Budget 2017 Falls Short of Being Transformative

The Budget appears to be pro-poor and pro-business, but it fails to address the reforms actually needed to structurally transform the economy.

Finance minister Arun Jaitley (centre) stands outside his office at North Block holding the briefcase containing the Union Budget for 2017. Credit: PTI

Finance minister Arun Jaitley (centre) stands outside his office at North Block holding the briefcase containing the Union Budget for 2017. Credit: PTI

In the wake of demonetisation and the assembly elections in Uttar Pradesh, Punjab, Uttarakhand and Goa, certain provisions in this year’s Budget were anticipated.

Coming as it does midway of Prime Minister Narendra Modi’s term, the Budget could impact his electoral fortune in 2019 at the next general elections. It could further move to a higher plane the passionate debate over whether the nation moves ahead as ‘India’ or ‘Bharat’.

Most significantly, the crusade on black money is not over as the Budget proposes a ban on cash transactions beyond Rs 3 lakh beginning April 1. A resultant side effect, no doubt, will be to increase credit to productive sectors and lower interest rates. Reforms in political funding will further contribute to the fight against black money.

Demonetisation appears to have impacted the GDP. The latest Economic Survey has pegged the nominal GDP growth in 2016-17 at 6.5%, down from 7.6% recorded in the last financial year. However, in 2017-18, the GDP is expected to rebound and be in the range of 6.75-7.5%.

On the bright side, the finance ministry, in August, had notified the consumer inflation target for the Reserve Bank of India until March 31, 2021, with an upper tolerance level of 6% and lower limit of 2%. Post-demonetisation, the retail inflation fell to a two-year low in December at 3.41%.

The decision to abolish income tax on household earnings up to Rs 3.5 lakhs appears to be a means to compensate the lower middle class for the hardships suffered from the note ban. This move will help increase consumption demand, which will further help boost the MSME (micro, small and medium enterprises) sector that took a hit from demonetisation. Rebate of 50% on income taxes due from the lowest taxpayer is another measure to make up for the hardships from demonetisation. 

The prioritising of agriculture and rural development through a substantial hike in expenditure is expected to boost agriculture GDP in the next fiscal year. The continued drive for 100% rural electrification by May 1, 2018, will enhance the political fortunes of the National Democratic Alliance (NDA). Coupled with its expenditure on rural transport and the usual rural welfare schemes started by the United Progressive Alliance (UPA).

Reduced interest for loans for low-cost homes will boost the morale of low-income families that experienced the trauma of demonetisation in urban areas, as will the permissible deductions devised to help homeowners.

Fiscal discipline is well maintained with fiscal deficit targeted at 3.5% in FY 2016-17, from 3.9% in FY 2015-16, and seeking eventually to be at 3.0% of the GDP. This is a significant variable. The higher GDP growth targeted for the next year is well within the long-term growth trajectory.

This will keep the attention of the global investors on India especially given the abolishing of the Foreign Investment Promotion Board following FDI liberalisation. Further liberalisation is being promised. Allowing 100% FDI in the marketing of food products produced and manufactured in India will boost commercialisation of agriculture with greater value addition from the integration of the supply chain. Also worth commending is the creation of e-platforms for agriculture wholesale markets that will create better competition through better information to farmers.

The winds of global economic and political turbulence necessitated that the government keep macroeconomic stability as its foremost priority by enforcing fiscal prudence (bring the fiscal deficit down to 2.5% if need be) and provision of adequate capitalisation of banks.

As per the Budget, the banks will be provided a further capital of Rs 10,000 crore or more in 2017-18. For greater fiscal prudence, the government has an option of further disinvestment of state-owned enterprises, but it’s not an option it has to exercise.

The Budget hints at more reforms in the future and, therefrom, it expects higher GDP growth. Clearly, a populist NDA hopes to be re-elected in 2019 on its ‘universal development agenda’ as opposed to the UPAs ‘inclusive development agenda’. What could these reforms be?

The introduction of GST is one, which it is hoped will add 1% to the growth. Contract farming and commercialisation of agriculture on a grand scale could be another, including expanding and deepening commodities trading. Moving out of income tax to consumption tax could be another innovation, which would boost revenue and curtail tax evasion. Accelerating industrial growth and enhancing the share of manufacturing in GDP is essential for mass employment creation. Reforming agriculture retailing and wholesale sectors to raise yields to farmers by amending ‘anti-farmer’ acts would be necessary to boost the vision of urban centres.

But the Budget is not a transformative one, so to speak. The finance minister has yet again avoided the troika of reforms the government needs to tackle head on if it hopes to achieve 8% or above GDP growth. These reforms are also needed to structurally transform the economy with the market as a lead institution to generate growth with maximum efficiency in resource allocation through accelerated productivity in the use of natural, human, financial and technological resources.

The troika comprises:

  • labour market reforms providing companies with freedom to hire and fire with a modern Industrial Relations Act that permits collective bargaining while safeguarding both ‘managerial prerogatives’ and  ‘labour rights’
  • administrative reforms to yield the PM Modi promised ‘maximum governance with minimum government’
  • agriculture market reforms.

Let’s hope that India will not only move from a ‘discretionary-based administration’ to a ‘policy based administration’, as Jaitley announced, but actually move even more boldly with administrative reforms towards a ‘managerial civil service’, which was the hallmark of civil service reforms in the tiger economies of East Asia of the late 1970s. These reforms helped transform East Asian societies to be developed industrial societies in 35 years. And, even more miraculously, transform themselves from autocratic polities to full-fledged democracies.

Madhukar SJB Rana is the former finance minister of Nepal and an economist and Atul K. Thakur is a New Delhi-based journalist.