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India’s best hope is that the Budget due February 2015 chooses growth and jobs -Arvind Panagariya
-The Times of India Blog


The presidential address to Parliament on June 9, 2014 had focussed nearly exclusively on projects and schemes, eschewing policy. Therefore, many had eagerly awaited the budget speech for a policy vision of the new government. Unfortunately, it too left observers guessing on whether the government would tackle tough reforms or rely principally on better implementation.

Had this been the budget of the United Progressive Alliance (UPA), arguably it could have passed as spelling directional shift. But coming as it does from a government that has just scored an unprecedented victory on the platform of growth, development and jobs, it feels incremental. Such is the ambiguity of the message that the outgoing finance minister P Chidambaram has gone on to claim, unjustifiably in my view, that this is his interim budget without the humour and inspirational quotes.

The budget surely has features that sharply distinguish it from the Chidambaram budget. It offers steps to minimise future tax disputes and surprises. It contains credible proposals to accelerate building of infrastructure. It promises to develop entrepreneur-friendly legal bankruptcy framework for small and medium firms. It introduces several steps towards trade facilitation. And it even proposes to reform the Apprenticeship Act, thus touching on labour law reforms.

This being said, it is inexplicable why finance minister Arun Jaitley stuck to Chidambaram's fiscal deficit target of 4.1% of GDP. One would have thought that a different and more realistic deficit target was the most obvious way for him to place his personal stamp on the budget. Even representatives of ratings agencies had accused Chidambaram of using overly optimistic assumptions to peg the deficit at this low level.

Therefore, Jaitley had the necessary political and economic space to opt for a higher and more realistic deficit figure. Predictably, nearly all experts have said that they expect the deficit to be close to 4.5%. One can keep resorting to dodgy accounting to misrepresent the bottom line figure but that would not make credible the ambitious fiscal consolidation plan that Jaitley has proposed.

Subsidies to the middle class are regressive and add to fiscal deficit. So it is further difficult to understand the finance minister's hesitation in tackling them. Back-of-the-envelope calculations show that cooking gas subsidy per beneficiary household is approximately the same as the average annual wage paid per beneficiary household under the Mahatma Gandhi National Rural Employment Guarantee Act. Given that MGNREGA wage is a payment for labour performed and not outright transfer, cooking gas subsidy is not just absurd but socially repugnant.

As with a higher fiscal deficit target, the government had enough political space to begin slashing the subsidy. Not long ago, the UPA government had reduced subsidised cylinders to six per household but went on to increase them to 12 as an election-time giveaway. With the beneficiaries having accepted the initial reduction to six cylinders without a whimper, a return to it posed little risk of popular backlash.

Then there is the issue of retrospective taxation. The budget speech says that such taxation is not the government's policy. Why not then end the ambiguity by repealing the provision cleanly? This was one measure on which there had seemed little disagreement even within the government and which would have delivered cleanly on the PM`s promise to end tax terrorism.

The only explanation for these and other puzzles is that finance ministry bureaucrats effectively hijacked the budget. Within the government, only they had a stake in the 4.1% deficit target and non-repeal of retrospective taxation. They are also said to be behind capping FDI in defence at 49%. Cataloguing of every scheme of the PM in the speech also points to a bureaucratic hand at work: list every scheme to please the boss and get him on board on the rest of the budget. According to one count, the budget lists as many as 29 schemes with just Rs 100 crore allocated to each. What progress on the projects can be made with such meagre allocation is anybody`s guess.

Yet more clues to the bureaucrats running the show appear in fiscal policy strategy documents, which extol rather than censure UPA's fiscal management. While complimenting UPA for fiscal consolidation, the documents neglect to focus on its role in promoting unbridled and irresponsible expansion of expenditure schemes. Also missing is any reference to indiscriminate denials of environmental and other clearances that rendered many projects unprofitable, forced restructuring of the loans associated with those projects, and greatly weakened the banking system.

Contrary to claims by many, this is not the best budget possible in 45 days. The tight deadline can scarcely account for capping of FDI in defence at 49%, fixing the deficit unrealistically at 4.1% and non-repeal of retrospective taxation. The suggestion that bad (indeed, very bad) drafting camouflages an otherwise masterly budget is also wide of the mark. Even the cleverest rewriting would not substitute for the missing policy vision.

The million-dollar question we now confront is: Come February 2015, will we see a budget that spells out the government`s policy vision and reform strategy clearly or will it be yet another document by the same finance ministry bureaucrats that chooses continuity over growth and jobs for the masses?

The writer is professor of Indian political economy at Columbia University.

DISCLAIMER : Views expressed above are the author's own.