Finance minister Arun Jaitley kicked off the pre-budget consultations on Monday, a good four and a half months before presenting the budget. In previous years such parleys usually took place in January. The finance minister has ushered in a welcome departure in this practice.
First, by advancing the budget-making calendar by more than two months, he is signalling the government’s intent to co-opt outside expertise in a more expansive manner. Second, he has begun the consultation process with economists as opposed to business leaders. This perhaps indicates that Mr Jaitley first wants to define the broad contours of India’s medium-to-long term macro-economic framework before getting on to the nitty-gritty.
Such a “big-picture-first-approach” marks a subtle, but significant, change in India’s conventional policy making. To borrow an analogy from diplomacy, this is akin to a framework agreement that defines the nodes within which substantive components are later factored in.
Fiscal policy drafting juggles multiple imperatives. A deeper micro analysis can sometimes blur the broader macro objectives that the economy needs to achieve. “Constrained optimisation” or the exercise to achieve the best state within given parameters remains the guiding principle for budget-making in India.
In India the multiple hurdles and goals, which sometimes overlap and pull in opposite directions, can complicate matters for policy makers. For instance, raising interest rates can cool inflation. However, high borrowing rates can dissuade companies from investing because of high capital costs. This contest between controlling prices and pushing growth requires crafty policy making. In such instances, a well-defined framework delineated early in the form of short-, medium- and long-term macroeconomic targets can be useful to work on.
It is also important to keep in mind that reforms do not — and should not —follow a calendar. While in mature economies such as those in Europe and the US the annual budget is a primarily an accounting exercise, in India it has assumed the central platform for laying down crucial policies. It also serves as a window to understand the goals of government. The need, and importance, of early planning cannot be over-emphasised. Besides, discussions, almost always, result in expanding the area of the possible.
India may have become the fastest-growing economy, but many rough edges still need a lot of ironing out to sustain the momentum. Having set the ball rolling early, the government now needs to institutionalise the structure of such consultations in a manner that it leaves enough time and scope to incorporate most of these inputs in the proposals that will eventually make it to the budget.