Here's the budget that India needs

By Ajay ChhibberAs you read this, hopefully before Piyush Goyal presents the interim Budget in Parliament today, the hand-wringing over another Budget — the last one of this government before the Lok Sabha election — continues. Will GoI meet its fiscal target after goods and services tax (GST) and disinvestment shortfalls? Will it be forced to cut an already meagre capex? Will it provide a big handout to farmers? Will the combined central and state fiscal deficit balloon out of control? Will the path of fiscal consolidation be maintained next year when earlier announced schemes such as Ayushman Bharat have to be paid for? Instead of the perennial tinkering at the margins, could we ask what a dream Budget at this stage of India’s development looks like? But first, a look at the context in which we face today’s Budget. The Glass is More Empty India has made remarkable progress since liberalisation some 25 years ago. Its GDP has grown almost 10-fold since, making it the sixth-largest economy in the world. But much remains to be done. India is a low middle-income country with per-capita GDP of around $2,000, behind all other G20 economies. Poverty, and child and maternal mortality are declining, but they remain too high in many parts of the country, and 9-10 million households fall back into poverty due to illness. Rural distress has increased, and lack of employment remains a huge issue. Important reforms were undertaken in the last five years — notably, huge fiscal decentralisation, GST, Insolvency and Bankruptcy Code (IBC) and Ayushman Bharat. There’s been progress in expanding education, improving the score on ease of doing business and in addressing corruption. But huge challenges remain. The growing uncertainty and tensions in the global economy will require India to lift its game even higher in the next five years. First, India needs another round of reforms to reboot its economic vitality. Sclerotic labour regulations have proven to be anti-worker. India’s producers suffer the world’s most inefficient and least inclusive financial system. Its trade and industrial policy needs a strategic thrust to help India gain greater share in global markets as well as to reverse the growing threat of de-industrialisation. Agriculture needs modernisation to help farm incomes grow and to better preserve natural assets. India also needs less red tape and confusing, overlapping (over-)regulation, as well as judicial and police reforms. Second, to be more competitive, India needs to shift from ‘hand-outs’ to ‘hand-ups’. There is inordinate attention in generating schemes for handouts — universal basic income (UBI), quasi-UBI (QUBI) — especially before elections. India needs to focus more on hand-ups to help farmers, entrepreneurs and exporters to become more competitive and increase employment. Instead of new schemes to provide more subsidies and quotas, people need more opportunities to lift themselves by the bootstraps and increase the economic pie. Third, the role of the State must be strengthened and expanded in some areas but reduced in others. GoI’s balance-sheet must shift from less Stateowned companies and banks, to more schools and health facilities, better sanitation, roads and railways. A Better Savings Scheme Given this context, what would a dream Budget look like? Better targeted subsidies — such as a shift to direct benefit transfer (DBT) for small farmers instead of free electricity and fertiliser subsidies, along with cash transfers to consumers instead of leaky fair price shops — and reforming the lumbering Food Corporation of India (FCI) could help save close to 2% of GDP. A better functioning GST should eventually help increase revenues by around 3% of GDP. Direct tax reform coupled with elimination of exemptions, and higher property taxes could add another 3% of GDP to public revenues. Finally, more aggressive privatisation and share sales of both public companies at the central and state levels, as well as some state banks, could bring in another 2% of GDP for the next five years. These funds could be utilised to increase public spending on education and skills development by 3% of GDP, from the current levels of around 3%. Public spend on health and sanitation should be increased by at least 2% from the abysmally low level of 1.4%, which is lower than our neighbours Bangladesh, Myanmar and Nepal. India has huge infrastructural deficits. So, these could absorb all the remaining funds raised, but must be tempered by the need to reduce the public sector borrowing requirement —which now exceeds 8% of GDP — reducing the availability of savings to the private sector. At the same time, more infra spend crowds in private investment. So, there are careful trade-offs, which could be split by increasing economic and civic infrastructure spend by 2% of GDP and rural infrastructure, through the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme and otherwise by 1% of GDP. This would leave a residual deficit reduction of around 2% of GDP. Some will argue against this. But as private investment (which has been in aslump) increases, its financing needs will increase. If the public sector borrowing requirement does not decline, there will be huge pressures on the government security (G-sec) yields, jeopardising public debt dynamics. If we think such bold changes are just a dream, we must remember Khalil Gibran’s lines, ‘Yesterday is but today’s memory, tomorrow is today’s dream.’ The writer is visiting scholar, Institute of International Economic Policy, George Washington University, US

from Economic Times http://bit.ly/2UxInZg