In­dia’s fis­cal for­tune

Financial Mirror (Cyprus) - - FRONT PAGE -

In­dian Prime Min­is­ter Naren­dra Modi’s gov­ern­ment must be feel­ing lucky. The decline in world com­mod­ity prices, led by crude oil, has made man­ag­ing the na­tional bud­get eas­ier. And now, af­ter the Cen­tral Statis­tics Of­fice re­vised its method­ol­ogy for cal­cu­lat­ing GDP data, that task has be­come eas­ier still. Ac­cord­ing to the CSO, as a re­sult of the method­olog­i­cal change, an­nual out­put growth in the sec­ond quar­ter of 2014 stood at 8.2%, up sharply from the orig­i­nal es­ti­mate of 5.3%.

Based on the re­vised GDP fig­ures, In­dia is ex­pected to av­er­age 7.4% growth in the fis­cal year end­ing March 2015. More­over, the coun­try is pro­jected to grow at an 8-8.5% rate in the next fis­cal year. No bud­get changes could gen­er­ate such a marked, cost-free ac­cel­er­a­tion in growth. It is fair to say that the usu­ally staid statis­tics depart­ment stole the thun­der from this year’s bud­get.

Nonethe­less, Fi­nance Min­is­ter Arun Jait­ley’s bud­get suc­ceeds on sev­eral fronts – not least in its align­ment of vi­sion and im­ple­men­ta­tion. Specif­i­cally, it ad­vances the gov­ern­ment’s vi­sion of a pro-growth agenda that en­hances the ease of do­ing busi­ness in In­dia, while tar­get­ing bet­ter de­liv­ery mech­a­nisms for wel­fare schemes.

On the ex­pen­di­ture side, the bud­get is ex­pan­sion­ary, scal­ing up in­vest­ment spend­ing dramatically, in­tro­duc­ing new wel­fare pro­grammes, and in­creas­ing credit for var­i­ous sec­tors. While there is no sig­nif­i­cant ef­fort to cap spend­ing on some of the largest fis­cal pro­grammes, in­clud­ing the Na­tional Ru­ral Em­ploy­ment Guar­an­tee Act (which guar­an­tees 100 days of wages to ru­ral house­holds) or the fer­tiliser sub­sidy, mea­sures to im­prove im­ple­men­ta­tion and re­duce leak­age are be­ing put in place. Though the bud­get men­tions dis­in­vest­ment in loss­mak­ing public-sec­tor units, the bud­get con­veys no sense of ur­gency on this front.

With pri­vate in­vest­ment re­main­ing weak, ow­ing to the cor­po­rate sec­tor’s heavy debt bur­den and banks’ huge vol­ume of bad as­sets, the gov­ern­ment has clearly de­cided to jump­start the process through in­fra­struc­ture spend­ing. But In­dia’s in­fra­struc­ture needs far ex­ceed what the gov­ern­ment can spend. In this sense, the new “plug and play” scheme for public-pri­vate part­ner­ships, whereby “all clear­ances and link­ages will be in place be­fore the project is awarded,” is a ma­jor im­prove­ment over the pre­vi­ous PPP model.

The bud­get’s suc­cess will be determined by how th­ese public-sec­tor in­vest­ments play out, which in turn will de­pend on other poli­cies, es­pe­cially the Land Ac­qui­si­tion Bill (de­signed to en­able industrial devel­op­ment in ru­ral ar­eas), which has al­ready run into trou­ble. More­over, gov­ern­ment in­vest­ment and al­lo­ca­tion of re­sources has long been tainted by cor­rup­tion, and Modi’s gov­ern­ment has yet to show that it can im­ple­ment the bud­get’s prom­ises in a trans­par­ent and sus­tain­able man­ner. On the tax side, there is one ma­jor an­nounce­ment: a re­duc­tion of the cor­po­rate­tax rate from 30% to 25% over the next four years, thereby en­cour­ag­ing pri­vate-sec­tor in­vest­ment. The im­ple­men­ta­tion of the Goods and Ser­vices Tax – a form of value-added tax on which the gov­ern­ment has made ad­mirable progress – would be a ma­jor ac­com­plish­ment and a huge boost for the econ­omy. De­spite rais­ing ex­pen­di­ture sub­stan­tially, how­ever, the bud­get re­lies mainly on growth and im­proved tax col­lec­tion to keep the coun­try’s fis­cal deficit within rea­son­able lim­its.

Of the bud­get’s many pro­posed mea­sures to boost in­flows of for­eign in­vest­ment, one ap­pears risky from a macro-pru­den­tial per­spec­tive. The gov­ern­ment would “do away with the distinc­tion be­tween dif­fer­ent types of for­eign in­vest­ments, es­pe­cially be­tween for­eign port­fo­lio in­vest­ments and for­eign di­rect in­vest­ments, and re­place them with com­pos­ite caps.”

There are many rea­sons to treat the two types of in­vest­ment dif­fer­ently. Port­fo­lio in­vest­ment, of­ten called “hot money” be­cause of its volatile na­ture, can in­crease the econ­omy’s vul­ner­a­bil­ity to the va­garies of in­ter­na­tional fi­nance. For­eign di­rect in­vest­ment, on the other hand, is far more sta­ble and driven by do­mes­tic fun­da­men­tals. With in­ter­est rates set to rise in the United States this year, volatil­ity in in­ter­na­tional cap­i­tal mar­kets can be ex­pected to in­crease. In this con­text, it would be pru­dent to main­tain the distinc­tion be­tween port­fo­lio and FDI.

In gen­eral, the bud­get plan ad­dresses the ma­jor is­sues fac­ing In­dia’s econ­omy. But trans­lat­ing good in­ten­tions into de­sired out­comes will de­pend cru­cially on the gov­ern­ment’s abil­ity to push through com­ple­men­tary and ur­gently needed re­forms on hot-but­ton reg­u­la­tory is­sues like land, la­bor, and the en­vi­ron­ment.

In any case, the bud­get sends a clear sig­nal about the Modi gov­ern­ment’s in­ten­tions. At least in the near term, it is shift­ing its prac­tice of “min­i­mal gov­ern­ment and max­i­mum gov­er­nance” to one of “mod­er­ate gov­ern­ment and max­i­mum gov­er­nance.”

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