Millennium Post

Modi’s first big bang budget

A budget document is an economic expression of a government’s political will. Speculations about the theme and contents of the Narendra Modi government’s 2014-2015 budget started even before the BJP launched its nation-wide Lok Sabha poll campaign. The announcement of Narendra Modi’s name as the party’s prime ministerial candidate did the trick. The global investment banker, Goldman Sachs, was the first to speculate on the possibility of a Modi-led BJP government to unseat the non-performing, policy-paralysed and scam labeled Congress-led UPA.

Soon after other global investment bankers and sovereign rating agencies followed to lead the chorus for a BJP government at the Centre even ignoring veiled threat and open criticism from Congress satraps of the likes of former finance minister P Chidambaram, commerce minister Anand Sharma and party vice-president Rahul Gandhi. Foreign investors flocked the stock market. A buoyant business and investor sentiment returned in anticipation of a BJP victory linked with economic stability and growth. The rest is history.

Once again, speculation on is rife as the Deliverance Day, 10 July, nears: Will the BJP be able to meet the accumulating expectations of both the business community, the Indian middle class, the common man and the youth, who considered Modi a harbinger of hope as he hopped from one election meeting to another through the length and breadth of the country, a dream merchant hard selling his development model and achche din albeit better days ahead? Will Finance Minister Arun Jaitley do a mythical Arjun to unveil a magic package in the course of his budget speech that will have everything for everybody?

This budget will be the first major test of Modi’s post-election popularity among the local stakeholders – the general public, youth, job seekers, homemakers, senior citizens, the hitherto social outcasts such as transgender and human scavengers, etc. – as also among global investors and India’s neighbours. The budget will test Modi’s innovative genius to tackle economic and social contradictions and challenges – from general price rise, shortages of food, water, housing, sanitation, electricity, roads and infrastructure, industrial and farm land, agricultural and industrial inputs, schools, affordable medicines, doctors and health centres to unemployment, growing criminality, individual as well as national security.

The budget will be a big test of the government’s ability to manage existing sectoral subsidies and mobilise funds outside the standard revenue sources and borrowing, internal and external, fiscal deficit and current account deficit. If the budget is all about number crunching, under the existing conditions, the government’s total expenditure in 2014-2015 may be restricted within Rs 18,00,000 crore, including foreign and domestic debt repayment. The chances of tinkering with taxes, direct and indirect, by the finance minister to boost the revenue are limited. In most cases, including tobacco and luxuries, higher taxes could even be counter-productive.

 If the government takes upon itself the cost burden of implementing its election promises and extra demand from cash-strapped states such as West Bengal, Bihar, Orissa and Punjab, the gross fund needs could exceed Rs 25,00,000 crore. How does the Modi-Jaitley combine propose to meet such a huge expenditure cum investment gap to make the wheel of development moving and put economy back to top gear? Is it possible, in the first place? The answer is: yes through private participation. Theoretically, a $60-70 billion FDI inflow and another $50-60 billion FII inflow supported by a modest on-ground investment of Rs 1,00,000 crore ($16 billion) by the domestic sector can cover the investment gap.

Are they wistful thoughts? Not really. According to the latest UN report, China, last year, attracted FDI of $117.6 billion as against India’s $28 billion. The highest annual FDI so far received by India was six years ago, $40 billion. The global FDI flow in 2014, forecasts UN report, would be to the tune of $1.6 trillion. At a time when foreign investors are betting high on India, all that the budget needs to do is to tap the sentiment through the introduction of a liberal FDI policy regime complimented by truly attractive incentive policy for domestic investors.

One of Modi’s forceful election promises was ‘less government, more governance’. The budget provides the best opportunity to show that he is serious. His slim government can dispense with unproductive departments, assign the surplus staff with rural development, cut avoidable subsidies that benefit the rich more than the poor, junk those social development and income generation programmes that eat up the best part of allocations in administration of the schemes leaving small portions for target beneficiaries. Money saved is money earned. The last UPA government budget, presented by Chidambaram, showed 15 per cent rise in non-plan expenditure while plan expenditure was up by a measly six per cent. A shrunken administration and cut in avoidable subsidies can generate a lot of extra funds that could be spent on improvement of social infrastructure with MPs tasked to help. The latter are mostly out of job when Parliament is not in session.

 Indian budget’s excessive reliance on public borrowings and external debt has, over the years, made the government’s ever fattening annual expenditure little relevant to development needs to meet the bare necessities of the common man. Nearly 40 per cent of the government’s annual expenditure goes for debt servicing, eating up a good portion of budget pie year after year. Moreover, the growing budget deficits have kept India’s inflation high and contributed to a widening current account deficit between 2011 and 2013 which heightened exchange rate volatility and resulted in higher domestic interest rates. Sovereign rating agency Moody’s which had placed big faith on Modi’s ability to reverse the trend recently observed this.

Finally, this budget will appear as an ultimate test of the power of the government’s political will over bureaucratic easy-way or resistance. The new rules do away with cost audit requirement in a number of industries giving not only corporate governance a slip, but also freedom for cost and price manipulation and, in the process, excise duty evasion by companies. The rules will also discourage the study and practice of cost audit and cost management in the country. The government change is yet to bring about a governance change in departments where key posts are still manned by babus long used to different functioning and delivery styles under the previous dispensation. It is important for Modi to motivate those babus to secure their full cooperation to convert his government’s political will into the economic statements in the crucial 2014-2015-budget document.
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