All signs point to a pathbreaking budget, the first to bear the stamp of team Modi-Jaitley (MJ), on 28 February. Recent utterances from both the prime minister and the finance minister have made it clear that the upcoming budget will be a marked departure from the business-as-usual version of July 2014. Modi has repeatedly emphasised the need for higher and sustained growth. He has made it clear that the interests of the poor cannot, and will not be, overlooked. Jaitley, on his part, has focused on the need to reignite the investment cycle and to expand public investment to shore up investment demand in the absence of a pick up in private corporate investment.
Almost on cue, the Reserve Bank of India reversed its monetary policy stance by announcing a small but highly symbolic 25 basis point reduction in policy rates. It shows that the central bank believes the government will oblige by announcing the necessary structural reforms.
An investment- and growth-oriented budget could further cheer the market, which, in anticipation, has already risen to new heights. The question is whether MJ will be able to meet the sky-high expectations not just of equity brokers but also of the hard-nosed investing community that has so far refused to be impressed by the flowing rhetoric. Investors have held back for the past eight months. but, at the same time, given the benefit of doubt to MJ. The budget must, therefore, include measures to kick-start the investment cycle and enthuse private investors, both domestic and foreign. I think MJ is fully cognizant of this reality and is, therefore, expected to focus on the following measures.
One, while achieving the difficult fiscal deficit target of 4.1 per cent of GDP, the government will come up with a more flexible fiscal glide path for the next three years to provide itself more fiscal space to increase public investment in infrastructure and agriculture.
Two, a slew of tax reforms, including an attempt to rationalise and simplify direct tax administration to make it more predictable and taxpayer-friendly, will be on the cards. It should include steps to eliminate the spectre of retroactive taxes; minimise arbitrary transfer pricing orders; release some revenues locked in appeals and court cases that amount to over Rs 4 lakh core; and do away with the practice of setting targets for corporate tax collection in the last quarter. Investors will respond positively to these steps.
Three, the budget will reflect on the on-going work of the expenditure management commission and take steps to make subsidy disbursement far more efficient. It may replace price-based food and petroleum product subsidies with direct tax transfer, using the Aadhar network.
Four, the government must replace fertiliser subsidy by direct tax transfer to poor and marginal farmers. The subsidy has been usurped by the middle and rich farmers so far. By decontrolling urea prices and using direct cash transfers for compensating poor farmers, who now have bank accounts thanks to the Jan Dhan Yojna, the government will make a revolutionary advance in the agricultural economy.
Five, the GST bill must be passed in this session. The Centre is on the right track to accommodate the demands of states, and keep liquor and petroleum products out of the GST ambit for the time being. There will surely be enough time in the future to make amends.
Last, the Make in India campaign now needs to be backed up by real reforms to improve India's ranking in the World Bank's Doing Business Survey. India languishes at a poor 142 among 180 countries. The prime minister has promised to improve this by 50 ranks every year.
The investing community will be looking at the budget hawk eyed on whether these promises will be kept. If it is, the country will be well on its way to regain the 9-10 per cent growth trajectory by the time political parties start their campaigns for the next parliamentary elections in 2019. The stakes are high.