A Budget to Transform
2
shooting the target of 4.1 per cent for the fiscal deficit in the current fiscal year, the Ministry of Finance has advised a reduction of plan expenditure. To do so would be fool- hardy. Note that what is being called for is only a temporary deviation from the target for the fiscal deficit. Any fiscal expansion may be reversed as its beneficial effects oc- cur and the economy expands. However, this may take up to three years or so given that growth has slowed for about twice as long. ‘Make in India’ The argument thus far is based on consid- erations of aggregate demand deficiency. But there are also significant supply-side gains to be had from public capital formation. These supply-side gains feed into one of the gov- ernment’s major initiatives and also one that is lacking even as it is very important for the country. The first is the idea of ‘Make in India’. The second is agriculture, which has so far received less attention from the gov- ernment than it deserves given its importance. There is a perception that the ‘Make in India’ initiative is pitched towards foreign firms. Foreign direct investment (FDI) is important both as a source of funds, foreign exchange and technology, and conditions must be created for a favourable entry of foreign firms, but we can hardly ignore In- dia’s entrepreneurs if we are interested in the wide-spreading of prosperity. And, while Indian firms rightly expect a predictable tax regime and freedom from Inspector Raj, they are also hobbled by the lack of adequate infrastructure. This only the government can provide, though not the Central govern- A budget to transform Pulapre Balakrishnan ment alone. There is a major role for the State governments in this regard. So long as we are interested not only in economic growth but also in the participation in it by individuals, publicly-provided infrastruc- ture is what is going to make the difference. While Special Economic Zones (SE Z) can be useful, especially for raising exports, and large corporates may push for them, I have in mind the infrastructure needed to service the segment of Indian manufacturing dubbed “unorganised”. More recently termed the MSME — micro, small and medi- um enterprises — sector, this sector pro- duces close to half the manufacturing output, comprises the largest number of pro- duction units, employs the largest number of workers, and generates a significant share of exports. What its firms need most is pro- ducer services. These range from electricity to waste disposal and assured water supply. These smaller producers do not have the wherewithal to supply these services them- selves. On the other hand they would be willing to pay for them. Agriculture and rural India For ‘Make in India’ to progress beyond promise, more than mere legislation is re- quired. An attractive investment climate is made up not only by favourable laws but also by enabling producer services. Among these are also information and advice. There is a strong case for something akin to the agri- cultural extension service for the MSME sector. It could be housed in the district industries centres, which were instituted nearly 40 years ago but have remained dormant. In the present state of the economy, when there is excess capacity in manufacturing, adequate stocks of foodgrain and the inflation rate is trending downwards, there is an opportune moment for a public investment-centred fiscal expansion A sector of the economy that h as not so far received even token attention from the gov- ernment is agriculture and rural India in general, though technically speaking ‘Make in India’, can be said to include rural indus- try. It is not sufficiently well known that in the past decade the real price of food has risen by 25 per cent. This is completely out of line with the experience of the richer econo- mies of the world where the price of food has shown a secular decline. Take China, where the share of food in the household budget is on average much lower than it is in India. As less need be spent on it now, cheaper food expands the demand for manufactures. The general approach in India has been to in- crease the production of food, but the point actually is to also lower its cost of produc- tion. Public capital formation in agriculture has been on the downward trend for about 25 years now, preventing the yield increase necessary for keeping price increase in check. The trend needs to be reversed. Whether in industry or in agriculture, ex- pansion of the economy’s infrastructural base increases productivity, driving growth and enhancing the tax revenue needed to finance the public debt. But more so, in- frastructure empowers people more than consumptio n subsidies do. Having made a case for greater public cap- ital formation, the issue of which projects to undertake is a real one. There is no question that the choice of projects should be done carefully and the implementation rigorous. The Pradhan Mantri Gram Sadak Yojana ini- tiated some years ago would be an ideal vehi- cle for investment. After all, roads are needed across the country, rural India would be targeted and the overall outlay will be substantial. Only, given India’s diverse geog- raphies a flexible approach should be adopt- ed and the States taken on board. Nothing is gained by insisting on one-size-fits-all solu- tions, a feature that has plagued Central schemes historically. Financing The suggestion that the budget be used as the vehicle for expanding the capital base of the country ought also to be seen from the point of view of the mode of financing. The much-vaun ted PPP model for expanding in- frastructure, in vogue for a decade, has bro- ken down. Also, public sector commercial banks are now undercapitalised having been pressured to lend to long-gestation projects which they are not suited to do. Once again, some perspective is to be gained from the experience of China where the infrastructure has been built by the state. In general, the importance of public capital in the form of infrastructure for economic growth, not to mention well-being, has been underrated in the discourse on the future of India. Greater public capital formation would have to be financed. As already argued we may expect at least some part of the in- creased debt due to the fiscal expansion to finance itself. Two other possibilities are for funds from consumption subsidies to be channelled into public infrastructure and for proceeds from disinvestment to be ear- marked similarly. Consumption subsidies other than on food for the poor should be reviewed. The slide in growth after 2008 began as the government chose to privilege consumptio n subsidies over investment. Do we really need a subsidy for cooking gas which we know to be regressive? The kero- sene subsidy is known to abet criminality as the stock is diverted to adulterate trans- portation fuel. The food subsidy could be trimmed if the public distribution system (PDS) is linked to Aadhaar and the buffer stock reduced substantially. Increasing the foodstock beyond what is necessary is not only costly but also raises the market price, leaving the poor without access to the PDS worse off, thus defeating the very purpose of government intervention. Narendra Modi had promised maximum governance. For- tune, it is said, favours the brave and the budget would be a good place to start. (The writer may be reached at www.pulaprebalakrishnan.in ) O ver the past eig ht months, th e gov- ernment has issued some strong statements on the economy and taken some bold steps aimed at transforming it. As it prepares to present its first real budget we may reflect upon the direction that it should take. First, we would expect a budget with a focus, one that resists the temptation to spread either allocations or interventions too thin. If quickening growth is the ob- jective, and the government has s tated that it is, the budget should address this objective squarely by increasing the allocation for cap- ital formation. We know that the trajectory of the econo- my over the past decade is related to the path of public capital formation, notably in in- frastructure. To be effective in the context of a significant slowing of growth, however, a substantial hike in public investment would be necessary. This will come up against the programme of fiscal consolidation being pursued. I do not consider it vital to stick to the 4.1 per cent fiscal-deficit target an- nounced for this year. Reports are that this target may have been breached already. But there is a more substantial argument. In the present state of the economy — when there is excess capacity in manufactur- ing, adequate stocks of foodgrain and the inflation rate is trending downwards — we have an opportune moment for a public in- vestment-cen tred fiscal expansion. Tax rev- enues will rise following the resulting expansion in output and the increased debt incurred to fund the expansion is thereby financed. This dividend has been termed, cheekily but surely, a “fiscal free lunch”. It also suggests that when there is a feed-for- ward impulse present in the economy, i.e., its current state casts a shadow on its future, fiscal abstinence when the economy is slug- gish could actually lead to a worsened fiscal balance in terms of the debt-GDP ratio, for growth would have been lower. Nothing said here detracts from sticking to fiscal consoli- dation as a desirable long-term objective. It only suggests that its pace must not be forced, but instead calibrated to the state of the economy. Right now a rigid adherence to a targeted fiscal deficit is not optimal. To borrow from Keynes, “the boom ... is the right time for austerity”. However, the fear is that the government may currently be prac- tising the reverse of this maxim. There are reports that faced with the prospect of over- While sticking to fiscal consolidation is a desirable long-term the state of the economy. Right now a rigid adherence to a target ed fiscal deficit is not o ptimal. objective, its pace must not be forced, but instead calibrated to
description
indian budget editorial of The Hindu
Transcript of A Budget to Transform
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shooting the target of 4.1 per cent for thescal decit in the current scal year, theMinistry of Finance has advised a reductionof plan expenditure. To do so would be fool-hardy. Note that what is being called for isonly a temporary deviation from the targetfor the scal decit. Any scal expansionmay be reversed as its benecial effects oc-cur and the economy expands. However, thismay take up to three years or so given thatgrowth has slowed for about twice as long.
Make in IndiaThe argument thus far is based on consid-
erations of aggregate demand deciency. Butthere are also signicant supply-side gains tobe had from public capital formation. Thesesupply-side gains feed into one of the gov-ernments major initiatives and also one thatis lacking even as it is very important for thecountry. The rst is the idea of Make inIndia. The second is agriculture, which has
so far received less attention from the gov-ernment than it deserves given itsimportance.
There is a perception that the Make inIndia initiative is pitched towards foreignrms. Foreign direct investment (FDI) isimportant both as a source of funds, foreignexchange and technology, and conditionsmust be created for a favourable entry offoreign rms, but we can hardly ignore In-dias entrepreneurs if we are interested inthe wide-spreading of prosperity. And, whileIndian rms rightly expect a predictable taxregime and freedom from Inspector Raj,they are also hobbled by the lack of adequateinfrastructure. This only the governmentcan provide, though not the Central govern-
A budget to transformPulapre Balakrishnan
ment alone. There is a major role for theState governments in this regard. So long aswe are interested not only in economicgrowth but also in the participation in it byindividuals, publicly-provided infrastruc-ture is what is going to make the difference.While Special Economic Zones (SEZ) can beuseful, especially for raising exports, andlarge corporates may push for them, I have inmind the infrastructure needed to servicethe segment of Indian manufacturingdubbed unorganised. More recentlytermed the MSME micro, small and medi-um enterprises sector, this sector pro-duces close to half the manufacturingoutput, comprises the largest number of pro-duction units, employs the largest number ofworkers, and generates a signicant share ofexports. What its rms need most is pro-ducer services. These range from electricityto waste disposal and assured water supply.These smaller producers do not have the
wherewithal to supply these services them-selves. On the other hand they would bewilling to pay for them.
Agriculture and rural IndiaFor Make in India to progress beyond
promise, more than mere legislation is re-quired. An attractive investment climate ismade up not only by favourable laws but alsoby enabling producer services. Among theseare also information and advice. There is astrong case for something akin to the agri-cultural extension service for the MSMEsector. It could be housed in the districtindustries centres, which were institutednearly 40 years ago but have remaineddormant.
In the present state of the economy, when there isexcess capacity in manufacturing, adequate stocksof foodgrain and the ination rate is trendingdownwards, there is an opportune moment for a public investment-centred scal expansion
A sector of the economy that has not so farreceived even token attention from the gov-ernment is agriculture and rural India ingeneral, though technically speaking Makein India, can be said to include rural indus-try. It is not sufficiently well known that inthe past decade the real price of food hasrisen by 25 per cent. This is completely out ofline with the experience of the richer econo-mies of the world where the price of food hasshown a secular decline. Take China, wherethe share of food in the household budget ison average much lower than it is in India. Asless need be spent on it now, cheaper foodexpands the demand for manufactures. Thegeneral approach in India has been to in-crease the production of food, but the pointactually is to also lower its cost of produc-tion. Public capital formation in agriculturehas been on the downward trend for about25 years now, preventing the yield increasenecessary for keeping price increase incheck. The trend needs to be reversed.Whether in industry or in agriculture, ex-pansion of the economys infrastructuralbase increases productivity, driving growthand enhancing the tax revenue needed tonance the public debt. But more so, in-frastructure empowers people more thanconsumption subsidies do.
Having made a case for greater public cap-ital formation, the issue of which projects toundertake is a real one. There is no questionthat the choice of projects should be donecarefully and the implementation rigorous.The Pradhan Mantri Gram Sadak Yojana ini-tiated some years ago would be an ideal vehi-cle for investment. After all, roads areneeded across the country, rural India wouldbe targeted and the overall outlay will besubstantial. Only, given Indias diverse geog-raphies a exible approach should be adopt-ed and the States taken on board. Nothing isgained by insisting on one-size-ts-all solu-tions, a feature that has plagued Centralschemes historically.
FinancingThe suggestion that the budget be used as
the vehicle for expanding the capital base ofthe country ought also to be seen from thepoint of view of the mode of nancing. Themuch-vaunted PPP model for expanding in-frastructure, in vogue for a decade, has bro-ken down. Also, public sector commercialbanks are now undercapitalised having beenpressured to lend to long-gestation projectswhich they are not suited to do.
Once again, some perspective is to begained from the experience of China wherethe infrastructure has been built by the state.In general, the importance of public capitalin the form of infrastructure for economicgrowth, not to mention well-being, has beenunderrated in the discourse on the future ofIndia.
Greater public capital formation wouldhave to be nanced. As already argued wemay expect at least some part of the in-creased debt due to the scal expansion tonance itself. Two other possibilities are forfunds from consumption subsidies to bechannelled into public infrastructure and forproceeds from disinvestment to be ear-marked similarly. Consumption subsidiesother than on food for the poor should bereviewed. The slide in growth after 2008began as the government chose to privilegeconsumption subsidies over investment. Dowe really need a subsidy for cooking gaswhich we know to be regressive? The kero-sene subsidy is known to abet criminality asthe stock is diverted to adulterate trans-portation fuel. The food subsidy could betrimmed if the public distribution system(PDS) is linked to Aadhaar and the bufferstock reduced substantially. Increasing thefoodstock beyond what is necessary is notonly costly but also raises the market price,leaving the poor without access to the PDSworse off, thus defeating the very purpose ofgovernment intervention. Narendra Modihad promised maximum governance. For-tune, it is said, favours the brave and thebudget would be a good place to start.
(The writer may be reached atwww.pulaprebalakrishnan.in)
Over the past eight months, the gov-ernment has issued some strongstatements on the economy andtaken some bold steps aimed attransforming it. As it prepares to present itsrst real budget we may reect upon thedirection that it should take.
First, we would expect a budget with afocus, one that resists the temptation tospread either allocations or interventionstoo thin. If quickening growth is the ob-jective, and the government has stated that itis, the budget should address this objectivesquarely by increasing the allocation for cap-ital formation.
We know that the trajectory of the econo-my over the past decade is related to the pathof public capital formation, notably in in-frastructure. To be effective in the context ofa signicant slowing of growth, however, asubstantial hike in public investment wouldbe necessary. This will come up against theprogramme of scal consolidation beingpursued. I do not consider it vital to stick tothe 4.1 per cent scal-decit target an-nounced for this year. Reports are that thistarget may have been breached already. Butthere is a more substantial argument.
In the present state of the economy when there is excess capacity in manufactur-ing, adequate stocks of foodgrain and theination rate is trending downwards wehave an opportune moment for a public in-vestment-centred scal expansion. Tax rev-enues will rise following the resultingexpansion in output and the increased debtincurred to fund the expansion is therebynanced. This dividend has been termed,cheekily but surely, a scal free lunch. Italso suggests that when there is a feed-for-ward impulse present in the economy, i.e., itscurrent state casts a shadow on its future,scal abstinence when the economy is slug-gish could actually lead to a worsened scalbalance in terms of the debt-GDP ratio, forgrowth would have been lower. Nothing saidhere detracts from sticking to scal consoli-dation as a desirable long-term objective. Itonly suggests that its pace must not beforced, but instead calibrated to the state ofthe economy. Right now a rigid adherence toa targeted scal decit is not optimal. Toborrow from Keynes, the boom ... is theright time for austerity. However, the fear isthat the government may currently be prac-tising the reverse of this maxim. There arereports that faced with the prospect of over-
While sticking to scal consolidation is a desirable long-term
the state of the economy. Right now a rigid adherence to a targeted scal decit is not optimal.
objective, its pace must not be forced, but instead calibrated to
