It is Budget time again and there are expectations galore. This is the last full-year Budget before the government goes into election mode and the last opportunity to be reform-oriented. Indeed, reforms need not be confined to the Budget and can be undertaken throughout the year. Moreover, the Union Budget cannot deal with the entire economy as over 58% of the total public spending is done at the state level. Nevertheless, the Union Budget is important as it signals policy directions.

Even in normal times, given the low tax-GDP ratio and competing demands by various sectors, budget making is difficult. However, this year, the challenges are formidable as the Finance Minister has to ensure the macro balance and yet loosen the purse strings to revive the economy. The quick estimate of GDP for 2017-18 at 6.5% is lower than the 7.1% recorded in the previous year, and the Gross Value Added (GVA) is also estimated lower at 6.1% as compared to 6.6%. The estimated growth in the manufacturing sector at 4.6% is lower than the previous year's 7.9% by 3.3%. The gross domestic capital formation has continued its secular decline and is estimated at 26.4% in current prices as compared to 27.1% last fiscal. The corporate lending in 2016-17 at 5% was the lowest in 60 years, and it has not picked up much since. In addition, there are concerns about farm distress and the inability to generate 9-10 million jobs required to absorb the workforce entering the labour market every year.

The major challenge that the Finance Minister is faced with is on fiscal discipline. There are indications that there will be a slippage in the fiscal deficit, budgeted at 3.2% for 2017-18, due to lower indirect tax collections post-GST launch, shortfalls in spectrum fees and charges and dividends from public sector banks, including the RBI. More importantly, it is hoped that the government will reiterate its commitment to contain the deficit at 3% as per the adjustment path indicated in the medium-term fiscal plan. With crude oil prices on the rise and the US Federal Reserve expected to increase interest rates, a high fiscal deficit could lead to higher capital outflow, higher current account deficit and inflation.

At a broader level, it is important for the government to restore the credibility of the Budget. Unrealistic forecasting of revenues has been a bane, and this adversely impacts the Budget implementation not only at the Union but also at the state level as 42% of the divisible pool is transferred to them. The government has to take a view on the report of the Fiscal Review Committee, which has recommended that fiscal deficit will have to be contained at 2.5% by 2022. To restore the credibility of the Budget, the Finance Minister could announce a Fiscal Council, appointed by Parliament and reporting to it as recommended by the Fourteenth Finance Commission. The Fiscal Council could report to Parliament on the realism of the Budget forecasts, monitor the fiscal deficit of the Centre and estimate the cost of new announcements/programmes to make the system more transparent and accountable. Although this may not be a silver bullet to ensure responsible fiscal behaviour, it could help to enhance checks and balances.

Revival of the investment climate will, hopefully, be on the top of the agenda. This requires enhanced public investment and revival of the climate for the increase in private investment. With Pay Commission commitments largely over, the government should rationalise subsidies and transfers to release funds for capital investment. The Indian Railways seems to be thinking of monetising its land for investment and this could be done systematically by other departments and enterprises. It is hoped that the GST revenues will stabilise during the year, but quite likely income tax revenues could show a healthy growth due to the possibility of cross-checking GST and income tax returns. After the amendments to the Mauritius treaty, it is time to redefine the 'long term' and make capital gains neutral between different financial assets. There is no reason to exempt any financial instrument, including long-term capital gains from equity-based funds. The time is also ripe to get rid of securities and commodities transaction taxes, rationalise the tax preferences and reduce the rate of corporate tax to 25% as was promised in the 2015-16 Budget. These measures will substantially increase the revenues. On personal income tax, the changes are likely to be nominal and much will perhaps be reserved for a time closer to general elections next year.

The most important ways to increase resources for investment is through strategic disinvestment. The NITI Aayog has done considerable work in listing the eligible entities. The decision on the implementation of Kelkar Committee recommendations on PPP and the announcement of governance reforms in public sector banks are the other measures needed. Hopefully, with bank recapitalisation plans and effective implementation of the bankruptcy law and functioning of NCLT, we will see improvement in corporate lending during the year. Addressing the issue of farm distress will require stabilising prices for farm products. The need of the hour is to phase out the subsidies and use the funds to invest in storage, marketing and processing infrastructure, besides making farm insurance much more effective. Of course, agriculture is a state subject and much needs to be done by them. The Union Budget can only provide direction.

(The writer was a Member of the Fourteenth Finance Commission. Presently, he is an Emeritus Professor, National Institute of Public Finance and Policy)