Monday, 16 February 2015

Money-wise: A budget is as good as our implementation capabilities

It is said that no success is final, nor failure fatal — it is the courage to continue that counts.
The Delhi electoral outcome has rekindled a fresh debate on the preferred model of development. Apart from other factors some analysts argue that the economic policies of the government have a pro-rich bias and alienated a large voter base among migrants, slum-dwellers and, generally, the very poor. The forthcoming budget, they argue, must course correct. This reasoning is truly farfetched. The focus of the election campaign by AAP related to issues of corruption, safety of women, availability of drinking water and inadequacy of basic infrastructure. Critics overlook that the amendment to the Land Acquisition Act pertains to the ponderousness of the process and does not dilute the generous compensation. Similarly, with respect to the MGNREGA based on CAG report the emphasis rightly has been placed on capital-creating assets. The approach also overlooks the more basic fact that the excessively entitlement-driven policies of UPA 1 and UPA 2 weakened macro fundamentals, reduced investable surpluses and smothered investor confidence. These entitlement-driven rights embedded in several legislations were a major draft on shrinking resources. Coupled with weak delivery systems with inherent leakages they eluded improved life quality to intended beneficiaries. Any economic strategy must be designed to create more jobs, improve outcomes of social spending, quality of infrastructure and improve competitive viability to attract private investments.
All principles of distributive justice are predicated on enlarging the size of the cake. The reverse is a vicious quagmire of a low-level equilibrium trap.
For too long budget expectations remain misaligned with contemporary realities. Broadly speaking, in a comparatively closed economy prior to 1991, the budget was predominantly an accounting statement of projected revenues and intended expenditures. Post 1991, the budget increasingly becomes an occasion to go beyond accounting and articulate the broader economic and social agenda of the government. This approach in the earlier reform period of 1991 to 1994 was fostered by multilateral institutions as a pre-condition for access to their resources.
Speculation, uncertainty and excessive secrecy contribute to the mystique of the budget process. It is not adequately recognised that all over the world economic policy-making is a continuous process. The budget is hardly a panacea for either all economic malaise or response to multiple economic challenges. In an increasingly inter-dependent world we need to adopt the best international practice in the budgetary process. The OECD Best Practices for Budget Transparency report has suggested an ex-ante engagement than ex-post outcomes. It argues that ‘a pre-budget report serves to encourage debate on the budget aggregates and how they interact with the economy. As such, it also serves to create appropriate expectations for the budget itself.’ British economist John Maynard Keynes suggests “Successful investing is anticipating the anticipations of others.”
So what should we anticipate for the forthcoming budget?
First, continue the focus on growth, investments and employment creation. Distractions and plea for populist programmes must be subsumed as part of the broader priority agenda of the government, which focuses on externalities, public goods, enhancing our competitive viability and total factor productivity of the economy.
Second, both savings and the investment rates and investment gearing ratio need to substantially increase for transiting to a higher growth trajectory.
Third, reiterating the commitment to fiscal rectitude and the path of fiscal consolidation. Mechanical fixation of fiscal deficit should be replaced by cyclically adjusted fiscal deficit with latitude to reach end targets with flexibility during the intervening period. The concept of cyclically adjusted fiscal deficits now has wide acceptance. As Glenn Hubbard, dean of the Columbia University Graduate School of Business, reminds us, “Gradual fiscal consolidation may also be stimulative in the short run.”

Fourth, improved expenditure management, reduction in the number of centrally-sponsored schemes and given reported generous award of the finance commission coupled with subsidy rationalisation, particularly direct benefit transfer, benefit macro management.
Fifth, a reiteration of abstinence for future retrospective changes and acceptance of judicial or quasi judicial or arbitration outcomes improves investor confidence.
Sixth, lowering tax rates to improve opportunity cost of investment and enlarging the base with a commitment to align our taxation rates with Asean rates will be an important investor fillip. Adopting best international practice in respect of treaty shopping, seeking tax arbitrage, base erosion and profit sharing and application of GAAR can be part of the same process.
Seventh, clearly-identified programmes that are popular but not populist and contribute to inclusive growth, like Jan Dhan, Swachh Bharat, Clean Ganga, the Digital India and Make in India campaigns should receive tax incentives to invigorate green shoots of investments and back-end infrastructure. Improving the ease of business, particularly enforcements of contracts and permissions in the construction sector as high priority, can make a difference.
Eighth, enhancing agricultural productivity, particularly supply side response, in consonance with changing consumer preference along with orderly non-agricultural job creation is important.
Improved social infrastructure, particularly health and education need an innovative approach. In education, the key issue of guaranteed access must be replaced by improved outcome, through teacher training, and undoing the debilitating feature of the RTE, which has smothered private initiative, is critical. This would be congruous to the new skill inculcation initiatives both in respect of rejuvenating existing institutions and creating new ones.
In the end, any budget is as good as our implementation capabilities. John Keats was right when he said “Nothing ever becomes real till it is experienced”.

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