The time has come for the government to make up for its sins of the past three years. The Budget, to be presented in less than two weeks, must be judged on whether it shows that the government is in the mood to recognise its follies, and in a position to undo the damage. It has taken considerable mismanagement to bring economic growth down to 6.1 per cent. Sustained inflation averaging over 10 per cent in the last three years is not happenstance. The massive fiscal deficit – now back to where it was at the start of the reforms programme 20 years ago – is the direct result of misplaced populism and an unwillingness to take the required decisions on energy pricing. There’s more to be accounted for, now that the time for reckoning has come: the abject failure to make headway on either the direct taxes code or the goods and services tax, and the external vulnerability that is reflected in record current account deficits.
There is the overall darkening of the business mood. Everyone can see the domestic investment famine even as businessmen put their money in slower-growing markets overseas, the acute problems in coal supply and power sector finances, the anti-business climate that has been engendered by rampaging tax officials and sector regulators, the whimsical manner in which foreign investors have been treated, the stasis on land acquisition rules and mining rights, and the flip-flops on special economic zones. Over and above all of which there is the mounting evidence of crony capitalism having grown to monstrous levels. All this and more point to a comprehensive set of failures that have brought the economy to its knees.
There is no quick or easy way back to the heights that this economy has climbed, but the downhill slide must be stopped, and the journey back uphill must begin. Next year will be a pre-election year, and too late for corrective action. Some of the action will have to be administrative, and has nothing to do with the Budget, but the finance minister could use his speech to Parliament to spell out the priority areas where action will be taken, and the mechanisms to ensure that action is indeed taken. It would also help if there were some acknowledgement that government spokesmen have been far too sanguine in their periodic forecasts on growth and inflation, that there is good reason for business to be disenchanted, and that lessons have been learnt. The important thing is to signal a change of direction, because confidence has to be rebuilt.
As for the specifics, on the tax front he can raise the Cenvat, or central value-added tax, rate from 10 per cent back to 12 per cent, and make the service tax more or less universal instead of cherry-picking what will attract it and what will not. Both should give a boost to flagging revenues. On the expenditure side, the runaway subsidies have to be reined in, and that will mean raising the prices of petroleum products and fertiliser. Importantly, the government should call a halt to new entitlement programmes until the fiscal position improves, and use the progress on the Aadhaar programme to begin a switch to well-targeted cash subsidies instead of persisting with government-provided goods and services through a machinery that is incapable of performing the task, and too corrupt to deliver to the right people. The finance minister could also propose a legislated ceiling on the absolute level of subsidies that will be funded by the Budget, as a percentage of either tax revenues or GDP. Doing all this will call for a measure of courage and conviction that have been missing these past three years. But that’s precisely the point.
