Spadework for a reboot

The Economic Survey suggests the government is keen to lay out a medium-term fiscal consolidation plan. Since 2007-08, the fiscal deficit has widened considerably and though the headline fiscal deficit targets were met in recent years, mostly due to spending cuts, the fundamental improvement in fiscal health was missing. The spending cuts, often in capital expenditure, of recent years are likely to have had negative longer-term side effects. I think the government could adopt a different approach. A clear forecast for a more realistic path for fiscal consolidation could be more effective than "achieving" a lower headline fiscal deficit by spending cuts, given the lingering weakness in the economy. Accordingly, if the government raises the fiscal deficit target for 2014-15 (say, to 4.5 per cent) and offers a credible medium-term roadmap (say, over three years), I feel this would be well-received by the markets and by external observers such as the credit rating agencies. I, however, do not expect any material overshooting of market borrowing plans in the Budget.

India's fiscal dynamics is typically pro-cyclical. Thus, an uptick in growth can eventually boost revenue buoyancy and help longer-term fiscal health the most. Accordingly, I would expect the immediate policy thrusts in three major areas: 1) Offering more support for manufacturing activity; 2) a more systematic and time-bound process to approve infrastructure projects to address supply-side concerns; and 3) laying out a timeline on tax reforms, including the much-discussed GST, in particular.

Apart from addressing near-term issues, I would expect the government to outline a timetable for liberalising more sectors for foreign investment, and make proposals to implement both labour law reforms and subsidy rationalisation, particularly for cooking gas/kerosene over the coming months. Tax rates, such as corporate and personal income tax, are on the higher side in India compared with most of its peer economies, while the breadth of its tax net is relatively narrow. Over the longer term, there might be a preference to reduce marginal tax rates, along with widening the tax net. However, it might be unfair to expect any big change in tax rates in this Budget.

Siddhartha Sanyal
Chief India Economist, Barclays