The Budget has done a reasonably good job of accommodating the major restructuring of central government transfers to states mandated by the 14th Finance Commission, notes Shankar Acharya
Most of my fellow panelists rated the Budget as 'excellent'.
Despite feeling like an outcast, I could only muster an 'above average' rating.
A dozen days later the accumulation of commentaries on the Budget suggests that much of the early euphoria has worn off and my initial assessment seems much less of an outlier and more in the mainstream.
In any case, here are the reasons for my relatively restrained assessment, organised along my usual four-fold framework.
Overall fiscal stance
Despite previous commitments to bring the fiscal deficit down to 3.6 per cent of gross domestic product in 2015-16, the finance minister pressed the pause button on fiscal consolidation and targeted a marginal reduction down to 3.9 per cent of GDP from the 4.1 per cent reported for 2014-15 in the Revised Estimates.
Could he have done better?
Yes, definitely, by raising more tax revenues by, for instance, increasing the general CENVAT excise rate to 13 per cent and restoring the modest customs duty of five per cent on crude oil imports, as well as by reducing further the central funding for state plans in line with Finance Commission recommendations.
More interestingly, should he have reduced the deficit further in the current and prospective economic/fiscal scenario? Yes again.
Two of the reasons the finance minister gave for going slow with fiscal consolidation in 2015-16, namely uncertainty about goods and services tax implementation and the anticipated burden of the 7th Pay Commission Report, actually apply in 2016-17 and beyond, rather than in the coming year.
Indeed, for precisely these reasons, it would have been better to undertake more deficit reduction in 2015-16 and less in the following two years. That is the exact opposite of the path chosen and raises significant doubts about the credibility of the announced consolidation trajectory.
Expenditure policies
The Budget has done a reasonably good job of accommodating the major restructuring of central government transfers to states mandated by the 14th Finance Commission.
Its increased investment support to infrastructure sectors (especially railways and roads) by Rs 70,000 crore (Rs 700 billion), or 0.5 per cent of GDP, is also most welcome.
However, the overall increase in budgetary capital expenditure is a very modest 0.2 per cent of GDP, from 1.5 per cent of GDP to 1.7 per cent.
That is disappointing.
Revenue expenditures on the other hand have come down by 0.9 per cent of GDP, from 11.8 per cent to 10.9 per cent.
Two main factors have been at work: the reduction in transfers to support state plans and the 0.4 per cent of GDP reduction in major central subsidies.
However, most of the latter reflects the good luck of sharply declining international oil prices, not significant policy reforms.
Although the minister’s speech indicates the potential of JAM (Jan-Dhan, Aadhar and mobiles) for better targeting and reduction of massive existing “leakages” in subsidy programmes, there is no specific mention of extending this mechanism to the existing major subsidies for food, fertilisers and kerosene.
Nor is there any reference to either the recent Shanta Kumar Committee report on restructuring foodgrain procurement, stocking and distribution or the Expenditure Commission’s interim report, both of which favour phased implementation of direct cash benefit transfers for major subsidies.
Does this presage a go-slow on such reforms in the backwash of the Delhi state election debacle?
Revenue policies
Last month (Business Standard, February 12) I had emphasised the importance of raising the Centre’s gross tax revenue to GDP ratio, which had slumped from its peak of nearly 12 per cent of GDP in 2007-8 to below 10 per cent in 2014-15.
This Budget plans for a modest but welcome increase to 10.3 per cent of GDP from 9.9 per cent in 2014-15.
However, this increase is predicated on the accuracy of the revenue projections.
The 16 per cent increase projected in gross tax revenues seems a little optimistic, especially the 18 per cent increase in income tax revenue, when nominal GDP is expected to rise by only 11.5 per cent and given the significantly enhanced allowances and exemptions announced in the Budget.
Mr Jaitley’s strong backing for ushering in the national GST by April 2016 is commendable.
However, daunting challenges remain, including passing the Constitution Amending Bill by a two-thirds majority in both houses of Parliament and getting approval of at least half the state legislatures.
Budget 2015: Complete Coverage
Moreover, the precise design elements relating to rate structure, exemptions, technology systems, etc remain to be finalised and the chances of all this happening satisfactorily within a year are slim.
The Budget also promises a significant reduction in the basic corporate tax rate from 30 per cent to 25 per cent over four years, with a concomitant reduction in the plethora of existing exemptions, to promote investment, growth and jobs.
However this announcement of phased reduction would have had greater credibility and impact if there had been some actual reduction of the tax rate (and associated exemption pruning) in the coming year.
None was forthcoming.
Instead, the surcharge was increased from 10 per cent to 12 per cent!
Broader policy initiatives
As for non-tax revenues, the 2015-16 Budget continues to rely heavily on receipts from telecom spectrum auctions (about Rs 40,000 crore) and disinvestment (nearly Rs 70,000 crore).
The first is not repeatable each year and the second has suffered from perennial shortfalls in execution, raising real issues of credibility for the fiscal deficit targets next year and beyond.
Mr Arun Jaitley’s first full year Budget is rich in broader policy announcements, encompassing schemes to strengthen insurance and social security for poorer segments of the population, steps to monetise gold stocks, measures to promote infrastructure investment, new laws against black money and steps to strengthen the policy framework for conducting economic and financial activity, including the ease of doing business.
The formidable legislative agenda in the last category includes: a comprehensive new Bankruptcy Code, a new law on public procurement, a law for resolving disputes in public contracts, the merger of the Forward Markets Commission into the Securities and Exchange Board of India, a new regulatory reform law to harmonise approaches across different infrastructure sectors, a new Indian Financial Code, an amendment to SARFESI to empower larger NBFCs and an amendment of the RBI Act to establish a new Monetary Policy Committee to operationalise the new Monetary Policy Framework Agreement with RBI.
Most of these legislative initiatives are commendable in principle, although one has to suspend final judgment until the draft laws become available.
For example, the proposed bill against black money 'stashed' abroad certainly appears draconian and runs the risk of vastly expanding the scope for extortionate behaviour by enforcement agencies.
It might also discourage much legitimate and gainful cross-border financial and trade flows.
Overall, the agenda is certainly challenging, although notable by their absence are initiatives to improve the governance and performance of public sector banks or to reform of our thicket of job-destroying labour laws.
Yes, an above average Budget; how far above will depend on execution.
Shankar Acharya is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views are personal.
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