Budget 2014 is only the first step
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Much was expected from Budget 2014/15 without realizing that India’s economy has its own rhythm, which changes only by small degrees if left to itself. That is why big-ticket reforms are necessary to quicken the pace. Finance Minister Arun Jaitley had reason to move forward with caution and make changes only at the fringes.
No wonder then that P. Chidambaram almost welcomed the budget as if it was a carryover from his own budget. Even the increase in shareholding by foreign investors in the insurance and defence sector, which Jaitley has announced, had been on the previous government’s agenda. Now that the opposition has shrunk, the Modi government took the first opportunity to do that, though with conditions.
The reason for carrying forward the agenda of the United Progressive Alliance (UPA) government could possibly be that the new government had little time to consider the nuances of any new approach to policies and the apprehension that any radical departure from previous budgets may see the repeat of opposition behavior in earlier parliament sessions.
Not that significant changes haven’t been made, but they are not so visible. The budget speech is silent on the cap on LPG cylinders, decontrol of diesel subsidies or direct benefit transfers, which are included in other budget papers.
The finance minister preferred to basically carry forward the interim budget of the UPA with the introduction of a few new schemes and an additional expenditure of 2 trillion rupees ($33.3 billion) to put its own stamp on the budget. In spite of the 12.5 percent increase in expenditure, Jaitley has projected a drop in fiscal deficit from 4.6 to 4.1 percent. That brings into question the credibility of the budget numbers.
Take, for example, gross tax revenue. The rate of increase had declined from 11 percent in 2012-13 to 10 percent last year. That has not deterred Jaitley from projecting 17 percent growth in the current year. The tax effort made in the budget actually involves a revenue loss of 146 billion rupees ($2.4 billion). The projected increase in tax revenue therefore presumes commensurate growth in industrial production.
Industry is the most important sector that generates revenue for the government. Corporate tax alone accounts for 33 percent of gross tax revenue. Add to that revenue from customs, excise and service tax and the industry’s contribution would go up to nearly two-thirds. Therefore, the 17 percent increase in tax revenue would be possible only if industrial growth, on average, is more than 5 percent in 2014-15. Apart from the energy sector, electronics and chemicals, growth in the rest of the industry may not be enough to generate the expected additional revenue.
Jaitley refrained from initiating structural reforms for which an environment was created in the poll campaign. Maybe after the first step, it will the next budget that will make all the difference.