Millennium Post

Jaitley's maiden budget

Return of political stability with a single party dominance at the Centre does not automatically translate into unlimited power for the new government to make early breakthroughs in fulfilling the great expectations BJP had generated in its vociferous vote-seeking campaign. These are still early days of the new government’s learning curve in the art of policy-making, picking out options relatively feasible for a start.

There is no doubt that Prime Minister Narendra Modi has within the first month galvanised  the government machinery at all levels for  becoming pro-active and being expeditious and effective in policy formulation and implementation. But the first month has also brought to the fore issues on which there are no quick fixes, though Modi in a passionate report card avers that whatever is being considered or decided on, is all in the ‘national interests’.

In the midst of both macro-economic challenges at home and geo-political risks in Eastern Europe and Middle East with implications for energy prices and trade, Finance Minister Arun Jaitley confronts a formidable situation in repairing finances, giving a boost to investors, promoting  job-creating growth prospects and controlling inflation.

It is here that the government would be critically tested whether by investors, domestic and foreign, or credit rating agencies or by the world at large. Understandably, he is buying sometime by extending his predecessor Chidambaram’s duty cuts for stressed segments of industry like automobiles and consumer durables, till December. States have been given another three months to begin operating the new food security enactment.

The Modi government has also deferred decision-making on new gas prices as fixed by UPA government. A continuity in policies with whatever modifications may be necessary. Nor Modi need be faulted for having reduced the railway tariff revision announced by his own minster, ostensibly to give relief to suburban travellers. Modi would certainly not have overlooked the forthcoming elections in Maharashtra.

There is no high road in politics. A bit of populism would always creep in. Also, policy continuity and consistency is inescapable in very many areas, especially in relations with the rest of the world. This is an area where Modi has taken some initiatives, especially in improving ties with neighbours, but behind all this are knotty problems, looking to the East (China) or West (USA), let alone Pakistan.
But the UPA, despite its belated activism, left behind a whole array of macro-economic imbalances which Arun Jaitley has now to begin tackling, keeping his key priorities in view. These are fiscal discipline, investment revival, creating business-friendly environment and bringing inflation under control.

Modi has reviewed the inflation and monsoon situation and detailed some steps in combating inflation with a call to states to sternly deal with hoarders as well as some contingency planning to cope with a fitful monsoon this year..

India’s low-growth, high inflation syndrome cannot be easily overcome in order to restore economic growth to its pre-crisis stability in the near future. The Budget will, therefore, be somewhat modest in its exercises for the rest of the current fiscal so that government gets time to firm up its reforms agenda and also get the states involved in finalising the Goods and Services Act for its introduction, if possible in the latter half of the year or from 1 April 2015. As the Reserve Bank points out in its latest Financial Stability Report, the prospects of recovery with the new government in place, appear bright. India’s GDP growth in 2014-2015 would be not less than 5.5 per cent though the momentum that the Budget could provide may lift it to six per cent or above.

Jaitley is determined to make the budget as investor-friendly as possible and whatever the fiscal measures are embodied in it should not result in any acceleration of inflation. Already, one of the ministers has realistically pointed out that what government could do at present is to see that at least inflation is contained and not allowed to edge upwards. Cement prices have risen and the government has to make decisions on pricing of diesel and LPG. At the same time, there is no escape from subsidy cuts on fuel products for achieving fiscal consolidation under a new road map Jaitley may outline.

In line with UPA’s annual exercises of raising minimum support prices of foodgrains and other agricultural commodities, the Modi government has also raised MSP for kharif paddy and oilseeds in order ‘to motivate farmers and compensate for higher input costs’. But these farmer-friendly exercises in the past have been at the cost of consumers. Market prices, especially rice, have been on unabated uptrend for over five years.

It remains to be seen what new mechanisms the finance minister will unfold in fighting inflation which has adversely affected savings and investments in recent years. Two sets of tough measures are needed in the budget, one to move projects still held up for clearances as also land availability, especially for infrastructure, and two, to launch  credible supply-side management to tame food prices fuelling consumer price inflation. Whatever his political thunderings at the hustings, Jaitley would have been tempered by now with ground realities. His efforts would be to frame and present a credible result-oriented Budget for the nine months left in 2014-2015 while setting out a medium-term agenda of fiscal consolidation and of reforms. It may be clothed in high sounding phrases. The return to political stability, as RBI puts it, has provided impetus to the economic outlook and the capital markets reflect the expectations on policy measures to address the adverse growth-inflation dynamics and saving-investment balance as also efficient implementation of policies and programmes.

At the same time, the supply side constraints have to be addressed ‘to complement the Reserve Bank’s efforts to contain inflation expectations’, according to Governor Raghuram Rajan. Domestically, it is assumed, with political stability returning, the next level of reforms, better policy implementation and initiation of steps to address.

supply side constraints will help revive the investment cycle and moderate inflation expectations.
While the current account deficit was brought down to 1.7 per cent of GDP in 2013-2014 through policy measures and interventions during the year, the structural imbalances in current account remain to be addressed. But fiscal consolidation has become the major policy imperative for the Budget. In this context, RBI report suggests public sector banks can approach capital market for meeting their additional capital requirements.

Within the existing fiscal constraints, Jaitley would be hardly able to provide for meeting the recapitalisation requirements of public sector banks. He can facilitate for banks to raise capital from the market if only they would meet the requirements of market discipline.  It is unlikely that the finance minister would throw any light on restructuring of public sector banks at this stage, given the high level of non-performing assets.
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