non-event. There are no major changes as it follows from a pre-announced policy path. In India it is a huge media and market event identifying losers and gainers. This Budget, in particular, was hyped up as compensation was expected for demonetisation pains.
But the Budget continues sedately on a pre-set path. Even the major reform initiatives announced, such as the measures on poll funding, follow from the Government’s action against black money, as do tax sops to push more spending onto digital platforms, the ₹3-lakh cap on cash transactions, and changes in capital gains in real estate. These measures ensure that long-term gains from demonetisation will materialise.
The Budget also adheres to the path of fiscal consolidation. Deficit targets were over-achieved and the 3.2 per cent of GDP estimated for next year will continue consolidation. The move to GST was also announced earlier.
Despite this the Budget manages to increase capital expenditure by about 25 per cent and give tax cuts to low-income taxpayers and to small firms. The good news is that steady reform in the right direction is improving the economy’s parameters, which is reflected in the Budget. It can have an impact without being dramatic. The assumed nominal rate of growth of 11.75 per cent, reduces deficit ratios, but is not unrealistic.
The small, poor and marginalised are a key constituency for this budget. It rewards the poor, honest taxpayer even while inducing her to enter the tax net, and makes it easier for her to buy a house. It thus contributes to shifting society to a norm of universal payment of a low tax, adding carrots to the sticks used against tax evaders.
Measures that empower by enhancing capabilities, such as the Mahila Shakti Kendras in villages, are more likely to succeed.
There are also more allocations for education and health. These were neglected earlier and can have can major effects on productivity, especially with the attempt to emphasising outcomes.
Rather than a universal basic income, at the current stage of low tax/GDP ratios, technology-based conditional transfers can more economically improve human capital. This is the route Aadhaar-based DBTs can take. Giving pregnant women a monetary transfer conditional on hospital delivery is a good initiative. Money transferred to a woman improves her bargaining power, as well as the quality of a household’s spending. Research shows that in poor households where men would spend on drink, women spend on goods that improve the household’s prospects.
The rise in road construction in the Pradhan Mantri Gram Sadak Yojana to 133 km per day from 73 km per day earlier is also a positive, as is increasing allocation for MGNREGS but directing it more towards productive assets such as water ponds. These have the potential to permanently raise rural incomes.
There is a large increase in expenditure on infrastructure and in rural areas. But this government has been trying to increase public investment since it came to power in 2014, without much impact on aggregate investment, which remains weak.
It is true that last year there was not much rise in public investment because of meeting pay commission awards even while staying within deficit targets. But governance and public capacity to spend effectively remains a major weakness. There are attempts to use technology to improve governance. Abolishing the railway budget makes it possible to plan for integrated transport modes.
The Foreign Investment Promotion Board, which had become another bureaucratic hurdle, can be closed because steps to allow easier entry to FDI as part of making business easier to do had largely made it irrelevant.
Responding to context
Much of the Budget is thus consistent with a long-term structural reform path. This is a positive, but there are real weaknesses in domestic demand and in private investment that also need attention. Credit growth is very low. Given uncertainty surrounding international trade in a post-Trump era, and a possible rise in US interest rates that may restrain monetary policy, fiscal stimulus is necessary.
Does the Budget deliver this? India’s growth revival after the global financial crisis proved shortlived because it was dominated by consumption oriented towards food where supply bottlenecks existed, so the only result was high inflation. The Budget strategy of spending on agriculture plus putting more money in the hands of low-income consumers may work, however, because food inflation is now low, and much of the spending in agriculture is the type that raises output. This may reverse the sharp reduction in consumption due to demonetisation, while rebalancing away from luxury goods towards middle-class consumer goods. Spending on higher quality mass consumption goods can stimulate investment and innovation.
Private investment must, however, recover for sustainable higher growth. Higher quality consumption and lower interest rates from banks flush with deposits will help. But a package is also required for the banks and industries where asset quality has been allowed to deteriorate. Here the Budget does not do enough — ₹10,000 crore as fund infusion is too little. Since the banks are PSBs where the Government is the majority shareholder, the onus is on it. The industries are largely in infrastructure. A package could be designed where asset sales are combined with fund infusion to clean balance sheets, thus equitably sharing pain, and reviving investment. The US did this effectively after the financial crisis. The Budget does promise further action and it should happen.
There is some simplification and rationalisation in the tax structure, but more is required. India’s increasing reliance on indirect taxes, which both rich and poor have to pay, is regressive. The reductions in lower income-tax slab rates help address this but it is essential to expand the base of income-taxpayers. The rich data base with the I-T department must be used. The Budget hints at but does not provide any assessment of income tax gains from demonetisation.
(This article was first published at The Hindu)