The ‘impossible’ is possible now
The limitations of balancing the popular and yet not populist constitute a real challenge beyond the budget arithmetic, writes NK SINGH
The inaugural budget of the new government awaits its presentation to Parliament. The prime minister recently commented that there has been no honeymoon period and indeed the Union finance minister equally had no luxury of beginning from a tabula rasa. Unexpected events and legacy issues circumscribe his options and flexibility. On a variation of what Harold Macmillan, the former British Prime Minister, had responded when asked what a Prime Minister feared most, “Events, my dear boy, Events”. Extending it to the Union finance minister, what are these events?
First, uncertainties about the monsoon — the intensity and spatial distribution of rainfall. This has implications for food security, inflationary expectations, rural employment, purchasing power and growth rates.
Second, the continued uncertainties in Iraq, its broader geopolitical implications and a possible spike in oil prices, halting the pace of aligning petroleum subsidies to the market.
Third, the impending elections in several states have inevitable consequences. A newly-elected government can ill-afford any early electoral reverse in a significant state election. This would immediately be interpreted as an abridgement of the mandate secured in the recently concluded national elections.
Finally, and not the least, the legacy issues of overextended expenditure commitments, sluggish revenue buoyancy given sub 5% growth, high cost of borrowing, large stranded assets given the structural rigidities, a stressed banking sector, and a decade of jobless growth.
All these constitute a difficult backdrop for any government.
At the same time, given years of prolonged policy stalemate this year’s expectations and budget wish list are longer than before. The relevant issue, however, is not what needs to be done in the forthcoming budget but should reasonably be expected, given the ‘events’. I am neither a minimalist nor at the forefront of lowering expectations but events do matter. So, what is our inescapable necessity?
First, improve our macro fundamentals and rekindle the saving-investment cycle. This means a combination of monetary and fiscal policies, which enables a credible return to the path of fiscal consolidation. Leaving aside the debate on the classification of expenditure (revenuecapital, plan and non-plan) cyclically adjusted fiscal deficit or desirable fiscal deficit depending on quality of public expenditure by way of capital creating assets, there is no doubt that rationalising public expenditure is inescapable. Calibrating subsidies on food, fertiliser and petroleum products is an ongoing process but the direction of change must be predictable, credible and transparent. A revised Fiscal Responsibility and Management Bill with the proviso that parliamentary approval for deviations will be ex-ante and not ex-post can assure investors, market and credit rating agencies.
Second, improvements in the regulatory regime to rekindle investor confidence, a time frame for implementing GST, and making the tax regime non-adversarial are important. The issue of retrospective taxation must be addressed and subsisting doubts set to rest. Disputes which have arisen on account of these changes should be settled through an alternative dispute resolution mechanism. Recalibrating exemption slabs for income tax and indexation to price changes would be sensible. The Direct Tax Code needs greater consultation with stakeholders.
Third, tangible steps for reviving and invigorating the manufacturing sector. This implies reviewing labour laws (extending the pilot project of Rajasthan to other states), enabling flexibility in the application of land acquisition procedures, faster environmental clearances on which work has begun, would be beneficial. Reviewing sector caps through administrative and/or legislative changes in respect of the FDI regime for insurance, pension, defence would improve investor sentiment and enhance long-term flows.
Fourth, several entitlement-driven laws, like the food security Act, the land acquisition Act, the right to employment, create enforceable rights but result in poor outcomes. We need to explore alternative delivery mechanisms giving the beneficiary the choice through vouchers or cash transfers and generate competitive pressures to improve the quality of public delivery systems. Even within the existing laws some changes need to be effected — in the MGNREGA to focus on capital-creating assets and linking wages to productivity; allowing flexibility to states on labour laws, as well as in the implementation of the new land acquisition Act; alternative mechanisms for the food security Act and seek improved outcome under the Right To Education Act.
Fifth, energy security-related issues need restructuring of Coal India by creating competing companies, permitting private participation, both domestic and foreign, to enhancing productivity and competition. Railway reforms, hopefully part of the railway budget, must encompass issues beyond railway tariffs by corporatising the railways, allow private investment, create special purpose vehicles for high-speed rails and permit foreign investment to help the railway revolution waiting to happen.
On the positive side, given the stock market buoyancy, it would not be unrealistic to raise 1,00,000 crore through a wellcalibrated disinvestment programme. Experience suggests that the value of government assets remaining with government will rise significantly, given improved management.
No doubt the budget is not a panacea for the deeper malaise of the economy. Expecting too much in a short period of time from the maiden budget of a new government must factor in ‘The Events’. Political economy is always about the art of the possible. Yes, leadership is about the art of the impossible and people believe that this defines the Modi leadership. The limitations of balancing the popular and yet not populist, the short-run compulsions with medium-term objectives and managing expectations while sustaining hope and confidence constitute real challenges beyond the budget arithmetic. I remain more than sanguine that the Arun Jaitley maiden budget will achieve these ends.