Finance minister Arun Jaitley's presentation of the new government's first budget last year was widely considered underwhelming. Even though Prime Minister Narendra Modi's government had barely got a couple of months to put it together, many people were expecting some sort of broad vision that would shift the Indian economy. Instead, we got a budget full of little measures prompting academic Pratap Bhanu Mehta to label India under Modi as being a "trillion-dollar economy with a hundred crore mindset".
The response to this from the government and other commentators was predictable. They didn't have enough time, we were told. Wait till next year. That would be the first "real budget".
That time has now come and, for many, it will decide whether Modi will be known as transformational or simply timely. If there is to be a shift in the vision of the country's future, one would expect to at least see it enunciated in Saturday's speech, even if the implementation is left for later.
Creative incrementalism
Those expecting t he Economic Survey to prepare India for this big transformation that will be announced on Saturday are liable to be disappointed. First off, for Modi's more anti-Gandhi family, fiscally conservative fans, it can't be a good sign that the first two quotes in the Survey are of British economist John Maynard Keynes and India's first prime minister, Jawaharlal Nehru.
The next sign is even clearer. The survey, which is put together by the prime minister's chief economic adviser and prepares the foundation on which the Budget is built, says right off the bat that India can't implement Big Bang reforms right away.
"Big Bang reforms in robust democracies with multiple actors and institutions with the power to do, undo, and block, are the exception rather than the rule. India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse," the survey says, adding, "Big Bang reforms as conventionally understood are an unreasonable and infeasible standard for evaluating the government’s reform actions."
Instead, chief economic adviser Arvind Subramanian insists that to take advantage of the political opportunity created by Modi's arrival, the government needs to follow a "persistent, encompassing and creative incrementalism". Aside from a few bold moves aimed at signalling some actual change, such as ramping up investment, improving the tax policy environment and rationalising subsidies, Subramanian calls for incrementalism that accrues over time to result in Big Bang reforms. "That is the appropriate standard against which future reforms must be assessed," he writes.
Bold moves
So what are those bold moves that can complement this incrementalism? We've already heard about the Jan Dhan Yojana and Aadhar being used to plug leakages in welfare. We're almost tired of hearing about the Goods and Services Tax in addition to a few other tax moves that would improve the business environment. Slowly cutting away at the subsidy bill is also an expected move, as is accelerated disinvestment. The survey proposes a radical National Agriculture Market that would require unilateral action from the Centre if states are unwilling to unlock growth in that sector, but at the moment, with the political situation being where it is, that seems difficult.
That leaves us with two more suggestions: public investment to kick-start growth and de-centralisation. As it happens, the government has already kickstarted both of those things.
By accepting the Finance Commission's report, the Modi government has already begun the task of moving towards "cooperative federalism". The report called on the centre to increase the share of central taxes giving to states from 32% in the previous fiscal year to 42% this year. The survey says this makes "far-reaching changes" that will move the government towards greater fiscal federalism, conferring more fiscal autonomy on the states. It also calls on the government to expand the concept to cities and local bodies in the next policy cycle.
The other major point is public investment. Here the survey identifies the Indian Railways as having the potential to be a "locomotive of growth" for the economy and the Modi government's acceptance of this recommendation already came on Thursday, with the Rail Budget.
This saw the government announce a massive increase in the planned expenditure in the Indian Railways, a hike of more than 50%. A hefty portion of this will be coming from the central government. And this isn't just rail minister Suresh Prabhu pushing his department ahead of others. Subramanian, in the survey, makes the case that the Railways are India's best bet to spur the economy forward. According to the survey, every Re 1 put into the Indian Railways results in an increase of Rs 5 in economy-wide output.
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The response to this from the government and other commentators was predictable. They didn't have enough time, we were told. Wait till next year. That would be the first "real budget".
That time has now come and, for many, it will decide whether Modi will be known as transformational or simply timely. If there is to be a shift in the vision of the country's future, one would expect to at least see it enunciated in Saturday's speech, even if the implementation is left for later.
Creative incrementalism
Those expecting t he Economic Survey to prepare India for this big transformation that will be announced on Saturday are liable to be disappointed. First off, for Modi's more anti-Gandhi family, fiscally conservative fans, it can't be a good sign that the first two quotes in the Survey are of British economist John Maynard Keynes and India's first prime minister, Jawaharlal Nehru.
The next sign is even clearer. The survey, which is put together by the prime minister's chief economic adviser and prepares the foundation on which the Budget is built, says right off the bat that India can't implement Big Bang reforms right away.
"Big Bang reforms in robust democracies with multiple actors and institutions with the power to do, undo, and block, are the exception rather than the rule. India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse," the survey says, adding, "Big Bang reforms as conventionally understood are an unreasonable and infeasible standard for evaluating the government’s reform actions."
Instead, chief economic adviser Arvind Subramanian insists that to take advantage of the political opportunity created by Modi's arrival, the government needs to follow a "persistent, encompassing and creative incrementalism". Aside from a few bold moves aimed at signalling some actual change, such as ramping up investment, improving the tax policy environment and rationalising subsidies, Subramanian calls for incrementalism that accrues over time to result in Big Bang reforms. "That is the appropriate standard against which future reforms must be assessed," he writes.
Bold moves
So what are those bold moves that can complement this incrementalism? We've already heard about the Jan Dhan Yojana and Aadhar being used to plug leakages in welfare. We're almost tired of hearing about the Goods and Services Tax in addition to a few other tax moves that would improve the business environment. Slowly cutting away at the subsidy bill is also an expected move, as is accelerated disinvestment. The survey proposes a radical National Agriculture Market that would require unilateral action from the Centre if states are unwilling to unlock growth in that sector, but at the moment, with the political situation being where it is, that seems difficult.
That leaves us with two more suggestions: public investment to kick-start growth and de-centralisation. As it happens, the government has already kickstarted both of those things.
By accepting the Finance Commission's report, the Modi government has already begun the task of moving towards "cooperative federalism". The report called on the centre to increase the share of central taxes giving to states from 32% in the previous fiscal year to 42% this year. The survey says this makes "far-reaching changes" that will move the government towards greater fiscal federalism, conferring more fiscal autonomy on the states. It also calls on the government to expand the concept to cities and local bodies in the next policy cycle.
The other major point is public investment. Here the survey identifies the Indian Railways as having the potential to be a "locomotive of growth" for the economy and the Modi government's acceptance of this recommendation already came on Thursday, with the Rail Budget.
This saw the government announce a massive increase in the planned expenditure in the Indian Railways, a hike of more than 50%. A hefty portion of this will be coming from the central government. And this isn't just rail minister Suresh Prabhu pushing his department ahead of others. Subramanian, in the survey, makes the case that the Railways are India's best bet to spur the economy forward. According to the survey, every Re 1 put into the Indian Railways results in an increase of Rs 5 in economy-wide output.
"The present government can now do for the neglected railways sector what the previous NDA government did for rural roads. This impetus has the potential to crowd in greater private investment and do so without jeopardizing India’s public debt dynamics," the survey says, adding, "Greater public investment in the railways would boost aggregate growth and the competitiveness of Indian manufacturing substantially."