There have been few periods in recent history when economists and policymakers across the world were so unsure about which way the winds were blowing. China has slumped to its lowest growth in a quarter of a century, while most of the developed world appears to be falling off a cliff.
Proponents of the India story will point to the fact that, regardless of the dispute over the new national income accounting formula, the country is set to grow at 7.6% this year and 7-7.75% in the coming year.
However, it would be foolhardy to ignore the signals layered beneath the deceleration across the rest of the world.
The incidence of such known and unknown unknowns makes policy making a difficult assignment. More so for finance minister Mr Arun Jaitley, who having steered the Indian economy relatively unscathed from the rubble piling up across the world, now has to lift the annual growth rate consistently above the 8% threshold needed to raise per capita income significantly and generate jobs.
Given the peculiar flux that the economy is caught in meant that Mr Jaitley had to be unfussy in his ambitions and also take a realistic position in signaling the government’s intent to walk the talk on sensitive issues.
It is not surprising that the finance minister has sought to put villages firmly at the centre of government’s development agenda.
The rural economy’s importance in India cannot be overemphasised. About 58% of rural households engage in agriculture and within this, two-thirds are heavily reliant on it.
India may be set to grow at a projected 7.6% in 2015-16, outpacing China, but a slowing rural economy can pose major hurdles in sustaining this turnaround. Alarmingly, rural distress -- marked by slowing wages, poor incomes and lower profits from farming -- now looks getting entrenched.
The allocation of Rs. 87,765 crore to the rural sector is as much an attempt at launching a direct assault on rural poverty as it is about shifting the focus of inclusive economics from handouts to jobs and asset creation.
The scheme’s success would also have an attendant political corollary. It will help counter the critics’ “suit boot ki sarkar” charge that this government is pro-big business.
This scheme, if executed well, could stand out as Mr Jaitley’s and the NDA government’s most visible signature initiative and potentially change the narrative of India’s development discourse in the years to come.
The finance minister also has made out a compelling case for direct income transfers given the rising list of entitlements and a bloated subsidy bill. He has targeted the complete roll out of fuel and fertilizer subsidies better through cash handouts could be the fulcrum for future welfare programmes.
This budget’s other loud reformist statement is in the area of taxes. It is an irony that even 25 years after India started reforming its economy, the country remains a disjointed bundle of multiple markets. It continues to stare at further delays on rolling out a country-wide goods and services tax (GST) that would take India closer to being one unified market.
On direct taxes, the finance minister set the ball rolling on reforming India’s corporate tax framework with an unambiguous message: lower rates of taxes will come bundled with fewer exemptions.
In a way, it was a signal to businesses that the government has begun the clean up act of the distortions that have slipped into the system over decades. In the short to medium term, this could hurt many companies that have taken advantage of concessions.
All told, Indian companies enjoyed a number of exemptions resulting in a potential revenue loss of more than Rs 68,000 crore in 2015-16. Mr Jaitley may well have marked the first big step in modernising India’s corporate tax system that has lower rates, fewer slabs and hardly any exceptions to the general tax rules.
The Centre’s spending plans do not make for clean arithmetic though. Government expenditure this year has overshot short initial estimates by 10.8% in 2016-17 from the current year. This is even after factoring in more than Rs 65,000 crore jump in the wage bill to take care of higher salaries and pensions based on pay commission recommendations. Yet, the finance minister has penciled in a fiscal deficit target of 3.5% of GDP, making it clear that he would not deviate from the fiscal consolidation roadmap laid out last year. This ability to achieve this will critically depend on a bonanza of Rs 98,999 crore from the sale of radio frequencies for telecommunication, and the finance minister is keeping this tap open alongside the proceeds from divestment, which he expects will fetch Rs 56,000 crore.
The finance minister has often said in the past that big reforms are those that to do not make headlines, but those that have a lasting impact on people’s lives. After all, growth is an economic concept, while equality is a sociological construct. This budget seeks to strike the right equilibrium between the two.