Nudges and Pushes

I think that cricket provides great metaphors for virtually everything in life. Thursday’s Budget certainly lends itself to cricketing references. Not for Finance Minister Arun Jaitley the six sixes in an over kind of thriller; more the nudging and pushing, singles and twos kind of innings that doesn’t keep you enthralled, but often gets the job done. There were apparently high expectations that the Budget would be a slam-bang kind of innings, but going by the market reaction at least, a nudge-and-push knock worked just as well.

I, for one, did expect the speech to begin with an overarching strategic statement, laying out an economic road map for the five-year term. Though there were some initial hints of this, in the event, Mr Jaitley dived straight into details. If there was, indeed, a big picture behind all these details, it had to be discerned. As the speech unfolded, outlines of a big picture did emerge from all the little details. Here are a few of its aspects.

Looking at it from the structural perspective, I believe that food, infrastructure and jobs are the economy’s three most pressing challenges. The Budget has something to say on all three. On dealing with the food problem, combination of technology initiatives, soil repair, a focus on proteins and an effective price stabilisation fund create the potential to address the fundamental problem of excess demand in food items other than cereals. Of course, these need to be overlaid on a rollback of incentives to produce massive amounts of cereals, which will be an enormous challenge. Their impact will be greatly enhanced if the two initiatives are done in tandem. There was, of course, no reference to procurement reform directly, but the intent to create a genuinely national market for agricultural commodities through a re-orientation of the state-level agricultural produce marketing committee (APMC) Acts points in this direction, as does the intent to reform the Food Corporation of India. No specifics here, but in a best-case (or even good-case) scenario, the components of an agricultural reform strategy that will serve to contain food inflation are there.

On infrastructure, a number of intentions have been articulated, with a uniform emphasis on the public-private-partnership (PPP) model. I think we have to accept the reality that PPP has not worked anywhere close to expectations in India (for that matter, in most places – I have heard it referred to as “promise, postpone and perish”), so before putting more eggs in that basket, we need to re-examine the model and figure out the conditions in which it seems to work, if at all. Meanwhile, more government funds are one way of revitalising investment in these sectors, provided execution is done with far greater efficiency than the government is known for. In fact, relatively little money has been provided in the Budget, so the onus is on effective project and contract design.

Some help, though I do not believe that it will be decisive, will come from the pass-through facility provided to infrastructure investment trusts, which will allow projects to broaden and diversify their sources of funds. Importantly, this facility has also been provided to real estate investment trusts, which stand to benefit far more. Real estate investment is always a good stimulus, given the multiple backward and forward linkages that the sector has. Also, the exemption of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements on banks, which finance infrastructure by issuing long-term bonds, will enhance the funding base significantly. Overall, though, the infrastructure challenge remains very significant, and we need to see a lot more detailing of the approach that the government intends to take.

On the jobs front, the focus is on reviving the manufacturing sector. To this end, extending the investment tax credit to small and medium enterprises may be an important stimulant. The emphasis on clusters – textiles and tourism – can help, if done correctly, but our experience with clusters is, to put it mildly, mixed. Here again, detailing is critical, and it is worth making an investment in designing these programmes to give them reasonable chances of succeeding. The emphasis on skilling is reassuringly being persisted with, even if the programme may be renamed. Labour reforms are being talked about, but the Budget speech itself was silent on this issue. The Rajasthan initiative on this front and the central government’s reinforcement of it should set the ball rolling in a favourable direction. One component of the solution that has so far been missing from the discussion is the creation of a safety net for industrial and service-sector workers. This needs to be a part of the overall discussion.

A number of other nudges and pushes are also significant. The firm commitment to the goods and services tax is very reassuring. The reduction of the witholding tax on corporate bonds complements the CRR/SLR exemption, creating an incentive for investors to buy bonds. There are, of course, a couple of extravagant shots as well. What seems to be a divestment target of almost Rs 65,000 crore may be a stretch. Revenue growth expectations of 19 per cent when nominal gross domestic product will grow by maybe 13 or 14 per cent also seems ambitious. But, then, such is the nature of the game.