Apart from his invocation to Lord Indra and Goddess Lakshmi, Union finance minister Pranab Mukherjee should also have prayed to Lord Vinayaka, for good luck and Godspeed! His fiscal strategy is based on brave assumptions about robust economic growth, better tax compliance, stricter expenditure management and the world continuing to view India favourably. If in fiscal 2010-11, the windfall earnings from 3G spectrum auction saved the finance ministry’s budgetary strategy, in fiscal 2011-12
Mr Mukherjee has pegged his strategy on a different set of 3Gs — growth, at 9.0 per cent; better governance, especially in tax administration; and, higher global financial flows, especially through new windows of opportunity that have been opened.
In a business-like, if excessively long, speech Mr Mukherjee enthused the markets by showing a lower than expected revenue and fiscal deficit numbers, not raising excise duties (as widely expected), assuring financial sector reform, including easing foreign fund flows into mutual funds and promising to stick to the goods and services tax road map. The moves on services tax, which will yield net revenues of Rs 4,000 crore this fiscal, also suggest that the movement towards a GST has begun. While naysayers and fiscal conservatives will question the credibility of the fiscal numbers, especially since the finance minister’s strategy is based more on expenditure reduction than revenue mobilisation, Mr Mukherjee could well prove his critics wrong if he meets the Rs 40,000 crore disinvestment target and the twin forces of economic growth and simplified procedures enables the government to meet, or even improve upon, its revenue projections.
Mr Mukherjee claimed that his intention this year was to move towards a “more transparent and result-oriented economic management system in India”, and he sees the reform of tax administration and moderation of taxes and tariffs as a means to these ends. However, given that Mr Mukherjee did underscore the virtues of counter-cyclical fiscal policy, as “our best insurance against external shocks and localised domestic factors”, it was surprising that he did not opt to raise more revenues and make a more convincing pitch on fiscal stabilisation. The jury remains out on the tax buoyancy assumptions.
While critics may be disappointed that the finance minister’s speech was not more forthcoming on reform and liberalisation initiatives, one must not lose sight of the fact that there are indeed several embedded reform measures that the seasoned and “politically correct” Congressman in Mr Mukherjee chose not to highlight. By opening up investment in mutual funds the finance minister has taken an important step closer to full capital account convertibility. The promised amendments to various financial sector legislation also indicate a willingness to finally open the sector up to more foreign investment. However, the overall approach remains, as we said last year, a very 1980s style of micro-managing tax policy, with a large number of special gestures, exemptions and targeted imposts.
There has been some reversal in the cleaning up of the tax system, widening the scope for bureaucratic discretion. The tax subventions given to farmers is a bad populist idea that has been repeatedly discredited in practice but one that politicians like as an idea. On the other hand, time was ripe for tapping a bit more into the wealth and incomes of the rich, given the mood in the country and that Mr Mukherjee chose not to do, hoping better compliance and higher growth would bridge the gap.
The success of Mr Mukherjee’s fiscal strategy will depend critically on the economy’s response in terms of growth, on the government’s response in terms of transparency and administrative efficiency, on the government’s ability to restrain wasteful expenditures and on the international investor community’s response to India’s increased openness. If the government of the United Progressive Alliance is unable to get its act together, and if the Congress party succumbs irreversibly to populist spending pressures, India runs the risk of getting trapped in a state of complacency induced by reasonably good growth, 7.0 per cent or so, which is not good enough to generate either the required employment or the required revenues that would take India to the next level of development. It is too early for India to take its 9.0 per cent growth rate for granted. Much more needs to be done to increase investment in employment generating manufacturing (including labour reform), in skill development and vocational education and human capital building. The finance ministry’s Economic Survey says it all. Yet, the government is unable to take the great leap forward on far too many fronts. Mr Mukherjee told the media after his speech in Parliament that he was adopting an incremental approach. This was the year for more, and in opting for caution, so typical of UPA-II, he has erred and missed an opportunity to find a place in history books.
