Finance Minister P Chidambaram must be given credit for a sensible Budget under the most challenging economic circumstances. The economy is not in a crisis as it was in 1991. But there are signs pointing towards it. There is no widespread acceptance of a reform programme as in 1991. We had no option then but to bite the bullet. There is now no need for multilateral borrowings with attached conditionalities. Yet the economy is in an inexorable downturn with all the vital signs giving warning signals unsustainable fiscal and current account deficits, declining growth, high inflation, and loss of investor confidence, both domestic and foreign. This Budget also follows one that reversed foreign investor confidence on India.
There was an unrealistic expectation that the Budget would be a game-changer putting the economy back on the growth turnpike. It is a tall order for even the most able minister in the government. He has, by and large, lived up to the expectation of a top finance minister. He has courageously tackled the fiscal consolidation problem by keeping the deficit in check, and to some extent, helped reassure investors that India is still a good investment destination. He has managed to rein in the fiscal deficit to 5.2 per cent in 2012-13, and to target the projected 2013-14 deficit at 4.8 per cent. This is to be achieved through a carefully crafted tax and expenditure policy, which he clearly outlined. More importantly, he has restarted the Goods and Services Tax (GST) process after a lapse of several years.
But the Budget will not accelerate the economy to a high growth trajectory. As argued in my earlier piece in this paper, the problems are structural in nature. Unfortunately, neither the Planning Commission nor the Prime Ministers Economic Advisory Council has paid sufficient attention to these problems. Their pronouncements routinely provide assurances that the economic situation is on a temporary decline and that things will soon improve. There is no focus on the long-term structural issues that are mainly responsible for the downswing. The Budget is not the place to address these issues. The main instruments for inflation control are also monetary policy and supply-side management that are outside its purview. A sharp reduction in the fiscal deficit is all the finance minister can do to tame inflation. But he has control over three areas of restoration of growth through a fuller global integration at a time when the current account deficit is becoming unsustainable, and foreign direct investment (FDI) inflows are uncertain. These are tariff rationalisation, trade facilitation, and simplification of the indirect tax structure by fully implementing GST. The Budget, unfortunately, has only partially touched upon the third problem while ignoring the first two.
Average tariff levels need to be brought down still further, and transaction costs need to be drastically reduced along with other problems associated with doing business in India. The average tariff level in India is still over 14 per cent in comparison with less than 10 per cent in the Southeast Asian countries. This is hurting our exporters and discouraging potential exporters. The best option is to move to a low uniform tariff, as in Chile, and neutralise revenue loss by removing all exemptions. This will discourage lobbying, and make the system transparent. In a 2004 Economic and Political Weekly article, Pattnaik and I showed through detailed calculations that the revenue gains from such an initiative could directly help deserving losers (for example, life-saving drug importers).
Since Customs is a big player in trade facilitation, it definitely deserved full attention in the Budget. Unfortunately, it escaped the attention of every finance minister after Jaswant Singh highlighted it in his Interim 2004-2005 Budget speech. Transaction costs should be reduced through the complete implementation of the recommendations of the 2004 Working Group on Trade Facilitation (WGTF) that I chaired, and which was presented to Chidambaram. These have been implemented in a piecemeal manner and two key objectives are far from being achieved. Cargo dwell time in India is still calculated in weeks against hours elsewhere; and we require approvals from 29 different agencies before we can export. These are big stumbling blocks to our globalisation drive.
The key recommendations of the WGTF are:
To rely on a system based on trust with reliance on self-certification of importers, and ex-post audits, and minimal physical inspection;
Speedy clearance with full reliance of a state-of-the art risk management system;
Introduce full automation leading to a paperless system with minimum face-face-contacts and signatures;
Cargo dwell time being reduced to levels comparable to the best performers in Southeast Asia;
- Regular monitoring of cargo dwell times by a high-level inter-ministerial committee with the full attention of the Prime Minister who only could strike the right balance between trade facilitation and revenue considerations.
One was also expecting a move towards rationalisation of tax incentives and elimination of most tax exemptions. Tax expenditures are high in India with a plethora of exemptions and tax incentives. As the government seeks to enhance revenue collections, exemptions remain the biggest challenge in this process. These exemptions are the result of targeted lobbying, and in the era of coalition politics, have become tools of political expediency. Doing away with all but a few essential exemptions will send a strong message that the governments actions are not politically motivated, and that lobbying for exemptions will be a zero-sum game owing to the governments commitment to minimise such leakage from revenue collection. It is also high time the government realised that tax holidays and incentives are not motivators behind investment, including FDI. A good business environment, good infrastructure and logistics, and access to markets that allow economies of scale to develop over time are the critical factors for attracting investment.
These measures are not easy to include in a Budget just before the general elections in the following year. But such thinking is needed to transform the Indian economy to a major global player and help over 260 million people claw their way above the poverty line.
India is a large country. Its time we started thinking big, too.