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On the right track

An appraisal of the economy indicates that the worst may be over. The year’s budget could see India attract more investment and better growth, writes Bimal Jalan.

india Updated: Feb 21, 2013 11:49 IST

There is a lot of concern about the economy. There have been worries about low rates of growth, about a widening current account deficit and about a growing fiscal deficit. These are statistical facts. Fundamentally, there was a lack of confidence among investors about some of our policies, which were extremely awkward.

But the way economic management has improved under the present leadership in the finance ministry, the worst seems to be over.

In recent pronouncements, there is a definite commitment to reforms and to hold the fiscal deficit down.

The most important aspects that need to be addressed are enhancing the flow of public investment in infrastructure and giving confidence to private investors through policy reforms.

There are reasons to believe that these are on the cards. Frequent tax changes don’t help any economy. The single most important move in this Budget could be a reduction in complexities in terms of taxes and rates.

The government had submitted a concept of a long-term fiscal policy as long ago as 1985. It would be nice if the budget focuses on policy reforms. On how to increase capital expenditure, both private as well as public.

On how to reduce revenue expenditure, particularly on administration — a Planning Commission study has concluded that in the public distribution system for the population living below the poverty line (BPL), 48% of disbursements made by the government are diverted.

The fundamentals of the economy are strong. The India of today is vastly changed compared with earlier decades, when there used to be a constant balance of payment problem, we were dependent on foreign aid, the rate of growth was low, the investment rate was low, the record on project execution was poor, and the corporate sector was bound by a licencing system.

Fortunately, much of that is over. We are on the forefront so far as technological capabilities are concerned, so far as entrepreneurship is concerned, so far as the investment drive is concerned.

Yet, there still is a lot more to be done. There is the broader question of the administrative design of policies.

In the National Rural Employment Guarantee Scheme — an exemplary policy so far as objectives are concerned — the wage rate and kind of work that can be taken up are prescribed by the Centre. Ruling market wages, however, vary significantly across states.

Likewise, the preferred kind of work may differ across states. The problem with such a model is that the administrative expense constitutes a very big proportion of the total spending on the programme.

This is limited not just to one specific scheme. The whole structure has evolved over a period of time and become extremely complex. Why is it that the execution record on infrastructure is poor? It is purely because of administrative intervention.

Therefore, it is imperative to design policies which are implementable with minimal government interference.
With inflation where it is, our interest rates are not all that high. Having said that, however, one can say that compared with borrowing abroad, it is certainly costlier to borrow at home.

Given this background, the budget this year can provide the perfect opportunity to signal the government’s intent that it wants investment and growth to pick up.

The finance minister has already announced that the government will keep the fiscal deficit under control. While managing overall liquidity between the government and private sector is a long-term issue, the finance minister’s commitment to keep government borrowing under control will greatly boost confidence among investors.

We also have to devise a system to accelerate the implementation of infrastructure projects to generate jobs and multiply income.

This may well be the most appropriate time to empower the National Highways Authority of India with more independence and autonomy, with the government’s role defined more towards monitoring the pace of projects.

This will greatly hasten the execution of large road projects, bringing along with it all the attendant benefits on employment and income.

On the indirect taxes front, aligning central excise duties with the proposed goods and services tax is a good idea for the finance minister to consider.

While economic priorities differ from time to time depending on the set of conditions at a particular point in time, the most important priority in our tax system is simplification, to have a long-term view, fix tax rates at a certain level and leave it at that.

The budget may well be the perfect opportunity to announce a long-term fiscal policy that would imply tax rates — both indirect and direct — do not change every year and there is stability in the taxation regime.

There is also the larger question of raising revenues, which is particularly relevant in a year of economic slowdown. A transparent, non-controversial and simple tax system is the most appropriate way to optimise revenues.

There is also a very strong case for cutting down on subsidies, particularly those that have been proved not to have benefited the poor.

A good beginning has been made on phasing out of subsidies in the oil sector. This may be the right time to take a firmer view.

(Excerpts from an interview)
Bimal Jalan is former Governor, Reserve Bank of India
The views expressed by the author are personal