The Hindu Business Line : A little change, we can

This Government’s decisive victory in May was unexpected. The mood of the nation swung from being apprehensive about a hung parliament, or worse, being governed by a motley coalition of incompatible partners, to jubilation at having secured a stable and near-majority government. This was the first budget of a five-year term, and hence expected to spell out an economic strategy.

This was a budget that followed an Economic Survey which recommended a slew of sweeping long-term economic reforms. Naturally the burden of expectations was very heavy. Presenting a budget is increasingly an exercise in management of expectations. In the Indian context it is invariably also a tightrope walk between fiscal restraint and fiscal expansionism.

As such, a fractious and coalition-prone democracy like ours has an inherent deficit bias. Additionally, given the downturn, and the global disdain for fiscal discipline, with domestic industry also cheering for more fiscal stimulus, there was not much hope for immediate fiscal correction.

As it happened, this first-year budget was all about continuity, and not about breaking new ground. Except for the actual size of welfare schemes and social spending, it could have been a budget in any of the earlier years of the UPA’s previous term. Of course, the nuisance of the FBT was thankfully removed. Some initial steps were taken in tax rationalisation, such as removal of surcharges.

The various measures at increasing “inclusiveness” will certainly add to consumer spending. For example, the removal of the surcharge itself will release additional income of Rs 10,000 crore. But missing are the measures to revive investment spending by the corporate sector.

Investment spend

The high growth of the previous four years was largely rendered possible by investment spending, which grew at 20 per cent per annum. With a collapse in exports, and limited room to expand government spending, the only growth drivers are consumer spending and corporate investments.

The latter need to be incentivised, and animal spirits need to be unleashed. This needs a combination of tax relief for capex, economic reforms, enabling easier access to funds and improvement in investment outlook. All this was much visible in the Economic Survey, but not really in the budget itself. The budget speech did mention that investment-based tax relief was being revived, but this time it was restricted only to cold chains and warehouses. This approach could have been given a much wider coverage.

The high deficit is definitely going to attract national and international scrutiny. We can only hope that the rating agencies don’t pull the trigger too quickly, as it can dent investment sentiment. Perhaps quickening the pace on disinvestment will provide the good cheer to calm the nerves of the fiscally nervous. Else the continuity promised in the budget will only lead to the stability of low growth.

(The author is Group Economist, Aditya Birla Group.)

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