As the finance minister rises to present the 2015-16 budget it’s the opportunity of a lifetime for him to write a new Big Bang Theory for India’s economy. He needs to script a blueprint for economic reforms that’s far more audacious than what was rolled out in 1991 under the shadow of a crisis.
This time around, while the economy does face significant challenges, it is far stronger than what it was in 1991 in many fundamental respects such as forex reserves, structure of the economy, fiscal deficit, oil prices and so on. Union government appears to have used its first nine months to win some more state elections so as to broad base support for the dramatic economic reforms they are expected to roll out. So what will this budget bring? And what should it bring?
Simply put, India needs more jobs, increased productivity and competitiveness to spur exports and growth (and in turn impact the investment climate). It needs lots more physical and social infrastructure and a lot less of the ‘bad’ subsidies, deficits and inflation. With private investment still not picking up, government needs to prime the pump.
Indeed, a tough reform budget does not have to be a fiscal stimulus budget. But in this case there aren’t too many options, stuck as the government is between a rock and a hard place. It is therefore likely there will be some ‘one-time relaxation’ of fiscal deficit targets and thus loosening of FRBM measures.
This will almost certainly be supported with a structured disinvestment plan, given the success of Coal India’s disinvestment. Target for disinvestment proceeds should be of the order of magnitude of Rs 45,000-50,000 crore.
The steep drop in the global price of oil will give India huge relief in terms of subsidies. Overall subsidy burden should be less than 2% of GDP this time around and perhaps around 1.5% for next year. Moreover current account deficit should be much better and inflation lower. This is indeed a well timed and significant boon for India and in order to boost revenues (where not much flexibility is available on other counts, for there will almost certainly be a shortfall in tax collection, especially indirect taxes, of about Rs 80,000 to 1 lakh crore), government should impose a small duty of say 5-10% on crude oil to mop up around Rs 10,000-15,000 crore. This will be in addition to the approximately $45-50 billion that India will save on account of lower oil prices.
A clear milestone-based timetable for goods and services tax (GST) roll out – which hopefully will not slip further from the 2016 deadline – is expected in this budget. However it is unlikely that a direct tax code will be announced this time. Along with this, service tax should be increased to around 14% given that post GST it is expected to go up to 16-18% in any case, and thus there is no harm moving in that direction.
Further, government must make virtue out of necessity and rationalise the 250 odd exemptions in excise, since GST will do away with most of them anyway. Also it must use this budget to correct inverted duty structure in many cases, where duty on raw materials is higher than on finished products.