Macroeconomics

Union Budget 2016: Will it support India's economic transformation?

  • Blog Post Date 08 March, 2016
  • Print Page
Author Image

Nirvikar Singh

University of California, Santa Cruz

boxjenk@ucsc.edu

In this year’s Budget speech, the Finance Minister articulated the government’s agenda to ‘Transform India’ through a set of economic reforms framed in terms of ‘nine pillars’ - agriculture, rural development, health, education and skilling, infrastructure, financial sector, governance, fiscal discipline, and tax reform. In this article, Nirvikar Singh, Professor of Economics at the University of California Santa Cruz, summarises the highlights of the nine pillars and discusses whether or to what extent this Budget will support India’s economic transformation.



India’s Union Budget lays out the national government’s expenditure and revenue plans for the coming fiscal year. Importantly, it also describes the government’s policy priorities, some of which may be expressed in choices that affect revenues and expenditures directly, but many that are meant to shape the future course of the economy. This latter category is what we include in ‘economic reform’, of course.

‘Nine pillars’

In this year’s Budget speech, on 29 February, the Finance Minister (FM) articulated a more ambitious goal than ‘reform’, stating that the government’s agenda is to ‘Transform India’. This transformation is to be guided and speeded by a set of economic reforms, which the FM framed in terms of ‘nine pillars’: agriculture, rural development, health, education and skilling, infrastructure, financial sector, governance, fiscal discipline, and tax reform. This list effectively covers almost every aspect of the economy: manufacturing and industry were not explicitly one of the nine pillars, but received attention in aspects of governance (increasing ease of doing business), financial sector reform (access to finance) and tax reform (incentives for investing and for starting businesses). After summarising the highlights of the nine pillars, I discuss whether or to what extent this Budget will support India’s economic transformation.

Fiscal discipline

It makes sense to consider the nine pillars in a different order than the Budget speech, beginning with fiscal discipline, the government’s main lever of macroeconomic management. The Budget stuck to the Fiscal Responsibility and Budget Management targets for fiscal deficits, and even plans to do better than targeted on the revenue deficit. Fiscal consolidation has been made easier by low oil prices – in the past Indian governments have had to resort to creative accounting when oil prices soared – but also reflects genuine fiscal caution. The Budget puts the ball very squarely in the RBI’s (Reserve Bank of India) court for the monetary easing that is currently badly needed for supporting economic growth.

Tax reform

Tax reform - while only a single pillar - encompasses a number of proposed actions, many of which feed into achievement of other goals. A striking aspect of the tax proposals in the Budget was the long list of measures designed to streamline and rationalise tax administration. Especially important were proposals that would provide incentives to investment - to start-ups in particular. Many measures are meant to encourage foreign investors, who have to be drawn in and kept in - if India is to invest in infrastructure at the scale that it will need to keep growing fast enough. There are still areas for improvement, but the tax proposals seem to reflect a government that is listening to business people and investors. Of course, in the category of tax reform, the Goods and Services Tax (GST) still looms as the single most important reform, tantalisingly close to acceptance and implementation.

Governance

Governance is also a broad category, representing some of the greatest challenges and possibilities. The question of governance is often expressed as ‘state capacity’, but it is more complex and multidimensional, including issues of structures, incentives and expertise. Improving tax policy and tax administration is an important aspect of governance, particularly in easing some of the unnecessary burdens of doing business in India. The Budget speech emphasised better targeting of expenditures, especially using Aadhaar (the massive digital identity initiative inherited from the previous government’s efforts), as well as using information technology (IT) to improve the internal working of government and the citizen-government interface. There was also a hint of plans to reorganise the government’s human resources, and this may be the most significant thing that can be done to improve governance, though it has proved the most difficult to achieve in the past. Setting a date for removing the relatively meaningless Plan-non-Plan categorisation of expenditures1 was a significant positive announcement in the Budget speech.

Financial sector reform

Financial sector reform has been progressing steadily in recent years, as exemplified by the Financial Sector Legislative Reforms Commission. This Budget provided welcome notes on deepening the corporate bond market, introduction of derivatives, greater retail participation in government securities, and improving various other aspects of financial access. The monetary policy framework also continues to be solidified, with legislation proposed that will amend the RBI Act of 1934 as needed. Of course the greatest imperatives in the current economic situation are the introduction of modern, efficient bankruptcy laws and trying to put the banking sector in order – the latter remains a major challenge, with a long road ahead in terms of cleaning up bank balance sheets. The Budget speech seemed to signal a resolve to achieve this, both through direct aid, and through bank consolidation.

Infrastructure

Infrastructure and investment received considerable attention in the Budget speech, with commitments to continued or increased investments in highways, ports and airports, though there may be a case for proportionately greater public investment in the railways. Greater private participation in road transport, and general improvements in the design and implementation of public private partnerships were also highlighted, though in both these cases, the details of implementation are likely to continue to challenge governments at the state and national levels, as will effective disinvestment of public sector firms. There was surprisingly little attention paid to the power sector and the dysfunctional state of electricity distribution, but this partly reflects the fact that the national government cannot directly fix problems that are state government responsibilities.

Agriculture and rural development

The two pillars of agriculture and rural development received the lengthiest treatment in the Budget speech, as well as the largest increase in planned expenditure. Irrigation is supposed to receive a major boost, which is needed, but longstanding problems of maintenance and corruption in irrigation will not be solved by increased investment. Sustainable management of groundwater, also highlighted, will be critical for Indian agriculture over the next few years. I have often highlighted the views of experts that the groundwater table in Punjab will collapse irretrievably in a decade if something is not done. Moves to improve the efficiency and competitiveness of agricultural marketing, including liberalising foreign direct investment (FDI), development of dairy farming, crop insurance, and more sanitation and rural roads will all be important if implemented well. The rural road scheme has yielded measurable positive results, as demonstrated by the work of Shilpa Aggarwal, and the benefits of rural sanitation have also been demonstrated by Dean Spears and others. These are good examples of how empirical analysis by economists is contributing to more evidence-based policymaking in India.

Healthcare and education

Of the remaining two pillars, healthcare saw the announcement of enhanced insurance, and an important scheme to replace traditional rural stoves using dirty fuels with access to cooking gas. Education received some recognition of quality problems, and plans were announced to enable selected higher education institutions to reach international standards by relaxing regulation. Skilling continued to receive attention as well, but the allocations of funds and expertise may not be enough to make a rapid enough dent in India’s needs. The biggest challenge in education and skilling is the lack of enough human and organisational capital to ramp up India’s educational supply rapidly enough. This sector has suffered from a lack of innovation, and needs much more attention.

Step in the right direction

My sense of this year’s Budget is that it is a strong step in the direction of transforming India’s material conditions - that is, sustaining rapid economic growth. Several items that I suggested a year ago were missing in last year’s Budget have been addressed now, and the language of intellectual engagement in the Budget speech indicated to me a strong understanding of India’s needs. The problems will continue to be with government’s capacity for implementation, its ability to create the appropriate environment for the private sector to be effective where it has a comparative advantage, and its ability to check corruption and rent-seeking.

One also hopes that what promises to be sound economic management is not derailed by political and cultural issues, where the government has been less than adept in its handling. In the medium run, the government has to think about getting India back above 9% growth, and more needs to be done to achieve that. In January, in giving a talk on possible growth futures for India at the annual meeting of the Association of Indian Economic and Financial Studies, I suggested that there was a reasonable technical case to be made that India could sustain a growth rate of 7-8% over several years. From the audience, Shekhar Shah, Director of the National Council of Applied Economic Research (NCAER), suggested that this might be too optimistic. His point was that if India did not grow at 9% or higher, it would not create enough jobs to ward off prospects of social unrest and conflict, which would then cause the country to grow much slower. From this perspective, policymakers have to be bold on the economic front, and their colleagues who push identity issues and stoke social conflict have to be more circumspect for India to succeed.

Notes:

  • Plan expenditure of the government is normally associated with increasing the productive capacity of the economy. It includes outlays for different sectors such as rural development and education. Non-plan expenditure, on the other hand, includes expenses on heads such as interest payment on government debt, subsidies, defence, pensions and other establishment costs of the government.
No comments yet
Join the conversation
Captcha Captcha Reload

Comments will be held for moderation. Your contact information will not be made public.

Related content

Sign up to our newsletter