How Jaitley will deal with challenges in new budget

Any Indian annual budget for its 1.2 billion people is a major event, but when Finance Minister Arun Jaitley rose to speak on February 1 it was in the wake of the withdrawal of 86 percent of India's cash and days before voting began in five state elections.

Guiding so vast an economy is difficult enough, but Jaitley also faced a political challenge. For two months the sudden demonetisation had disrupted the economy. Much inconvenience and cost had been inflicted on innumerable voters, and yet these state elections are vital for Prime Minister Narendra Modi and the BJP, especially those in Punjab and Uttar Pradesh. How well has he coped with this dilemma?

For the economy his guiding principle has been 'fiscal prudence'. Further cutting the budget deficit to 3 percent of GDP has been delayed a year in order to reduce taxes for poorer Indians and small companies while allocating nearly $60 billion to infrastructure investment. The disruptive cash shortage has at last been overcome and economic growth is forecast to rise to 7.6 percent (higher than China).

Jaitley noted that India was 'largely a tax noncompliant society' but revenue had risen 17 percent and huge sums that had been hoarded as cash had now been deposited in bank accounts and would be subject to investigation by tax officials. The inflow of cash had eased capital shortages, so opening the way to increased bank loans and lower bank rates.

More generally Jaitley claimed a 'huge' increase in cashless transactions by mobile phone. Combined with the great expansion of bank accounts and nearly total distribution of biometric identity cards, these cashless transactions have now opened the way to bypassing the wastage and corruption of traditional bureaucracy while greatly contributing to transparency and accountability.

A good step in this area is the 'payment regulatory body' which is a clear move to regulate cyber security in the digital payment scenario by strengthening the digital infrastructure. Furthermore, the budget is trying to reinforce 'negotiable instrument act' to recover loans.

The political calculations behind the budget were also very clear. Fuel, food and fertiliser subsidies would remain and, besides infrastructure of all kinds, the focus of increased spending was rural areas and poverty, with the aims of doubling farmers' incomes in five years and completing rural electrification by 2019. New schemes would provide skills training linked to wider job opportunities in rural areas. While taxes had been cut for small companies and the lower middle class they would be increased by an income tax surcharge for the richest.

In Uttar Pradesh, where seven rounds of voting will be needed to cope with the size of the electorate, power is held by the Samajwadi Party with 229 seats, well ahead of the BSP's 79, BJP's 41 and Congress's 21. Caste and religious voting and combinations have been the traditional norm in UP politics, but even in backward and poor UP, a young generation and the information revolution are generating change. Many people there, as elsewhere in India, however, personally hit by the suddenness of demonetisation, have been galvanised by its sheer drama and as justified as a drive against the corruption of the rich and powerful.

If Modi can strengthen the BJP in UP, midway through his term of office, it would be a major political advance, even if in Punjab the BJP were to lose ground to the challenge from Arvind Kejriwal's AAP.

After decades of very rapid growth, fuelled by a very high savings rate and based on exports, China's economy is still very much bigger than that of India. But that growth is slowing as emphasis switches to services and domestic demand. Exports have recently started to fall and higher wages are encouraging investment in labour intensive industries like textiles and garments to lower cost countries like Bangladesh and Vietnam. China's population also exceeds that of India but it is quickly ageing, as is that of Japan. India's population will overtake China's by 2020 and its problem is more to provide productive employment for its rapidly expanding young workforce. That problem is multi facetted. It requires not only a transformation of physical infrastructure, roads, railways, ports etc, but better quality education and training at all social levels plus expanded health services, including family planning.

Nongovernmental organisations, community based organisations and private initiatives can make an important contribution but they will be inadequate without dynamism, efficiency and accountability from India's vast bureaucracy.

Like his predecessor Manmohan Singh, Prime Minister Modi recognises this. A growth rate of 7.6 percent now provides more resources for infrastructure and the budget has usefully increased spending on health and market based training, although still not on the scale needed. The new identity cards and direct cash transfers should cut waste and corruption. Besides asset sales of state-owned companies (of which 71 have been working at a loss for the last five years) and expanding the tax base, there are even projected moves by Modi to try to shake up the antique Indian administration by weeding out lazy, corrupt bureaucrats and promoting merit and commitment – a real challenge.  

Finally, the budget is filled with good plans, but it has to be implemented by the people of India and the delivery of the initiatives and reforms have to be transparent and accountable. The human capital employed by the government and other sectors of the socio-economic structures have to be dedicated, honest and efficient enough to make the budget a success. This remains to be seen.      

The writer is a former ambassador.