Chuck those fetters

Chuck those fetters

Nirmala Sitharaman’s first budget should provide a 5-year road map to transform India.

Nirmala Sitharaman will make history on Friday as the first full-time woman finance minister to present a Union Budget. It is not the best of times for a maiden budget speech. Each passing day throws up more information on a pronounced slowdown in economic activity. Now, it’s not just a contraction in automobile sales, even the overall tax collection in 2018-19 is lower than the forecasts of the interim budget in February. Monetary policy began easing a while ago to combat the slowdown. It’s now government’s turn to come up with solutions.

Fiscal policy will have to complement monetary policy. India’s aggregate fiscal consolidation has not been noteworthy in the last few years. This precludes the possibility of a stimulus through new spending programmes, financed by either more taxes or higher borrowings. Yet, the government will have to bear the primary responsibility for investment in an economy where private activity is lacklustre. One way out is through a sensible privatisation programme. To start with, a successful sale of Air India will not only generate resources, it will also have a positive impact on sentiment.

The budget also needs to lay out a road map on direct tax policy for the remainder of NDA’s term. The US-China trade war offers an opportunity to attract new investment. One ingredient is a tax regime that is both stable and inter nationally competitive in terms of rates. A compelling need for it is that India can no longer be said to be challenged by a cyclical slowdown. The challenges are visibly structural in nature – the impetus from post-1991 reforms is over.

Structural challenges now need to be addressed in conjunction with states. They include reform of factor markets such as land and labour where states exercise significant control. Cooperative federalism will also have to provide the base for solutions to deal with looming ecological challenges such as declining availability of water. One way the budget can contribute to federalism is by avoiding new centrally sponsored schemes which compress a state’s fiscal autonomy. All these solutions cannot come in the first budget. Yet what the first budget can do is ride on NDA’s sweeping political mandate to imagine an India without self-imposed economic fetters. Since NDA loses no opportunity to berate Nehru’s legacy, it should be bold enough to deviate from the stale ‘Nehruvian consensus’ that holds down Indian growth.