Tuesday, July 1, 2014

India's Big Budget - What Should It Be?


"I know I have a Tough Task" - Arun Jaitley and Narendra Modi in a Pose for cameras (courtesy Dainik Jagran)

It is ironic that every budget is labelled historic in India, completely sidestepping the incovenient facts. Any country that has raised itself in our geographical vicinity has shown policy stability. An annual general budget is a moronic idea to promote economic stability, and I believe it should be replaced with an economic charter at the beginning of the government with no changes through an amendment to the Constitution. Alternatively, governments should focus on one budget and pass votes on account in subsequent years that uphold the policy framework laid out in the budget earlier.

Unlike February, the General Budget is being presented in the middle of a truant monsoon this year. A change of government with a mandate not seen since 1984 has meant that Narendra Modi has a tide of hope carrying him. This tide can also leave him high and dry if he fails to propel growth, control inflation, and also push for job creation on a scale not seen since Chinese economic reforms. Also, this budget needs to expand the economy while maintaining fiscal prudence. There are already signs of what may happen, and so, as I see it, the budget may be seen highlighting among other things points that I put down here:

1. A sovereign wealth fund on the lines of Singapore's Temasek Holdings that manages all Public sector enterprises may be proposed by the government. As Raghav Bahl has pointed out, such a fund would be able to mobilize over US$1trillion, and coupled with DoPT reforms that give such companies complete managerial autonomy, a lot of the fiscal deficit can be covered up.The government in fact has shown keen interest in the proposal of all public sector banks to set up an asset management fund to manage non-performing assets. Investment can be sought in these funds by large international financiers, including the Gulf countries, Japan and Korea, thus raising further monet for the government.

2. Tax policy of India will see major changes. While the disastrous retrospective taxation is certainly going to see the cold storage, the government looks keen to bring out Goods and Services Tax (GST), and this intention may see a mention. A first step towards that may be a reduction in the various cesses and service tax rates that the government levies. At the individual level, income tax exemption limit may just see an increase to INR 5lakh, which is intended to offset the impacts of inflation on tax paying middle classes. Income tax rates may be lowered significantly, and instead, one of the two things may happen. A consumption tax like the one in Japan may be introduced by this government, knowing Modi's fascination with Japan and its economic recovery. Alternatively, a banking transaction tax may be introduced.Also, Value Added Tax (VAT) rates may be reduced periodically.

3. Incentives for industrial manufacturing may see a major revamp across major sectors. The government has announced funds for the revival and re-establishment of electronic manufacturing clusters in India, Memorandum of Understanding (MoU) with China for the establishment of industrial parks across India by Chinese industries has been cleared by the government. This MoU may in fact be extended to Japan and Korea, who are already major investors in India. Exclusive economic zones shall see a major backing, and the current government may be able to sell this idea better, as it has more confidence of the industry. Taxation, as discussed earlier, shall also be tweaked, to see a reduction in the corporate tax rate down from the current 30% while reducing the tax holiday period. 100% Foreign Direct Investment (FDI) in defence, a big employing sector, has seen flip flops by industrial lobby groups, the move has revived significant global interest into investing in India, particularly from such large defence hubs like France and UK.

3. Banking sector may see a major shake up with the introduction of three things - license to Postal Services to set up their bank, which has major inclusion effects for India's poor; divestment of public sector banks to raise funds coupled with greater autonomy; and allowing private sector banks to give loans to Micro Small and Medium Scale Enterprises (MSMEs). These have the potential to change the banking sector in an unprecendented manner. The last one may have particular impact on employment, since lack to access of easy capital is one of the key reasons (apart from  archaiclabour laws) why MSMEs are unable to expand. Also, asking banks to clear up their debt backlogs may be given a go ahead.

4. Energy subsidies may be removed across major products, particularly diesel. Prices have already been hiked for non-subsidized LPG cylinders, an indication of what may happen. Energy subsidies are bleeding the economy, and there is enough evidence to suggest that. States may be however asked to reduce their tax and octroi rates on fuel so that the consumer is not pressurized. Also, cash transfers shall be pushed to help the poor manage their fuel expenses, utilizing the Aadhar card scheme or the National Population Register (NPR) of the Home Ministry. 

5. Agricultural sector shall see the National Rural Employment Guarantee Scheme (NREGS) being linked to asset generation schemes, particularly the Pradhan Mantri Gram Sinchai Yojana that has been anounced by the President of India. Ministry of Surface Transport is pushing for a scheme to promote horticulture along national highways while greening them under NREGS while setting up a long term income source for poor villagers. Crop insurance may see a re-introduction, and interest rates for farmer loans may be reduced sgnificantly.

These are just an indicative host of measures. These are essential for reviving the economy at a large scale, and need to accompany major law reforms that accompany, which can happen without the consent of the Parliament, since they fall under the purview of executive decisions, like labour law reforms. The government has to fulfil hopes and aspirations of millions unlike anything before. Hopefully it shall not let us down.

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