Onwards to Viksit Bharat

Initiating policy reforms on the priorities outlined in the Budget without delay is crucial for India's developmental goal

After the noise and euphoria following the Union Budget presentation, it is now time to take a filtered look at the medium and long-term strategies and policy interventions needed to make India a developed country.  According to the World Bank’s definition, a developed country in fiscal 2025 has a per capita gross national income (GNI) of $14,005.  India’s GNI is estimated at $2,600, implying that to leapfrog into the developed country club, India must multiply its per capita GNI by 5.3 times.  This translates into an average annual growth of about 7.5 per cent in per capita GNI or about 9 per cent per year in overall GNI for the next 23 years.

Moreover, India’s population is likely to stabilise only in 2045, and the Economic Survey estimates that about 8 million new jobs will have to be created in the non-farm sector every year until 2030.  In addition to accelerating growth and creating employment avenues, India is a signatory to the Paris Agreement to make a transition to Net Zero by 2070, involving massive investments to phase out fossil fuels.

Accelerating growth requires the economy to enhance both investments and productivity.  At the present incremental capital-output ratio of 5, the investment rate must increase to 40 per cent of gross domestic product (GDP) from the prevailing 34 per cent. Any shortfall will have to  be compensated by increasing productivity.  Therefore, the application of new technologies and imparting greater education and skills to the workforce are equally important.  These are difficult challenges that require redefining priorities and initiating policy reforms without delay.  

The Union Budget presented on July 23 attempts to give broad directions by defining the government’s priorities in nine areas.  These include improving agricultural productivity and resilience, employment and skilling, human resource development, infrastructure, industry and services, urban development, innovation, and next-generation reforms.  While these priorities are comprehensive, what is important is formulating and implementing specific reform measures in each of these areas. A critical evaluation of these priorities and policy signals can help steer the right path and make necessary course corrections. 

The most important measure needed to accelerate investment and productivity is to reduce the cost of borrowing for businesses and to generate generalised externalities.  Fiscal consolidation and enhancing capital expenditures have been attempted since 2021-22.  Reducing the fiscal deficit to 4.5 per cent of GDP next year should not be difficult, but to get back to the original targets of 3 per cent and the Union government’s debt target of 40 per cent of GDP is necessary to leave adequate borrowing space for the private sector.  This is particularly important when the household sector’s financial savings have declined to 5.3 per cent.  Therefore, the government must rework the medium-term fiscal plan targets and present them in the next budget, which is just six months away.  Equally important is the need to make a calibrated reduction in the statutory liquidity ratio to enhance the efficiency of the financial sector and bring greater market discipline to government borrowing. 

Greater focus on infrastructure investment by enhancing capital expenditure will have to continue at both Union and state levels.  This would require considerable rationalisation of revenue expenditures.  At the Union level, the low-hanging fruits in phasing out revenue expenditure have been exhausted and further reduction in food and fertiliser subsidies will require major reforms in the farm sector, which will have to be carried out by both the Centre and states.  Substantial increases in expenditures on education, skilling, and healthcare will also be required.

On the positive side, tax buoyancy is likely to continue, and greater use of technology should help improve it further.  The rationalisation of personal income tax by scrapping the old scheme and reducing the number of tax rates to three in the next budget will make the system simpler.  The tax bias against foreign companies has been reduced to 35 per cent in this Budget and it would be reasonable to tax them on a par with domestic companies at 30 per cent.  There is an urgent need to rationalise the goods and services tax (GST) by restricting the exemptions to perishables, expanding the base to items hitherto excluded, reducing the rate categories to two, and keeping the threshold at a reasonably high level to focus on “whales rather than minnows”.

Factor-market reforms, particularly the implementation of labour reforms, are critical to increasing employment and enhancing productivity.  Micro, small and medium enterprises (MSMEs) must become bigger, better, and embrace modern technology to become more competitive. Restrictive labour laws are an important constraint on their ability to scale up.  The Union government has already reduced 29 labour laws into four codes, and it is important to implement them. Since labour is on the Concurrent list, the states also have an important role in this. It remains to be seen how effective the incentives offered in this year’s Budget will be.  These include paying one month's salary, up to  Rs 15,000, for first-time employees registering with the Employees’ Provident Fund Organisation (EPFO), incentives linked to the scale of hiring for both employees and employers over the first four years of new hiring, and reimbursing employers their contributions to the EPFO, up to Rs 3,000 per month, for new workers.  The same is the case with the internship proposal in the top 500 companies, which involves paying Rs 5,000 for 12 months.  These proposals may also have significant redundancy.

Another major area of reform is reversing the protectionist trend.  Reduction in the tariffs of some commodities gives a positive signal for a more open policy.  Hopefully, the promised review of the tariff rates in the next six months will help to reduce and unify the rates in a time-bound manner to make Indian manufacturing competitive.  Widening and deepening openness also requires the government to expedite more bilateral trade agreements.  Phasing out fossil fuels and moving towards green energy are also factors adding to the downside risks.  Much of the financing needed for this and to enhance capital expenditure will have to come from the government vacating the competing areas with the private sector and monetising these assets.

 Finally, the reforms are like walking on two legs.  Both the Centre and states should partake in them with single-minded focus and that requires harmony, dialogues, coordination, and stronger federalism.

The writer was a member of the Fourteenth Finance Commission and  director of the National Institute of Public Finance and Policy, New Delhi.  The views are personal