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Friday, July 11, 2014


ul 11 2014 : The Economic Times (Bangalore)

The Budget sets out to preserve macroeconomic fundamentals
Over the past three years as the Indian economy has disappointed, the collective impatience created the political storm that gave the BJP/NDA and Narendra Modi an unequivocal mandate to rule.
However, it also generated a diversity of expectations, some of them quite unrealistic. Those who may have felt that their expectations were belied were just being over-simplistic.This Union Budget had to achieve a certain set of objectives. It had to lay out the broad contours of the policies that the government would implement and its preferences and priorities. True, many of them have been articulated in the course of the election process, but seeing it in the cold light of documented policy is altogether a different thing.
The Budget speech and the statements that came along with it I think fully met this need. We now know for certain that preserving the macroeconomic fundamentals -high growth rate with fiscal, price and external payments stability -will inform the conduct of this government's policy.
The Budget speech by virtue of having become the main platform for announcing official policy had also to address a large range of issues. The finance minister gave shape, and in considerable detail, to the priorities of his government: for irrigation, drinking water, roads -both rural and highways -“smart“ cities, industrial-cum-rail corridors, electricity generation and distribution, skill and entrepreneurship development, protection of the girl child and improved sanitation. There was clarity in other areas too, including the increase in FDI limits in insurance and defence to 49% in both cases and the welcome changes made in the withholding tax regime.
In many cases, it preferred to announce institutional mechanism to deal with these problems. The most prominent was the Expenditure Management Commission that is expected to submit its interim report within this fiscal year. The proposed HighLevel Committee in CBDT, the manner in which it sought to deal with the tricky issues of transfer pricing and other matters relating to tax administration were others.
Given the complexity of many of the issues, it is only reasonable that opting to work through these matters over the course of the coming months is desirable. To quote from the speech, “The steps...announced in this Budget are only the beginning of a journey towards a sustained growth of 7-8% or above within the next 3-4 years along with macroeconomic stabilisation.... Therefore, it would not be wise to expect everything that can be done or must be done to be in the first Budget presented within 45 days of the formation of this government.“
The full f lavour of this government's policy preferences will become clearer in the months to come and in Budget 2015.
However, we can anticipate many things that are likely to happen from now till February 2015. Petroleum subsidies will be “overhauled“ and a new urea policy would be formulated.
If we turn to the medium-term fiscal statement, there are more details. “If there are no international shocks in the oil sector, it is expected that in a year, the government will be able to decontrol diesel fully. With rising fuel subsidy, there is need to cap the subsidised cylinders at a more realistic level.... On fertilisers, nutrient-based subsidy regime has been working well in the P&K sector.
What is now urgently required are certain pricing reforms in the urea sector with an immediate price correction for urea, new nutrient-based urea policy.“ While this does not carry the authority of the Budget speech, it is reasonable to infer that it gives us a sense of the direction of thinking in the Modi government.
The conduct of the fiscal stance is entirely in the hands of the government. On this front, the Budget has given out signals that are positive. On a few other issues, the policy announcements are clear. On many others, while the contours are positive, we will have to wait for the substantive actions that may be expected to follow in the coming months.
There are several important issues that have been only partially addressed in this Budget: such as the problems of the infrastructure sector and the related problems in our banks. Here too, we will have to wait as the government copes with them.

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