A change in course?

Three shifts in the Union Budget that may pay off

It is often hard for governments to reverse course. This involves admitting that something you earlier did might have been ill-advised. It also could mean that you have to listen to advice from those whom you either think are poorly informed or do not have your best interests at heart. But it is far more dangerous to stubbornly stick to a course of action after it has become clear that it is failing.
 

It may not be immediately clear, but the Union Budget, presented last week, did, in at least three important fields, signal — if obscurely — that the finance ministry is listening to advice and changing the direction of policy. This is of particular importance since ill-natured punditry over recent years has often accused the current finance minister and finance ministry bureaucracy of being unwilling to listen to criticism.

The first shift might be in trade and tariff policy. Since at least 2016, Union Budgets have had an overtly protectionist tone. Tariffs have been raised across the board, and we seemed to have returned to an era in which Budget speeches would tinker with tariffs at the request or insistence of various interest groups and domestic industries. This not only incentivises rent-seeking and raises costs for domestic consumers, but it also means that Indian companies struggle to enter global value chains. It diminishes our export potential. These points have been repeatedly made to the finance ministry, apparently to no avail. The concerns of traders and consumers seemed irrelevant compared to the protectionist demands of local capital.

There may be signs in this Budget that this knee-jerk protectionism is coming to an end. There was a subtle shift in rhetoric: The finance minister’s speech specified that “export competitiveness” was an aim, while also adding that “the interest of the general public and consumers” was the overall aim. This was reflected in concrete proposals, as well. Most importantly, the Budget proposed a reduction in Customs duties on mobile phones and printed circuit boards, “in the interest of consumers”.
 

The finance minister also promised a “comprehensive review of the rate structure” before the next Budget to “rationalise and simplify it for ease of trade”. This seems to be an invitation for further constructive suggestions about how a low and stable tariff rate is important for both consumers and exports.
 

The second shift is in direct tax policy. The Budget speech insisted on “simplification” as the goal for its tax policy. Here, again, a “comprehensive review of the Income Tax Act” was promised, in order to increased certainty and reduce litigation. A target of six months —again, presumably to inform the next Budget — has been proposed for this as well as the tariff review.
 

The much-criticised changes to capital gains taxation — which removes indexation while changing the tax rate to 12.5 per cent on long-term gains — has been specifically defended by the finance minister in subsequent public appearances as a shift towards rationalising direct taxes. In one such appearance she argued that people had long demanded that all forms of income face similar tax rates, and this was a preliminary shift in that direction. This will likely be the mandate, therefore, of the review of the Income Tax Act. On this occasion, therefore, the finance minister clearly signalled that this shift was in response to long-standing concerns about tax policy.
 

The final shift — more nebulous, but also more important — is to the overall direction of economic policy in this government. The oldest and most damaging criticism of the current administration is that it lacks policy vision. It certainly has a sense of where India can and should go (“Viksit Bharat” being only the latest incarnation of this); it can set targets and occasionally meet them; but it does not have an overall set of principles that can guide policy making. Without such principles, policies are chosen piecemeal. They can contradict or undermine each other. As a consequence of this absence of joined-up thinking, the government has tried to promote exports while shutting down imports; it has sought to push manufacturing without liberalising labour law nationwide; it has strengthened regulation while weakening regulators. This is one answer to a question that puzzles the government: Why do investors say they are faced with uncertainty even when they are provided personal assurances by high-level officials?
 

In the Budget speech, however, the finance minister promised “next-generation reforms” that would not be piecemeal targets but based on a new “economic policy framework” that would set an “overarching approach to economic development”. One clear reason for this is that an overall framework will need to be constructed if states are to be pushed into making some of the necessary changes. Indeed, the finance minister suggested as much when she implied that new interest-free loans could be provided to states as an incentive. Nevertheless, this concession to integrated policy strategy is a clear shift from the past. It may not be fully implemented, but if the discussions around the framework themselves are public and transparent that may well catalyse some of the reform energy that has been missing for years.
 

These three shifts have one thing in common: They have been telegraphed in advance, and for two of them at least “reviews” have been clearly promised. These reviews should include public consultation, and updates about what is being discussed.

Indeed, it could be argued that this is the fourth visible shift. Several times in its tenure, this government has run into trouble because it has simply ignored the benefits of consultation and the creation of consensus. The land and farm laws are the best examples of these, because on those occasions the Prime Minister himself had to walk them back. But there are numerous others that were passed — but not without the loss of political capital. The revised criminal code is just one example.
 

It is time for this unilateral approach also to end. If nothing else, that was the biggest request from the voters in the general elections. Perhaps the government has heard, and acceded to, this request.

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi