Recommitment to reform, also inability to implement

The budget has pleasantly surprised the markets. Their expectations were so low that better deficit numbers and the absence of negative shocks have pushed up stock indices. This experience gives many lessons about budgeting in a growing economy, and about misperceptions markets are prone to.

Growth makes many things possible, including a rise in expenditure without a rise in tax mobilisation. Deficits improve without painful expenditure compression or tax rise. Given high growth, why did markets doubt these possibilities? The reason is they tend to be swayed by short-term factors and have a poor understanding of fundamental forces. Therefore inflation, external oil shocks and failures of reform dominated the discourse. Also, many of the analysts they rely on have a better understanding of foreign economies than of India. Therefore, the view of reform is also standard, consisting mainly of more openness and easier entry for all kinds of foreign participants.

There was a lot of hype about government debt and deficits. This continues despite the demonstration of fiscal capacity during the crisis. The government expenditure was successfully increased during the crisis and helped maintain decent rates of growth in India, and is being decreased with the private sector recovery. How many countries in the West are able to do this? The budget demonstrates a sharing of the fruits of growth in tax cuts and expenditure rise through the system.

Admittedly, there are short-term problems such as inflation and severe external risks. The vision statement in last year’s budget was growth, inclusion and governance, and it continues in this one. The finance minister and his team are to be congratulated for delivering on growth at a time of global uncertainty. Growth aids fiscal consolidation and makes continued efforts towards inclusion feasible. The third item was work in progress and remains so.

Just like growth, better governance aids fiscal consolidation because it removes waste. India is far from best practices in many aspects and this gives a large opportunity from closing the gap.

There is recognition that revenue booms tend to be wasted. The countercyclical fiscal stance adopted creates room to respond to the next downturn. There is a beginning in the use of technology to deliver subsidies and tax reforms, reducing waste and thus shifting social spending towards education, health, and insurance that creates capacity.

Transaction costs are to be lowered by shifting towards self-regulation in manufacturing, self-assessment in customs, and technology enabled tax returns. A generous view of the many statements of intent in the budget would be to view it as a recommitment to reform. But it may just reflect the inability to implement.

One way to decide which of the two views is more correct is to check if the government kept the promises it made last year. The performance on deficits exceeds promises but that could be luck in the shape of buoyant revenues and the spectrum auction bonanza. The budget notes that for the first time, the expenditure target will be fully achieved in the last year of the11th Plan. But the sectoral allocation shows severe underperformance in irrigation, energy and communication last year. However, the expenditure target was exceeded for agriculture and rural development. This makes the actual rise in planned expenditure in these two sectors very low. So we conclude there is some improvement in implementation, but there is still a long way to go.

Given the importance of improving the agricultural supply response to moderate inflation, more could have been done. The major failing of this budget is the potential contribution of many excellent supply-side initiatives towards anchoring inflationary expectations is not brought out. The government is refusing to take responsibility for inflation, preferring to pass the buck to the RBI.

Ashima Goyal is economics professor, Indira Gandhi Institute of Devolopment Research