Modi has to take lessons from Delhi verdict
By S. Sethuraman
Mr Arvind Kejriwal’s spectacular electoral conquest of Delhi, at the centre of the Modi Government, outshines, albeit over a smaller but politically sensitive area, the way Mr Narendra Modi managed to enthrone himself as Prime Minister of India but with just 31 per cent of an 800-million electorate backing him in May last. Mr Kejriwal’s AAP ,making a clean sweep of the national capital region with 67 out of 70 Assembly seats, has politically hurt Mr Modi and has also raised new hopes for weakened opposition forces in the country to galvanise themselves for more state battles to come.
On the economic front, Mr Modi’s bold assertions of development with “achhe din” in store, are still mired in ambiguity with little to show on ground in the first eight and half months, except demonstrable subsidy cuts helped by a precipitous fall in global oil prices. First signs of disenchantment with governance are discernible in Delhi poll.
The country and the world now await his Government’s first full year budget (2015-16) to test how credibly it hopes to implement all the structural reforms and fiscal policies it has enunciated with fanfare. For the most part, his government has traversed the same ground as, and embracing policies of, the UPA which the ruling BJP had fiercely denounced before and during the Lok Sabha poll campaign and has since rehashed more or less its flagship programmes with a Modi imprint.
The Finance Minister Mr Arun Jaitley’s Budget on February 28, aimed at moving India to high-growth trajectory, would be intensely scrutinized by foreign investors and countries where Mr Modi courted investments with apparent success. But response in the current year either to raised FDI caps or to steps said to have been taken toward doing business easier in the current year has been negligible. Sentiment and confidence by themselves are not enough.
In the Modi era, the “development” – designed more as a leap to modernisation whatever it means to the millions at the bottom – has largely been conditioned on substantial inflows of foreign capital and investments, even as there has been little revival of domestic corporate investment. The Modi Government’s faith in faster liberalisation for a country wedded to a globalised economy is unquestioned but the ability to deliver on promises, even seemingly feasible, lacks credibility.
This is because of legislative deadlock and difficulties cited by stake-holders for the reforms initiated – insurance, land acquisition for projects, labour, mining etc – and the huge backlog in clearing infrastructure bottlenecks. Additionally, the Modi Government has also been subjected to criticisms for its “dangerous silence”, as the New York Times put it, over religious intolerance with attacks on minorities including ransacking of churches and mass conversions.
As the Modi Government enters its second year, the economy is seemingly moving out of its slowed growth pace of last two years – though new official statistical data project higher growths in stark contrast to what was assumed, however sceptical economists and experts are over the new numbers, which point to a 6.9 per cent growth in 2013/14 as against the earlier 4.7 per cent.
With a base change for calculation to 2011-12, the Central Statistical Organisation has projected 7.4 per cent in the current fiscal ending March 2015 and already this has been seized on to claim India is on par with and overtaking China’s growth. (India’s 2-trillion dollar economy at best is far down China’s 9.5 trillion). The pre-Budget Economic Survey is expected to provide a reliable picture of growth trends of the past decade.
Mr. Jaitley has been hard at work to keep down the fiscal deficit in 2014-15 at 4.1 per cent of GDP he had promised, and his task has been rendered more difficult to keep the deficit ratio to the now revised growth estimates. On the other hand, it would be helpful for him to aim a growth target of 7.5 to 8 per cent growth (12 to 13 per cent at current prices) for next fiscal so as to budget for higher tax revenues and enhanced tax-GDP ratio.
A larger mobilisation of additional revenues would nevertheless become inevitable in the new fiscal year to measure up to the challenges including a further reduction in fiscal deficit, a larger devolution of central revenues to states under 14th Finance Commission award (reportedly 50 per cent) and a certain order of public investment in infrastructure – roads, power, transport and communications sectors.
Whatever the tax changes and concessions, pending the major GST reform from April 2016, adhering to the earlier road map on fiscal consolidation to limit deficit to 3 per cent by 2016-17 is essential to staying on course and securing India’s sovereign credit rating.
The Budget is expected to implement the recommendations of the Expenditure Reforms Commission for more subsidy reductions and rearranging the expenditure pattern. For long, widening the base of direct tax and also spreading the net wider for commodities and services has been invoked to augment revenue and these could be part of the forthcoming budget.
Boosting savings and investment are normally a function of budgets. How far Mr Jaitley succeeds in this effort remains to be seen. Domestic savings rate had declined in recent years, with elevated inflation for over five years, and the budget should set the tone for accretion to savings. At the same time, fiscal and other incentives besides easing of regulatory and other barriers are looked for by India INC, which holds the Modi Government in great admiration, in order to enlarge business investments.
Direct tax reform is bound to figure in the budget, with perhaps marginal revisions in exemption limits and tax slabs and with assurance of stability. Mr Jaitley is opposed to what he called “tax terrorism” and Government may clarify, with some amendments, tax applicability environs for foreign firms in the light of recent High Court judgements in favour of Vodafone, Shell and other firms and Government’s decision not to appeal against them.
Domestic business is resistant to any hikes in excise duty though government would be moving toward the usual “streamlining” or “rationalisation” and in this case also to facilitate GST introduction next year. A general hike in excise or service taxes cannot be ruled out at this juncture and/or cesses may come to the rescue. Overall, investment boosts and financing mechanisms for infrastructure will be at the top of budget priorities, especially in power, energy, railways and ports, according to the Finance Minister himself. The Budget will specifically focus on the “Make in India” drive for manufacturing and jobs.
The Budget will be set against a background, still murky in several respects with stunted recovery in industrial output and supply constraints but seemingly holding promise of an economy moving toward its potential growth as reforms get into stride. Externally, despite lower oil prices which may begin a rebound in the latter part of 2015, the global economy post-crisis has not recovered as projected for 2014 and another difficult year is ahead unless G-20 nations act in concert to boost growth and implement structural reforms.
Divergences across the advanced nations – steady growth in USA and slowdown and deflation hovering over EU and Japan – have also adversely affected trade flows. Global market turmoils would pose risks with China’s economy slowing, trade tumbling and concerns growing over its bank credit expansion and likely US Fed moves to raise interest rates in the latter half of this year. Currency and exchange markets would get affected as the dollar keeps strengthening.
India, however, is better cushioned externally with portfolio flows surging in recent months to raise the level of reserves to above US$ 320 billion and the current account deficit, despite a slowdown in trade turnover, is easily manageable at present within 2 per cent of GDP. (IPA Service)