For Arun Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. Photo: Hindustan Times
Live Mint Dipti Jain 7 July 14
The expectations from the finance minister’s maiden budget are sky high. Here are the six biggest challenges he faces
Mumbai: The expectations from finance minister Arun Jaitley’s maiden budget are sky high, as is evident from the fact that Indian stocks are scaling new highs daily. For Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. The finance minister has to attack the core problems facing the economy. Here are the six biggest challenges faced by Jaitley, along with their solutions.
1) Declare war on subsidies
Graphics: Paras Jain/Mint
The subsidy bill was allowed to balloon over the past 10 years. This was not due to benign neglect alone. Handouts were central to the political strategy of the past two United Progressive Alliance governments. Such subsidies are often captured by vocal groups such as large farmers in the case of fertilizer subsidies and the urban middle class in the case of fuel subsidies. Jaitley has to slash subsidies at a time when the National Food Security Act has to be funded.
Key reform: Keep increasing fuel prices till the subsidy is eliminated while committing to follow whatever the 14th Finance Commission, headed by Y.V. Reddy, suggests on how to insulate the pricing of public utility services from politics.
2) Increase public investment
India cannot have a sustainable economic recovery unless the investment cycle is revived, according to most economists. The private sector is still wary about funding new capacity; many corporate balance sheets are burdened by excessive debt. Public investment has been indiscriminately cut in recent years whenever the government has had to trim spending. India needs more capital spending by the government to improve its creaking infrastructure. Jaitley will have to switch his spending priorities from subsidies to asset creation.
Key reform: Revive the defunct National Investment Fund that will direct public funds into new infrastructure projects. The money available for such overdue capital spending should be ring-fenced by ensuring that all money collected from privatization and sale of telecom spectrum is sent into this investment fund rather than wasted in populist spending schemes that do not create assets for the future.
3) Sell assets to generate funds
A weak economy means that tax revenue will continue to be sluggish this year. That is why non-tax revenue from privatization will be especially important if the fiscal deficit has to be narrowed. But privatization should not be seen only as a tactical necessity. The Indian public sector is inefficient. The government has created assets that it cannot manage well. It should sell them and use the money for new projects, the way a private equity fund juggles its investment portfolio.
Key reform: Announce a credible privatization road map that will be overseen by an independent commission. The sale of state-run companies has to be done in a fair manner to avoid the sort of crony capitalist practices that have given privatization a bad name in so many countries from Russia to India.
4) Increase tax-to-GDP ratio
The government collects too few taxes to run its daily show, create quality infrastructure and build even a minimal welfare state. The tax-to-GDP ratio is low even by Asian standards—though the two decades since the 1991 reforms have seen it become more progressive thanks to the growing contribution of direct taxes and the declining contribution of indirect taxes. Increasing tax rates is a bad idea. The more useful strategy is to get more people into the tax net by having a simple and stable tax system.
Key reform: The introduction of the goods and services tax (GST) has been delayed for far too long; the constitutional settlement has to be driven by the finance minister’s boss, Prime Minister Narendra Modi.
5) Put public finances back on track
The splendid increase in the national savings rate after 2003 was because of fiscal consolidation. The sharp increase in the revenue deficit after February 2008—six months before the global financial crisis—was the biggest reason why the savings rate has declined subsequently (while deteriorating company financials also reduced corporate savings). India won’t have adequate domestic resources to fund faster growth unless public finances are repaired.
Key Reform: Move towards a new version of the landmark Fiscal Responsibility and Budget Management Act that was introduced by the previous National Democratic Alliance government led by Atal Bihari Vajpayee.
6) Shift savings into the financial system
Years of high inflation combined with negative real interest rates on financial assets have encouraged Indian households to shift money out of the financial system. Physical savings have grown in importance. India cannot fund its economic revival unless financial savings become more attractive. The likely end to the gold super-cycle may help, but the eventual solution is to contain inflation.
Key reform: Tax breaks on financial savings can be increased, but the more viable strategy is to back Reserve Bank of India governor Raghuram Rajan in his battle against high inflation.
No comments:
Post a Comment