Union Budget 2019: This year's Union Budget was different from most, since it followed a general election and an interim budget. Every Budget includes a list of expenditure plans and proposals, along with estimates of the tax and other revenues that will make those possible. Those revenues, as well, are partly determined by plans with respect to tax rates and coverage. What is the big picture that emerges from the conglomerate of specific revenue and expenditure proposals?
The overarching theme is, of course, the task of reviving economic growth. Unfortunately, this challenge has to be tackled in a situation where there is significant uncertainty with respect to the national income statistics that are the basis for headline growth numbers. It is a pity that, when attention should be on the quality of all the economic activities that are components of aggregate growth, mindshare is being dominated by the quality of measurement of those activities. It should not be difficult to clarify the construction of the national income data, and to correct any deficiencies, and doing so seems like it should be an obvious priority.
There is another, less salient, data issue, which has to do with the Budget assumptions about nominal (not inflation-adjusted) income growth. The discrepancy between the Economic Survey assumption and the Budget assumption has been pointed out, and addressed by the finance minister. However, either number, together with real growth assumptions, seems to imply an inflation rate that is above the RBI inflation target. Nominal growth below assumptions will have serious implications for tax revenue, and fiscal stability, and this is a potentially worrying aspect of the Budget, although one must admit this is not the first time this issue of overoptimistic projections has arisen.
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Reviving growth requires a recovery of investment, and this is a major theme of the Budget, with various proposals for liberalising both direct and portfolio investment by foreigners. The proposed measures chiefly involve relaxing rules, which is a necessary condition for increasing investment from global sources, but probably not sufficient. What is needed is the creation of attractive combinations of infrastructure (hard and soft) to incentivise FDI, in particular. More focused and urgent efforts to develop Special Economic Zones are needed. The Budget also included measures for domestic investment, particularly reductions in the corporate tax rate except for the very largest firms, and more favourable tax treatment for start-ups. These are steps in the right direction, but one could argue that more is needed. Even the largest Indian firms are not giants by global standards, so it would make sense, and be simpler, to lower their rate as well. With respect to start-ups, one would like to see more flexibility, including abandoning attempts to have bureaucratic determinations of which start-ups are 'eligible' for favourable treatment. These bureaucratic approaches perhaps are hangovers of the licence-permit Raj.
Sometimes, eligibility restrictions or tax disincentives are driven by concerns about misuse of funds within the system. The new share buyback tax seems to be driven by this kind of thinking. Certainly, many corporate actors have been guilty of theft or misuse of funds, but the way to deal with this is through tracking, enforcement, competition and capability-building for managers, auditors and regulators. A command-and-control approach will not achieve the kind of investment boost that India needs. Indeed, the focus should be on making it attractive for households to increase financial, as opposed to nonfinancial, savings, and building up the quality of financial intermediation should be a priority. There are glimmers of this goal in the Budget, such as the continued tax incentives for creating a global financial hub in Gujarat, and one can be hopeful that modernisers will prevail over those who are overly cautious about risks. However, one has to side with those urging caution in the case of the plan for the government to borrow in foreign currency: the potential risks here seem to be substantial, with no real benefits.
The Budget also contains ongoing themes of digitisation, more effective policies for inclusion and welfare support, and agricultural reform. These themes had varying degrees of explicitness and salience in the latest Budget, and the details of policy formulation and implementation will continue to challenging, especially in the context of India's political economy of rent-seeking by politicians and others with power. While the GST was being finalised and introduced, 'cooperative federalism' was a popular term, but there is much more that needs to be done in terms of making subnational governments more effective.
Separate from the Budget, the Terms of Reference of the 15th Finance Commission do not inspire confidence that the Union government is willing to trust and to strengthen sub-national governments to make significant economic decisions. In education, health, industrial growth, urbanisation, environmental management and even exports, state and local governments have critical roles to play, and it remains to be seen if the national government's centralising impulses can take a step back when economic growth requires sub-national governments to step up in ways that they have not been empowered to in independent India's history.
The big picture of the Union Budget is a continuing increase in trust with respect to the private sector and foreign economic actors, but still not enough trust in India's own people and the governance choices they make at the sub-national level.
(The author is Professor of Economics, University of California, Santa Cruz. Views are personal.)