India’s Jaitley Designs Roadmap for Next Fiscal Year

Arun Jaitley, India’s finance minister, had three main tasks in his budget speech that he delivered on Saturday, the traditional Feb. 28 date. One was to manage government finances, reduce spending deficits and curb inflation. The second was to boost infrastructure, private sector investment and growth, and introduce other reforms.

The third, and politically the most important, was to revive the flagging image of Narendra Modi’s Bharatiya Janata government, which has in the past four months lost the sheen of last year’s landslide general election victory.

The finance minister managed well on the overall economic front with inflation at around 5 percent, manageable though somewhat higher deficits, and economic growth that he forecast at 8-8.5 percent next year – though that is a misleading figure because the Central Statistical Office recently reworked its estimates and raised current growth by about 2 percent above the previously announced 5 percent.

Arvind Subramanian, the finance ministry’s chief economic adviser, has said he finds that “puzzling”, and Arvind Panagariya, head of the revamped planning commission, said yesterday the source of the increase needed to be identified.

Jaitley also introduced tax reforms and did well on infrastructure. There is to be a national investment infrastructure fund, plus new financing and tax-free bonds for roads, rail and irrigation schemes. He is reworking arrangements for public private partnerships (PPP), which were mishandled by the last government and became often-corrupt blockages to development instead of boosting viable investments. Jaitley plans to rebalance risk with the government bearing a greater share, which is in line with the effective highway building programme of the last 1999-2004 BJP government.

It is too early to decide whether Jaitley has succeeded on the government’s image. What was needed was a budget that would show that the government elected nine months ago with a landslide victory is capable of making India work and succeed. The image it has been developing is of a less-than-effective administration cluttered with determined Hindu nationalists bent on furthering their religion, led by a prime minister who often seems better at performing on the international scene than on getting to grips in Delhi with the detailed work of reforming how Indian functions.

Jaitley therefore needed to build a vision of how all his measures would lead to a more efficient growth-oriented future – which he failed to do. He had phrases such as “the world is predicting that [this] is India’s chance to fly,” and that the speech was “a significant opportunity to indicate the direction and the pace of India’s economic policy.” He claimed it provided a “roadmap for accelerating growth, enhancing investment and passing on the benefit of the growth process to the common man, woman, youth and child,” but that was in the first couple of minutes of a 90-minute speech. After that, the theme got lost in the detail.

The government needs someone who could both inspire and carry conviction, standing between Modi with his powerful oratory and catch phrases and Jaitley’s lawyerly precision. This was done by Manmohan Singh when he was a reforming finance minister in the early 1990s, and to some extent it was also done by Palaniappan Chidambaram, the last finance minister.

Comment on the budget so far has been bogged down in businessmen’s inevitable (given that corporate tax is being reduced) applause for what Jaitley has done, and the opposition’s insistence that the budget is “anti-poor” and “pro-corporate” – corporate being a dirty word because businessmen are easily cast as crony capitalists bent on seeking favors from the government.

A BJP spokesman tried to correct that on television after the budget speech when he said, probably accurately, that “we are not pro -corporate but pro-enterprise.” In a similar vein, Jaitley told the parliamentary opposition two days earlier in a speech on the government’s controversial Land Bill: “Don’t create an environment in the country in which infrastructure and industry become bad words.”

This illustrates the left-right divide in Indian politics at a time when the opposition, led by the Gandhi family’s leftward leaning Congress Party, plays the pro-poor card to challenge the government, even though that delays what the country needs – strong economic growth and a revival of development projects. (The Congress leadership has been hit by Rahul Gandhi, party president Sonia’s son and heir-apparent, vanishing on a two week “sabbatical” just as the parliamentary budget session began “to reflect on recent events and the future course of the party’’.)

Land Bill

The Land Bill is currently the main left-right battleground, with the BJP trying to reduce the crippling impact of the last government’s legislative restrictions on the use of agricultural and other rural land for industrial and infrastructure projects. Several Congress politicians opposed these restrictions when they were being drawn up, but are now opposing the BJP doing what they had wanted their own party to do a year or so ago.

Jaitley’s speech is being criticized for not containing sufficiently firm plans. Notable here was the creation of an “expert committee” to design a “pre-existing regulatory mechanism” that would remove the multiple permissions needed for new investments and projects so that new businesses could be created “in accordance with publicly stated guidelines and criteria” instead of the current myriad of regulations. Since Modi was elected to introduce just this sort of reform, it is puzzling why it has taken the government nine months to set up a committee – unless it has decided that the task is virtually impossible, so a committee is the best way to buy time.

Black money

Also controversial is a plan to tackle black money stored abroad to evade tax with legislation that will include 10 years imprisonment for those found guilty. The BJP pledged during the general election campaign to bring back to India billions of dollars stored illegally abroad. The government has found that harder to organize than it expected, and Jaitley’s measure shows the government is taking some action. However the move is being criticized by businessmen who say it will lead to officials extorting bribes from those involved.

Overall the budget needs to be seen in the context of other events on the economy in the past week. On Feb. 24, the government accepted a finance commission proposal to increase to 42 percent (from under a third) the share of tax collections that are handed over to the states to spend on their development and aid schemes. Together with other grants, the states will now receive total of 62 percent of all taxes, which is in line with the government’s aim to encourage initiatives in the states. Jaitley has controversially made consequential cuts in some national schemes, which led to complaints that his budget was “anti-poor.”

On February 26, railway minister Suresh Prabhu presented the annual railway budget . This did not include the usual cuts in fares and politically inspired uneconomic new railway services, but instead proposed a 50 percent increase in investment to $137bn in railway infrastructure as part of a five year plan to boost efficiency and safety.

Taken together, this all shows that the government is beginning the changes that it promised during the election. It did not however do enough is its first nine months when it had the authority of a new government and it now faces a united and invigorated parliamentary opposition and an increasingly skeptical electorate.

John Elliott is Asia Sentinel’s Delhi correspondent. He blogs at Riding the Elephant,which can be found at the bottom right of Asia Sentinel’s home page