‘TOUGH’ BUDGET AHEAD

Prime Minister Narendra Modi has done well to tell people in advance that this is no time for ‘goodies’ but for ‘tough decisions’, which should mean some hardships somewhere, and that is realism creeping in when you get down to governance away from pulpit protestations.

For months, Modi had slammed the UPA government for all its failures and his electoral victory has been deemed to be a decisive endorsement for a ‘change’ he promised. Now it is crunch time to face up to reality and justify his intended moves, especially on the fiscal front, where his predecessor government has left ‘everything empty’. Finance Minister Arun Jaitley had already been talking of the ‘economic mess’ inherited by the BJP-led NDA government, and listed fiscal correction, inflation, investment and growth as the priority tasks that have to be addressed first. Inevitably, all this would involve some deft manoeuvres in the premiere budget (2014-2015) he would present in the second week of July.

Modi is no exception to the deplorable convention of newly-elected governments condemning the predecessor regimes for all ills in the country – a refrain which could last longer – and seeking to lower people’s expectations of any immediate reliefs or benefits that could make some change in their daily lives, especially for the vast multitude of low-incomes and poor.

Indeed, he has warned of ‘stringent measures’ required over the next one or two years in repairing finance and wherever action is needed to restore self-confidence and image of India abroad. Modi concedes that such actions may dent on the ‘immense love’ he is having from the people but, he pointed out, all these would be ‘solely guided by national interest’.

 Jaitley, seized of the fiscal and other imperatives of the current economic situation and of demands and expectations from business, industry, urorganised sectors and consumers, afflicted by inflation, will seek to make his maiden budget investor-friendly and at the same time sketch out plans on fiscal consolidation. He has to give a boost to the economy by promoting both investment and consumption. The fiscal exercise in the forthcoming budget may be somewhat tentative, given only nine months in the current fiscal year and the changes in federal finance (devolution) that would become necessary in the light of the recommendations of the 14th Finance Commission (for the five-year period beginning 1 April 2015).  GST (nationwide Goods and Services Tax) is yet to be finalised with the states, in the coming months.

While the budget will have some proposals on indirect taxes, such as import duty on gold and other modifications as may be needed, the finance minister is expected to focus more on direct taxes which could include a modest rise in the level of tax-exempt income, a possible readjustment in rate structure in higher income slabs, and withdrawal of those tax exemptions as have outlived their utility.

The finance minister is expected to withdraw retrospective taxation and come up with new norms for tax liability for foreign companies. Streamlining of the direct taxation structure and of the tax administration will form part of the budget, which has to raise revenues commensurate with the needs of the economy.

At the same time, the budget  has to provide an overall thrust for stabilising and strengthening the economy to achieve a 5.5 to six per cent growth in fiscal 2015 through steps to speed up project clearances as well as to make doing business a lot easier. It will aim at not only giving push to investments, domestic and foreign, with tax incentives as in infrastructure, but also unveil reforms which would cover foreign direct investment at higher levels in insurance and defence and such other sectors as are in need of extra-budgetary support.

Unless railways decide to raise its revenues, the budgetary support with all the planned dedicated freight corridors and safety works and for modernisation cannot be curtailed. Growth assumptions for the current year still being in modest range, the finance minister will have to supplement tax revenues with market borrowings and other capital receipts.

Given the magnitude of the budget aggregates, the finance minister will certainly embark on a larger programme of disinvestment in public undertakings to cover income-expenditure gap, and may also have recourse to privatisation of some segments of public sector undertakings, especially those in the loss-making category. Major undertakings would be encouraged to tap the capital market for resources required.

On the expenditure side, there will be efforts to make reductions in non-productive areas and to improve the quality of spending in order to keep down the fiscal deficit which may be kept at four to 4.5 per cent of GDP.  A rise in this order of deficit would involve a correspondingly larger resource mobilisation effort.

Fiscal correction demands a slowing down in the growth of subsidies other than food and fertilisers from the present unprecedented levels. The oil subsidies are likely to be re-visited in a way that the net outgo becomes manageable within limits of envisaged fiscal discipline. Food subsidy may even increase as more states have now embraced the Food Security Act. There is need for extra contingency financing, depending on the outcome of monsoon this year..

Jaitley will certainly have to ensure a certain order of public investment in infrastructure to support growth and create jobs, which in turn would spur investment in the corporate sector. It remains to be seen whether it would be possible for him to keep down the level of borrowings, which would help private sector investments.

On the economic front, latest data are somewhat encouraging. GDP is now forecast to rise from below five per cent over the last two years to 5.5 to six per cent in fiscal 2015. After several months, there is a pick-up in industrial activity, the IIP index showing a 3.4 per cent rise in April this year and manufacture growing by 2.6 per cent reversing its decline over more than a year. Capital goods also registered a notable rise by 15.7 per cent though from a low base. WPI inflation has edged down slowly to 5.2 per cent in April this year but CPI was still stubborn at 8.28 per cent in May. This is due to food inflation continuing to remain high at 9.56 per cent, which reinforces the need for effective measures on supply side management. Hopefully, the budget speech of the finance minister will indicate some steps in this regard.

Jaitley has said that costs of doing business should be reduced but agrees on the importance of lowering the food inflation, which has fuelled high consumer price inflation.

CPI is now the benchmark for RBI to calibrate its monetary policy and Governor Raghuram Rajan looks forward to new government’s initiatives on fiscal policy and supply side measures to buttress RBI’s policy so that in a steady disinflationary course of the economy, it would be possible to reduce the key lending rate of eight per cent.