Budget 2015: An economist's wishlist from Finance Minister Arun Jaitley
William Wilson February 27, 2015
India and much of the global investment and business communities are highly anticipating the release of the Union Budget on February 28, which could turn be one of the most important days in the country's recent history.
After sweeping to power in 2014 with a Parliamentary majority under the promise of boosting languishing economic growth, Prime Minister Narendra Modi's first Interim Budget fell below expectations and made only minor changes to his predecessor's Budget. In office for only two months, the excuse was that the new government lacked time for a radical overhaul.
Modi, in power now for over eight months, has had time to assess his priorities. The excuses for the last Budget no longer hold, and expectations are now even higher. A Budget that lacks boldness in reform will be a harbinger of timidity for the next four years. A Budget that is serious about free market reforms could begin the process of transforming India into an economic superpower and ultimately alter the political equilibrium throughout the Indo-Pacific.
While Modi's administration has had some notable successes recently - like stronger economic growth, lower inflation and smaller current account and Budget deficits - India's competitive standing globally leaves much to be desired.
According to The Heritage Foundation's 2015 Index of Economic Freedom, India's economy is the 128th freest in the world (out of 178). Licensing requirements cost almost 10 times the average annual income and help contribute to an abysmal ranking of 155th in business freedom. Cutting this red tape is on the top of my wishlist.
Here are the other items on my list:
India has some of the highest corporate taxes in Asia. Moreover, they are riddled with loopholes. A move to rates prevailing in the ASEAN countries would immediately increase competitiveness. With only 3 per cent of Indians paying income taxes, the tax base will also need to be broadened. The much discussed goods and services tax (GST) would replace a complicated array of state taxes and other levies. These measures could add 2 per cent to GDP growth.
The court system is seriously underfunded and understaffed. The United Nations (UN) estimates that there is a backlog of 30-40 million pending cases. The Budget should provide additional funding for the courts.
While lower oil prices have cut some costly fuel subsidies, the Budget should continue stressing fiscal consolidation and stick to last year's promise to reduce the fiscal deficit to 3.6 per cent and 3.0 per cent of GDP over the next two years. While there will be pressure to spend the fiscal windfall on infrastructure (India is urbanizing fast and the urban infrastructure is totally inadequate), additional spending on roads, ports and bridges can be financed through privatisation.
Selling 10 per cent of Coal India was a good start but the railway system - India's most important source of transportation - is in serious need of upgrading. Currently both domestic and foreign investors cannot invest in government entities. The rail system should be privatised so that investors can pour in capital.
Lower energy prices have also brought inflation down to approximately 8 per cent. There should be a follow-up commitment to bring it down further to prevent capital flight and stabilise the rupee.
India's state banks are in a precarious condition and they alone could cause a financial crisis. According to the Economist, India's state banks may need up to $85 billion to meet international rules on capital to cover losses on bad debts. The best way to avoid a financial catastrophe is to begin privatising the banking sector.
It is hoped that labour market reform will occur sooner rather than later. India's working-age population of 750 million is expected to increase by another 230 million by 2030, so job creation is India's greatest long-term challenge. In a bold move, the current government allowed Rajasthan to liberalise its labour laws without regard to national restrictions. What works for Rajasthan should work for the entire country.
While this does not exhaust my wishlist for Modi's Budget, it would be a fantastic start.
(William "Bill" Wilson is a senior research fellow at The Heritage Foundation's Asian Studies Center. He is a former chief economist for Ernst & Young and has more than two decades of experience directing economic research for both commercial enterprises and non-profit institutions. Any opinions expressed here are the author's own.) - Reuters