The Union Budget for 2017-18 is a mirror image of the person who presented it: likeable, sensible, non-controversial, accommodative and with very few rough edges, if any at all. Indeed, like Arun Jaitley, the Union budget is traditional in terms of the (budgetary) value system, and modern in (fiscal) sensibilities.
In budgetary genre, it is a good old classic budget; expansionary yet not imprudent; rural agrarian yet accommodative of industry and enterprise and institutional reform-oriented more than market reform-led.
The key driver of the budget is public expenditure not revenues, yet the core budgetary arithmetic is in place; personal income taxation makes a comeback after a long time.
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It is a budget with a soul and softness of the vintage 1960s and the mind and mentality of the 2020s.
Coming after two game-changing federalizing budgets, this budget neither has big bang announcements nor any fireworks. To that extent it is a simple-minded and effective public expenditure policy document.
If one joins all the dots of micro changes strewn across different parts of the budget, there is one macro design that emerges: formalization of the Indian economy.
Comparable, though not as glamorous as liberalization of the 1990s, or globalization of the 2000s, it is distinctive in its push towards formalization of the country’s informal economy.
This thrust comes at the right time; just when the world is becoming protectionist and the Indian economy is headed to become a unified market by the change in the overall indirect tax regime. It sets the stage for a growth strategy that is based on “home market”—a term very popular in the 1970s—development.
The critical macro question is whether the budgetary measures are overweight on addressing the issue of “under-consumption” in the economy, and underweight on “under-investment” in the economy.
On balance, the finance minister may have erred on the side of populism and quick gains. The noise in the system about demonetisation and the upcoming state elections may have weighed heavier than they ought to have on his mind. It would have been far more prudent to address the issue of under-investment. Within the same level of public expenditure, the structure and composition could have been tweaked more towards public investment than current expenditure.
Given the fiscal stance of the budget, this imbalance in the policy thrust needs to be addressed by the Reserve Bank of India. The RBI must act to align its monetary policy in line with the expansionary fiscal policy.
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While many economists will question the headline deficit number of 3.2% and see it as a tad too aggressive, I am of the view that in the current situation—one of overall economic dampness—a higher fiscal deficit is not an issue.
This is so especially in the context of infrastructure and capital expenditure showing an increase of over 25%. This hike should see a turnaround in the rate of investment in the economy and will also spur some private investment.
The biggest constraint that this budget seeks to overcome is the institutional capacity to spend. Having brought the budget forward to 1 February, if the finance ministry now releases the money to different ministries and they in turn push it down to departments and executing agencies, the inter-temporal spending management will dramatically improve the capacity to spend. The long-drawn process of spending the money—releasing, authorization, tendering, verification, allotting and finally paying—will be reduced, resulting in a longer working season to spend. This will improve the institutional capacity to spend.
It is imperative that ministries/departments/executing agencies set in motion the procurement and tendering process which should be done in the next two months. Only then will it see all budgeted works allotted and supply orders issued or procurements made before the next fiscal year.
The increasing incipient pressure on banks, especially in the post-demonetisation phase, has not been adequately recognized in the budget. There has been no increase in capital infusion to what was already budgeted. The least that could have been done was to nudge banks into raising equity in different hues since demonetisation-related flows make it easier for banks to raise equity. The accounting change from accrual basis to actual basis is a definitive positive.
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The short-term boost to sentiment in the market has come from making no change in long-term capital gains definition; this was one of the major worries weighing on the market.
The finance minister has been very wise in not tinkering too much with indirect taxes, especially the service tax. This would have undermined the emerging institution of the GST council which he has worked so assiduously to make a federal institution of the country.
The budgetary policies implicitly recognize the importance of the informal economy, and seek to increase the productivity and improve the working conditions of those who work in it. This formalization will bring benefits not only to both formal and informal employees, but also to formal and informal entrepreneurs, their institutions and the state as a whole.
The budget in small but meaningful ways incentivises transitions which result in jobs and economic units in the informal economy moving in a multiplied manner and getting relocated in the formal economy, resulting in job outflows from the informal economy.
This promotion of a transition to the formal economy will lead informal workers out of poverty, powerlessness, exclusion and vulnerability. This is the way for them not only to obtain labour and social protection, but also to avoid unsafe and unhealthy work conditions. Through formalization and the connected safety nets, the finance minister has ensured an increase in the workers’ job security and income stability.
Formalization and recognition can also mean that informal entrepreneurs can more easily access capital and credit, investing in their businesses to obtain higher productivity and sustainability.
Notwithstanding the fact that this budget is not spectacular, it will find its place in the history of budgets in India: this will be the last Union budget of an erstwhile era. From next year onwards, there will be a different tone and tenor to the budget as it will be sans any indirect tax changes and will be a pure play public expenditure document.
In this budget, Arun Jaitley has laid the foundation for reinventing the ritual next year.