"It's not all hunky-dory", 'Business Line', February 28, 2015

Thrusting mildly

Arun Jaitley has presented his second budget. He has been restrained and workmanlike in his approach, making-up for the shopping list that he had presented in 2014. There are few shibboleths this time, with ‘FDI’ and ‘PPP’ barely making an appearance. Clearly, Mr. Jaitley is a quick learner. But he is also a career politician partial to use of gestures. Thus he could not resist announcing new IITs, IIMs and 3 institutes on the lines of AIIMS even as there is much scepticism on the success of the ones recently set up.

        As this is being written without access to all the numbers, we are confined to a discussion of the strategic core of the budget contained in the Speech. There we would first find that Mr. Jaitley has claimed more than is credible for his government in the nine months it has been in power. Naturally, he has seized upon the CSO’s revised GDP estimates which show much higher growth of the economy. These figures are for 2014-15. Since we don’t have the revised figures for 2013-14 we cannot be sure of the difference the Modi government has made. But it is his claim of their having re-established macroeconomic stability, thus restoring “credibility” to the economy that is more difficult to accept. The decline in inflation and reduction in the current account deficit are both due to the more than fifty percent decline in the international price of crude oil. This has fed through the economy and reduced the import bill. It has also helped the government to attain its fiscal deficit targets.

        On the central task before him Mr. Jaitley is quite certain. It is to energise the economy through growth. Growth he sees as vital to jobs and he is right. He recognizes that investment is necessary for growth and that public investment in infrastructure would be necessary. But he is also committed to not deviating too much from the pre-set targets for the path of fiscal consolidation. This has circumscribed his actions. There has been announced an increased allocation of rupees 70, 000 crores for infrastructure, with most of it going to roads and railways. While the direction of this investment is surely right, the sum involved is not very impressive. We don’t know the percentage increase over the Revised Estimates for 2014-15 that the 70,000 crores represents but know from the Finance Minister’s speech that additional capex of the Government “as a whole” will amount to 0.5 percent of GDP. At the present juncture this appears to be too little. Of course, even with the fiscal balance undisturbed, this budget will be expansionary as it has increased the allocation for capital expenditure. But the thrust is mild given Mr. Jaitley’s stated growth ambitions.

        So what could the Finance Minister have done under the circumstances? He had two options, but has chosen to exercise neither of them. The first option was to allow a breaching of the fiscal deficit target for this year itself. A higher capex would now have been possible. Mr. Jaitley has on earlier occasions shown himself to be somewhat fundamentalist when it comes to the fiscal deficit, reportedly observing that “the government cannot spend money that it does not have”. But then it can borrow, and, unlike a household, can reap the benefit of higher taxes as the economy expands.  It is interesting that this has been ignored, even though India - unlike the United States - does not have lobbies actively working towards limiting the size of government.

This takes us to the second option for scaling up public capex beyond 0.5 percent of GDP. It was to have made fiscal space by reducing subsidies. Food, fertilizer and food subsidies all offer scope for reduction. Here his political instincts have governed the FM, very likely with a little help from a party skittish after the Delhi elections. For someone so reluctant to increase public investment Mr. Jaitley has not come up with adequate arguments for why he expects private investment to rise to the challenge of taking India to the double-digit growth of his ambition. Perhaps he is banking on the budget reviving animal spirits in the private sector.    

        While the Budget’s push for growth may have been somewhat mild, it does contain some significant initiatives. The most impressive among these is the move towards universal social security though we must wait for the details. Secondly, the MSME sector has received attention, with the SC/ST among the self-employed there to receive priority in funding. This approach contrasts favourably with the use of quotas that underlies ‘priority sector’ lending for public sector banks which may have encouraged risky loans. Finally, Mr. Modi’s significant supporters have been rewarded by a lowering of the corporate tax rate. There has been some deft balancing.