Budget: Big moves in key sectors

There is a push for infrastructure, rationalising taxes, attracting foreign investments, etc.

The Union budget 2015 is a vision document for the economy over the next several years. It is robust in its pronouncements for several sectors of the Indian economy and has been creative in unprecedented ways. There is a significant push for infra-structure, rationalising taxes including reduction in corporate tax, improving bankruptcy laws, attracting foreign investments, skilling of workforce and much more.

These moves are being hailed unequivocally by corporate India. But beyond these measures, and from a larger economy point of view, there are five specifically bold moves that stand out. These include an effort to streamline subsidies within the country, the greater role for state governments, a definitive push to monetise non-financial savings in the economy, shifting the balance of regulatory powers away from RBI towards SEBI and a decisive and determined move to curb black money. These specific reforms will have long term structural impacts on the health of the Indian economy and politics.

Prime Minister Narendra Modi has often advocated the concept of Team India comprising of state chief ministers, headed by the PM. True to that spirit, the move to devolve greater fiscal autonomy to states will lead to a stronger Indian federal structure. Given the variations in capacity and performance across states, we have seen serious moral hazard problems.

State governments that performed poorly were often cross subsidised in the hope that they will catch up, which seldom happened. The current move of devolving greater fiscal responsibility to states is therefore incentive compatible – states have to use resources wisely and cannot pass on the blame to the Centre.

In same vein, we are also likely to witness a greater divergence between states in performance over next several years. There are serious deficits in governance capacity in the laggard states. While they have the resources, can they put these to the best use is an open question, the answer to which lie in local politics.  Poor performers will be forced by the local electorate to build capacities and catch up with the better performing states.

The second big move through Budget announcements is to streamline the subsidy schemes running in the country. There are numerous schemes, with significant leakages. If the economy gradually moves towards direct cash transfers using the PMJDY, and facilitated by the Aadhaar technology, it will be a major long term gain for the beneficiaries. This will also lead to huge positive externalities for the local economies.

This move of streamlining various subsidy schemes and brining them within the banking system is also necessary from an accounting point of view. It will be possible to finally get an idea as to how much cumulative subsidy reaches the final beneficiary. Currently, this is highly fragmented and therefore, an impossible exercise. 

Monetising gold, welcome

Lastly, the move to monetise gold should be commended. This is a smart plan because it brings a large amount of household savings into the financial sector. While Indians are notorious for high savings rate, we hold savings in highly illiquid assets such as gold and land. Indians hold about 11 per cent of the world’s gold. This scheme will allow depositors to earn interest, and also help jewellers’ access credit.  So, it unlocks several potential sources of investment.

The budget announcements have also revealed a shift in the balance of regulatory power away from RBI towards SEBI by merging it with the Forward Markets Commission. The government also wants to set up its own debt management agency, thereby moving it away from the RBI. This measure could be a double edged sword and its true implications on fiscal deficit can only be judged over time.

The most determined push in this Budget is to curtail the black money plague in the economy. Besides announcing rigorous imprisonment and penalty for concealment of assets and income abroad (though curiously not domestic!) there is an attempt to reduce cash transactions and move towards plastic money through credit and debit cards. The Finance Bill sets a cash limit for large transactions and makes PAN mandatory.

The one sore point in the Budget is the overemphasis on health insurance as a means of financing healthcare. As the experience of several economies have shown, excessive  reliance on health insurance will lead to sever over utilisation and thereby pushing healthcare costs too high.

The US is reeling under that pressure and struggling to break through. India must experiment with better health financing methods such as health savings accounts which has proved successful in many countries. The main benefit is that health savings do not lead to over utilisation of resources and therefore, do not put the pressure on costs as insurance does.

Overall, the Modi government has pushed in the right direction and clarified their stand on several key areas. We have to now wait for the GST to be implemented from next year which will unleash huge gains for the Indian economy.

(The writer is Fellow, Development Economics, Brookings Institution India Center. All opinions are of the writer)