Column: Budget should convey that state will shrink.
By Derek Scissors
WASHINGTON, DC: The Indian budget is due Saturday. It has been long awaited as Prime Minister Narendra Modi’s first full budget, and thus a signal of his economic program. What the budget needs to convey clearly is that the Indian state will shrink, in multiple ways. That would separate Modi from his predecessors and create the conditions for strong, durable economic growth.
Unfortunately, the budget has to some extent been overshadowed by recent national accounts revisions. Recent GDP growth has been revised sharply upward and now clashes with other indicators showing weak expansion. If GDP growth is truly hovering near or above 7 percent, it becomes more difficult to justify the large budget deficit.
In this file photo, dated July 20, 2014, India’s Minister for Finance Arun Jaitley is seen departing from North Block to Parliament House, along with Minister of State for Commerce and Industry Nirmala Sitharaman, to present the General Budget 2014-15. (Photo credit: Press Information Bureau).
The way to reduce this deficit is not to make unjustified assumptions about growth or hope tax revenue will soon rise. Instead, spending must be cut, and in a lasting way.
The decline in global energy prices allows India to reduce energy subsidies but this is just good luck, not good policy. A transformative budget terminates most energy subsidies, wiping out the bureaucracy supporting them so they can’t be easily restarted.
There should be an analogous step on the revenue side. True privatization has been missing from the Modi agenda. Selling more small stakes in public enterprises is not an impressive step, either in terms of budget health or economic health.
Instead, some firms should be designated for full privatization, especially while the market is strong and complaints of undervalued state assets are less reasonable. Ideally, some state banks would be sold off first, reducing the greatly excessive state role in the banking system which promotes financial waste.
The single biggest budget issue is the roll-out of a unified goods and services tax (GST). To its credit, the current government has pushed for a sound GST. However, this was before the recent election setback in Delhi. If the budget reveals continued strong support for a broad and simple GST this year, it will be an encouraging sign for both short- and long-term reform.
The Land Acquisition Act is not part of the budget proper but it is a pressing national issue and linked to tax revenue. There is populist opposition to revising the Act and Finance Minister Jaitley’s budget statement should be used to confirm that the Act is fatally flawed and must be changed.
(The ultimate goal should be to let land-owners decide whether and at what price to sell land, rather than the government mandating sales and fixing prices, but full private ownership of rural land remains a radical concept for India.)
Similarly, the budget should be used to fully endorse ongoing efforts by Indian states to reform self-destructive labor laws.
One of the oddities of the large GDP revision is that, if accurate, India’s GDP growth pace has matched China’s and could exceed it. This has long been an Indian obsession yet no one had any idea it might be happening.
The reason for the discordance is that GDP growth is manifestly not the key to prosperity – perhaps the clearest illustration is world-leading China adding $20 trillion in debt the past seven years. The key to prosperity is the sound, sustainable policy that India and the world expect from the Modi government, policy which should be made clear in this budget.
(Derek M. Scissors is a Resident Scholar at the American Enterprise Institute in Washington, DC.)