— by Vineet Gupta, PGP Student, IIM Ahmedabad
The NDA government, equipped with an undisputed majority in the Parliament, with the aspiration to disrupt UPA’s socialism, was expected to uncover a plan for structural changes. But largely, the budget does not meet the expectations. It has some positives, and with an effective execution, they will be impactful. But several key and persistent problems have been left unanswered.
This was an extraordinary budget for 3 reasons –
- Firstly, being the 1st fiscal budget of the new NDA government, it was anticipated to display a plan for the next 4 years.
- Secondly, Its is the first undisputed majority in the Lower House in last thirty years, and the elections were contested on the grounds of revolutionary changes.
- Thirdly, there is an extraordinary chance for an important change in spending due to the closing of Planning Commission, and the Finance Commission’s advice on higher resource allocation to states.
NDA government was expected to bring about fiscally effective announcements in this budget. This was due to several factors in favor of NDA. The government received great economic relief due to the reduced crude oil prices via reduced subsidies. To the government’s credit, NDA has put several efforts for reducing petroleum subsidies. Also, the Finance Commission’s recommendation to expand the resource share of states (32% to 42%) does not impact the finances of center, as it just brings the spending to the state government (which is the right place). Further, the shutting down of planning commission gives a much-needed opportunity to the government to repair the broken financial system.
The estimates of the budget are grounded on GDP growth of 8% and a low inflation of 5%. The new GDP estimates are very stimulating as they show a stronger economy.
To save the Indian credit rating was teetering from getting sub-graded, Chidambaram had made a sincere commitment for a fiscal adjustment, to which the markets had responded positively. Jaitley has unfortunately announced to modify this plan by seeking another year to get to the 3% target. This is not a wise step as the economy will be stronger with better fiscal policy. And if the rationale was increasing the investments, the money should have been generated from disinvestments of sectors not needing government or reducing the skyrocketing subsidy bill. Deserting the fiscal reforms is not the correct way for public investments.
The end of Planning Commission
The failures of the Planning Commission are well known and are regarded as central to many economical failures of India. NDA took a strong progressive step by abolishing this body. But this step requires a parallel re-engineering of government for ensuring accountability. This can be done by the help of non-government agencies which measure that the ministry has delivered on its commitments. And any failure in this should have consequences. This is the way the fiscal systems work in developed nations.
The budget has done some re-engineering needed due to this, but only minimal. Most of the schemes that were a part of Planning Commission (PC) have not been terminated. The budget appears to ignore the fact that PC has shut down.
On the other hand, Niti Ayog, which was established for being a think-tank, has been allocated thousands of crore. This is not what a think-tank expenses are like. It appears as if just the name “Planning Commission” has been taken away, the processes and budgetary allocations remain the same.
Tax policy and tax administration
There has been an announcement to reduce the top corporate tax rate to 25%. Though this is a positive move for providing a much-needed impetus to the infrastructure and manufacturing, few have coined this as a measure to make the rich richer.
It has been announced that a good GST will be built. The impediment is its implementation. The Finance Ministry has come up with a plan to implement GST from 1st April 2016 onwards. There is still a period of one year for removing the difficulties in the implementation.
Financial sector reforms
There have been several key financial sector reforms:
The government bond market has been merged into SEBI and there has been an announcement to setup a Public Debt Management Agency. In relation to international finance, setting up an International Financial Services Centre has shifted the regulatory power on FIIs via equity to the Government. The RBI has signed a Monetary Policy Framework Agreement mentioning a below 6% inflation target.
For building a deeper institution, there have been announcements to establish commercial divisions in courts and setting up of a Financial Redress Agency. Further, for Pension based reforms, there have been proposals for social security and increase in deductions for pension funds.
There have been a slew of investments in infrastructure, though not meeting the expectations set before the budget announcements. Spending on roads and railways are up by 14k crore and 10k crore respectively. Further, off-balance sheet borrowing is up by 20k crore. Adding all these investments come out to just around 0.38% of GDP. Hence this area has been poorly looked at in the budget.
Jaitley has come up with an idea of stimulating the PPP model in infrastructure development. By making the government hold a greater part of the risk, the idea is to rebalance the risk in these projects. Though the idea is great but it introduces threat of losses and possibilities of private partners contributing to just riskless aspects of the project like construction. Adding to this, the governments history of selecting the projects has been dismal I, thus shifting the burden on itself is a very poor idea and might to more harms than goods.
There have been some positive reforms too: there is an announcement of new law on procurement and dispute handling. There has been an initiative to bring about new law on regulations in infrastructure.
In conclusion, though the budget has promised a slew of reforms and policies that are pro-economy, the budget has disappointed us in many aspects. There have been many positive initiatives and announcements, but the government still needs to chalk out a measured and properly managed plan to bring about these reforms.
Let’s see what the future has in store for India.