A Budget for reforms with continuity

The first full Budget of a newly elected government was expected to give a clear vision. This was all the more essential because of a growth slowdown, which required a countercyclical stimulus.

The vision articulated was marked by continuity with a focus on reform and inclusion, in the context of India’s youth and therefore new technology advantage.

Despite the long-run focus, and a relatively conservative Budget, there were many measures to reverse the slowdown but this vision has not clearly presented. Since the Budget stayed within the Fiscal Responsibility and Budget Management (FRBM) Act, the markets have taken this to imply the absence of widely expected countercyclical measures, partly explaining the post-speech slump in stock indices.

But the markets may also have slumped if there was a wide departure from the FRBM, on possible fears of uncontrollable deficits. The Budget, therefore, had a difficult balancing act to perform, which was well attempted. But the message was lost in all the details given.

Stimulus

First, the escape clause was invoked to allow a 0.5 per cent rise in the fiscal deficit (FD) for two years. Given many dire forecasts of fiscal slippages it was surprising the FD could be contained within the (FRBM) clause. This is the magic of a nearly $3 trillion economy. Even a 0.5 per cent of GDP makes large absolute numbers available for spending. The growth in tax revenue was only 1.4 per cent against a budget estimate (BE) of 11.4 per cent, as nominal income growth was much below the forecasted 11 per cent. Although lower than the BE forecast of 13.4 per cent, the rise of 9.8 per cent in expenditure was respectable and much higher than that in tax revenue.

Growth of capital expenditure at 10.2 per cent was actually higher than the BE of 6.9 per cent. It was financed by a rise in capital receipts as well as borrowings. A fall in interest payments also helped. A rise of 18 per cent is slated for next year while total expenditure goes up at 12 per cent.

Second, borrowings from small savings were used to finance part of the food subsidy that was devolved on the Finance Corporation of India (FCI). Therefore, these were not included in the FD. Since small savings are not available to the private sector using them does not crowd out private borrowing, and allows stimulus to exceed the FD.

In fact only credit to the government and quasi-government agencies showed respectable growth last year and was essential to keep the economy afloat. The current FRBM is too rigid and, therefore, had to be bent. Inadequate countercyclical spending makes it more difficult to achieve fiscal consolidation as growth and revenues fall.

Third, the income-tax cuts for lower slabs (on using the option to give up exemptions) put more money in the hands of people who are likely to spend it faster, as does large planned rural spending. PM-Kisan is expected to be more effective in its second year.

Fourth, there are attempts to restructure towards expenditure that has higher multipliers, such as tax cuts, rural transfers and infrastructure spend on rural roads and low income housing. The infrastructure pipeline announced has many ready and ongoing projects and effectively leverages limited possible budgetary allocations.

Reform

The emphasis in the Budget speech itself was on continued reform. Stimulus consistent with reform is more sustainable. There are noteworthy initiatives for better incentives and systemic improvements. For example, promoting prepaid smart metering in next three years — while giving consumers the freedom to choose suppliers, should contribute to resolving the vexed issue of discom viability.

The focus on youth power in many activities will create jobs as well as raise productivity. Attention is even given to maintenance. Major reforms in government recruitment will reduce duplication and improve the set of skills available.

The thrust to give clean corruption-free governance based on trust is commendable. The announced taxpayer charter; incentives to close tax litigation; removal of criminal liabilities for business activities; and use of technology for faceless assessment and appeal are all systemic changes that move towards this goal.

Initiatives to strengthen the financial sector and improve the availability of finance are in continuation of the many taken after the last Budget, although the absence of big moves for stressed sectors has disappointed markets. But there is a tension between having a big-bang Budget and retaining the flexibility to respond to an evolving situation through sustained stakeholder engagement.

For example, schemes to improve liquidity access for NBFCs have been extended to smaller NBFCs in response to complaints that they were excluded from current schemes. It is important to listen to markets, and while not accommodating narrow interests, make operational improvements and take action wherever systemic spillovers would otherwise occur.

While opening government and corporate bond markets further to foreign investors, it must be remembered that such flows can be volatile. Deep domestic markets are a precondition for and not a consequence of such flows. Moreover, foreign debt has to be repaid in hard currency. So using it to build export capability is essential.

Implementation

The assumed 10 per cent growth of nominal income is likely to be realised this year, since there are signs of a turnaround in growth, while inflation is likely to anchor around 4 per cent. It will be important to continue front-loading government expenditure and maintain its quality. As DBT reduces leakages, government payments must be made in time to keep money circulating in the economy.

Privatisation has to be aggressively pursued to keep the FD in check and release funds for productive expenditure. At the same time, corporatisation of public sector enterprises makes them profitable, independent entities free to raise resources in the market if required.

Continued double-digit growth in the revenue deficit has not been addressed. For this, subsidies have to be rationalised, even as the tax base expands. For example, the food subsidy must be better targeted and foodgrain stocks reduced. Poverty-based polices become distorting when prosperity spreads and diversifies diets.

The shift to accrual budgeting is a long overdue reform that would enhance the credibility of the budgeting process, as would incorporating more realistic countercyclical measures in the FRBM. The current transparency about off-balance-sheet financing does improve credibility as does the announced path of continued fiscal consolidation. A good stimulus is temporary and self-limiting.

The writer is Professor, IGIDR, and Member, EAC-PM

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