Saturday, July 19, 2014

#UnionBudget: A Missed Opportunity

Finance Minister Arun Jaitley, in his maiden budget, set out some necessary policy changes that would be important to awaken India's economy, which the previous UPA administrations left in the doldrums. The move to raise FDI to 49% in defense is one such move, although whether that will be enough to attract foreign players to India's almost-dead domestic arms industry is another matter - manufacturers have been asking for 75%. In the short span of time, about 40 days, that Jaitley had to prepare this budget, he certainly had a great deal on his hands. While the general policy direction is good for the most part, this budget was sadly a missed opportunity.

The single biggest failure of this budget was to abolish retrospective taxes and instead refer pending cases to a committee - an irony, given how PM Modi is against referring things to committees to buy time. In one fell swoop, the Minister had the chance to undo the damage caused by Pranab Mukherjee and significantly improve business sentiment in India, which has been nothing short of despondent so far. Instead, he chose to leave it at a half-promise to avoid such taxation, which, when he was in Opposition, had described as 'tax terrorism.'

However, there are still some positives to take away. The most significant of these is the outlay to provide credit to 'Own Account Enterprises,' official jargon for informal businesses that employ over 80% of India's non-farm workforce. These businesses have always been unable to get credit from the formal banking system and by opening them to credit through the government, the BJP-Government has made a good, well-informed choice to boost employment, possibly the main issue on which the party won its spectacular victory in May. However, this too will not be enough to boost all-important manufacturing, which will certainly need the RBI to lower rates, indicating a future clash between Raghuram Rajan and Arun Jaitley.

In his post-budget media interactions, the Minister did give valid explanations for his '100 crore' schemes, which in themselves are quite ambitious, particularly the Metro and IIT/IIM projects. His move to allot INR 7060 cr for 100 smart cities also sets a good start for the BJP to fulfill its manifesto promises. However, his explanation for the slow pace of reforms on the need to make reforms politically palpable is simply unacceptable - if political acceptability was going to decide the pace of reforms, then it would have been better for the UPA coalition to return, because coalition dharma, another form of political acceptability, was their defense for their failures. The BJP was given such a resounding mandate, a full majority no less, so that it can take politically-difficult decisions without fear of losing their government. Jaitley has clearly failed in this regard.

Overall, the #UnionBudget sets out a tone of optimism. True to his right-wing economics, Jaitley has put his bets on higher infrastructure spending to boost GDP and offset the debt-GDP ratio and hence the fiscal deficit, for which he has accepted Chidambaram's ambitious targets. This is not a new formula - it has been used around the world and also by the Vajpayee-led NDA Government, which also brought India out of recession. This is a tried and tested formula and, if executed properly, does work. Unlike his predecessor, who cut capital spending to keep Sonia Gandhi's doles afloat, Jaitley has put his bets on the strength of Indian enterprise.

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