On 1 July, if all goes to plan, the country would have formally transitioned to the goods and services tax (GST) regime. By the sheer path-breaking nature of the tax reform initiative, which for the first time economically unifies the country, GST will have a special place in India’s modern economic history. What about Budget 2017? For several reasons it, too, is a watershed moment.
Firstly, advancing the schedule is more than just a break with a colonial hangover. It actually gives an administration a full year to spend the money it has earmarked for various projects; of course it also means more work for our bureaucrats, who have long been used to a nine-month spending cycle.
Second, there is a fundamental reset to the nomenclature—plan and non-plan have been abandoned and instead replaced with revenue and capital expenditure. But this is much more than just a change in classification. The idea is to move to an outcome-oriented approach and the finance minister has announced that the Niti Aayog will monitor it.
Third, this budget is the likely template for the future. Given that GST rollout is imminent, the finance minister wisely chose not to tinker with the indirect tax rates. And most don’t realise, but the movement in indirect tax rates and slabs inevitably generate the news and hype about budgets; which is probably why most people came away feeling underwhelmed.
In that sense this year’s budget, sans tax rate changes, was sanitized to begin with. It focused on spending and listing out the government’s priorities within the fiscal sector: social sector with a particular accent on the poorest of the poor, farmers, rural sector and roads.
Going forward, this will be the likely contour of future budgets. Not a bad thing really. After all it is time Parliament and the country focused on government spending—so far it has been in the news mostly for the wrong reasons, like misappropriation of money.
Fourth, this budget has renewed the new-found focus on agriculture; especially the emerging agriculture economy, which includes new alternatives like horticulture, dairying and so on—all of which are vulnerable to market volatility. The Indian farmer is probably the biggest risk-taker in India right now, but the least rewarded; they are a proud people who don’t want largesse (as some commentators seem to think). By promising the introduction of derivatives as a hedge against price volatility and delinking perishables from the shackles of the Agricultural Produce Marketing Committee, the budget has set the ball rolling in integrating farms into the market economy (read that as the formal economy, with its attendant advantages).
Fifth, and finally, this budget marks the flowering of the federation. The 14th Finance Commission set the stage for the govt. to walk the talk on cooperative federalism, and the last two budget did precisely that; GST is just another example of how the centre and states are beginning to do things in tandem. And with the shift to outcome-based budgeting (as explained earlier) the allocations of public money has moved from departments to stakeholders—like states and the third tier, panchayats and urban local bodies (though this is very inadequate at the moment).
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.