Gentle Nudges But Not a Big Push

Focus

The Union Budget 2015 has provided the economy with several gentle nudges but not a big push. Hopefully, some additional off-budget reforms will be introduced by the government in future. With what has been delivered so far, however, we have improvements, but not yet a clear path towards the realisation of our dreams of India as a dynamic and innovative economy, maintains Pravin Krishna

The Union budget, which was presented to parliament on February 28, 2015, elicited a mixed response. On the one hand, the budget provided a series of positive and progressive measures to boost the economy and raise its growth potential. On the other hand, relative to the expectations of many that the budget would rapidly revitalise investment and growth through ‘big-bang’reforms, the announced measures fell short.

Highlights of the Budget

Key components of the budget include an announced reduction in corporate tax rates (from 30 percent to 25 percent over the next four years), an expansion of pension, insurance and social security programs of the poor, a plan to introduce a Goods and Services Tax (GST) to modernise India’s fiscal architecture, while also providing a degree of certainty concerning the future direction of tax policy, substantial increase in infrastructure spending (approx `70,000 crore) and a greater devolution of economic power from the centre to states, with transfers of 42 percent of tax revenues to states (compared to 32 percent in the past), enabling states to craft developmental strategies to suit their own specific needs, rather than to follow centre-mandated schemes. Notably, the budget was able to provide for additional infrastructure spending by the centre despite the crunch caused by the transfer of additional resources to the states.

Concerns about Pragmatic Implementation

Sceptics have questioned the efficacy of the budget’s proposals. For instance, do the states possess the capacity to take on the additional responsibilities implied by the fiscal devolution? If not, will there emerge even greater inequality between the richer and poorer states? Will the GST be implemented in time, given the deep and divisive negotiations between the centre and the states that are yet to be completed? Will infrastructure spending be efficient or corruption-ridden and wasteful? These are legitimate concerns and are likely to put to full test the reputation of Prime Minister Narendra Modi and his team for pragmatic policy implementation.

An equally important issue, in my mind, has to do with PM Modi’s ambitious ‘Make in India’program – aimed at rejuvenating India’s manufacturing growth, while providing employment to the many hundreds of millions of young Indians who are expected to join the labour force in the coming decades. How well did the budget support this program?

The myriad obstacles facing Indian firms and facing manufacturing sector firms, in particular, are well known. Government policy and bureaucratic process reflect an anti-corporate hangover from our socialist past. Clearances for new projects are subject to enormous delays and uncertainty. Separate approvals by the centre, states and local authorities and the lack of functioning coordination between these entities only fuel corruption. Land acquisition is difficult. Infrastructural support, in the form of transportation networks and energy supply, remains weak. Indian labour regulations are hugely onerous. High costs of retrenching or firing workers translate into disincentives to hire workers in the first place. In an ironic twist, business owners in labour-abundant India are adopting capital-intensive production techniques.

The announced reforms addressed, albeit only partially, some of these issues. The government has announced the launch of an ‘e-Biz’portal, which promises to speedily process multiple (although not, of course, all) regulatory clearances at once, enabling more efficient entry of firms. It has promised to introduce a bankruptcy law, enabling efficient exit for unprofitable firms. Importantly, it has scaled up the commitment to infrastructure development, implying better transportation facilities and greater energy supply in the future.

Necessity vs Sufficiency

These are positive and necessary steps. Unfortunately, necessity does not imply sufficiency. Other major hurdles to ‘Make in India’remain. The process of land acquisition was to be simplified through the government’s land acquisition bill. This, however, has met with stiff political opposition, including from the government’s own allies. Our antiquated labour laws, widely recognised as an obstacle to employment generation and detrimental to workers that they purport to help, have been left largely untouched, with no apparent prospect of reform in the near term. Indeed, even the business climate measures already announced by the government, for the most part, have lacked depth and convincing specificity. Changes on paper may help India improve its ranking in the much obsessed-over ease of ‘Doing Business’indicators published by the World Bank. But, I suspect that it will likely take a lot more to induce once-reluctant domestic and international entrepreneurs to rush to set up business in India at the scale that is expected.

Overall, the budget has provided the economy with several gentle nudges but not a big push. Perhaps more could not have been expected given our institutional history and political landscape. Hopefully, some additional off-budget reforms will be introduced by the government in future. With what has been delivered so far, however, we have improvements, but not yet a clear path towards the realisation of our dreams of India as a dynamic and innovative economy.

Go to Content Page

Author

Pravin Krishna

Pravin Krishna is Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University

Back to Top

Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

Search