Budget Preview

Geetima Das Krish

The first full budget of the BJP government will be presented on 28th of February 2015. The expectations are sky-high. Last year, the budget was presented in July, in a hurry, just one month after the new government took charge. At that time, the Fince Minister Arun Jaitley decided to stick to the same budget numbers presented by Chidambaram in February 2014 with only some minor tweaking.

In India, budget is no longer a statement of government’s annual accounts. Over the years, it has morphed into a platform to announce the major policy initiatives and reform agenda of the government. This year, it will be more so as the new government will get the opportunity to articulate the detailed reform roadmap for the next few years. The budget speech can also be used to put forth all the policy initiatives undertaken till now. With the next big state election some ten months away, this is the perfect opportunity to announce tough unpopular economic reforms. Lower global crude oil prices create the perfect back-drop. There are some concerns that the massive win of the Aam Admi Party in Delhi election might push the central government to lean towards a populist budget. Hopefully, Mr Jaitley will not succumb to the temptation.  

Slow growth, high inflation, large current account deficit and sliding currency had made India the leader of the fragile economies in 2013. India was even referred to as the first ‘fallen angle’ of the BRIC economies. Since then, most of the macro imbalances have corrected. Current account deficit had rrowed significantly in FY 2013-14. Inflation has softened this year helped by falling commodity prices. The growth has bottomed out, currency has stabilised and forex reserves are improving. India is now considered ‘one bright spot’ among the Emerging economies.

The government this year will achieve the challenging fiscal target of 4.1% of GDP (Gross Domestic product). The over-estimation of tax revenues in the budget, highlighted by us just after the budget, is eventually acknowledged by the Ministry of Fince. Unfortutely, despite assurances by Mr Jaitley, the fiscal target would be met through less-than-desirable slashing of Plan expenditure just like the previous two years. The pick-up in spectrum sales and disinvestment receipts in the last quarter will help.

This government has inherited fiscal targets of 3.6% and 3.0% of GDP for the next two years, respectively. At this juncture when the economy is just starting to recover with no sign of investment picking up, the government needs to kick-start the investment cycle. With private corporate balance sheet stretched and banks laden with NPAs (non-performing assets), major theme of the budget should be increased capital expenditure with higher public investments going to railways and roads.

The Fince Minister has just accepted the 14th Fince Commission’s recommendations. This will result in sizable jump in tax transfer from centre to states (from 32% to 42%) and give states more flexibility to use public funds. But this might subsume some Plan assistance and sector-wise grants. So, there might not be any major change in the fiscal consolidation plan. This report further pushes the idea of co-operative federalism and competition among states which was first discussed in detail in Fince Ministry’s mid-year economic review.

Other positive recommendations include use of divestment proceeds only for capital expenditure, move to accrual-based accounting from cash-based accounting, reducing subsidy bill from 2% of GDP to 1% by FY20 and raising capital expenditure from 1.8% of GDP in FY15 to 2.9% by FY20. The move to accrual based accounting might happen gradually but it will lead to greater fiscal transparency stopping the legacy of window dressing of deficit by rolling over expenditure to next year.

Overhaul of the tax system with strengthening tax administration, improving data mining and tax compliance, increasing manpower, fast tracking tax disputes along with timeline for GST implementation is expected in this budget. Tax sops for infrastructure and manufacturing sector in line with ‘Make in India’ campaign are in the offing. Removal of controversial taxes like GAAR, retrospective taxes that adversely impact ‘ease of doing business’ are likely.

The budget might streamline expenditure by merging or removing some central schemes. The Adhar platform supplemented by Prime Minister’s ‘Jan Dhan Yoja’ provides the opportunity for direct cash transfer for welfare schemes that will reduce leakage and raise efficiency through better targeting. This together with lower oil price will help in implementing subsidy reforms. These savings can be ploughed back into infrastructure sector to remove supply-side deficiencies. Some innovative ideas to raise funds for long term infrastructure projects will be extremely positive.

Higher devolvement of tax revenues to states leaves less money with the union government. The Fince minister may decide to lower the deficit target to 3.8% of GDP instead of inherited 3.6%. In that case, the headroom should be used responsibly for higher public investments. This will improve the quality of fiscal consolidation and also start the much needed investment cycle.

(The author is senior researcher in CPR. The views are persol.)