PLUSES & MINUSES. Budgeting for structural reforms

Much has been written about the 2016 Budget, mainly in praise and some critical. The Budget is generally considered the economic policy statement of the government. Hence, by not speaking about structural reforms, we have lost some ground to grow.

In a recent talk, the RBI governor Raghuram Rajan echoed the same sentiments, “Structural reforms, typically ones that increase competition, foster innovation, and drive institutional change, are the way to raise potential growth.”

While he was speaking on the subject of India in the Global Economy, perhaps Rajan had some message for Indian policy makers as well, specifically our Finance Minister.

The annual Budget should not merely be an account of receipts and expenditure of the Centre but must be part of the broad long term vision of the government on economic growth.

It should chart the requisite course to achieve the same. This should include structural reforms needed and steps taken and proposed to accomplish them. Consequently, every Budget must be viewed as an economic policy statement which fits within the long term vision of the government.

Thus, two elements are necessary to turn a Budget into an economic policy statement, viz. a long term vision, and structural reforms to achieve that. The Union Budget 2016-17 was long on former but short on the latter.

So, what exactly are structural reforms? Structural reforms are focused on institutions for achieving efficiency and effectiveness of policy making and delivery. They are cross-sectoral in nature and aim at improving the process, rather than focusing on specific outputs.

Structural reforms ensure that better decisions are made on the basis of best available information, and take into account concerns of all stakeholders. Such reforms are the key to introduce transparency and accountability in decision making, avoid ambiguity and uncertainty, and inspire confidence in the system.

They ensure that the decision actually results in “ Sabka Saath, Sabka Vikas ”, and move ahead of the rhetoric. This has become much more important now, given the divergent socio-cultural narratives the country is grappling with.

For instance, use of Aadhaar for delivery of government subsidies is a structural reform, but introduction of relevant legislation as a money Bill, and its passage in presence of just 73 MPs is not.

Devolution of higher funds to State and sub-State governments under cooperative and competitive federalism paradigm is a structural reform, but imposing cess to check the depletion of central government coffers, without relevant details on usage and implementation, is not.

Rationalising and pruning subsidies for the poor for efficient targeting is a structural reform, but recapitalising public sector banks, engaged in irresponsible lending, is not. Focus on agriculture and third tier of governance is good, but scant attention to implementation details is not.

Moving away from Plan and non-Plan distinction in expenditure to capital and revenue classification is good, but limited attention to details is not. Sticking to fiscal deficit target is a structural reform, but achieving the same through revenue generated by adhoc disinvestment in public sector entities and allocation of natural resources, without rationalising wasteful subsidies on fertiliser and sugar, is not.

Rationalising the corporate tax is a structural reform, but doing away with statement of revenue foregone and status quo on individual income tax rates is not. Such moves are but two steps forward and one step back, which needs correction.

During the pre-Budget consultations with the finance minister, I had highlighted the importance of structural reforms. I had urged that National Competition Policy, Public Procurement Policy and Law, Regulatory Impact Assessment, and an omnibus financial consumer protection legislation, were some of the structural reforms, critical to achieve sustainable growth.

While the finance minister conceded to the last request and has promised introduction of a comprehensive central legislation to tackle ponzi schemes, in his budget speech, there is no indication on the others. I would urge government to walk the talk, at least on protecting the vulnerable financial consumers.

Two days prior to the budget, the Ajay Shankar Expert Committee on Prior Permissions and Regulatory Mechanism, made its recommendations public (which were submitted to the government in early February). In his previous budget speech for 2015-16, the finance minister had announced constitution of the committee. Regulatory Impact Assessment is the first and primary recommendation of the Committee.

The finance minister should have taken the opportunity offered by this budget to announce adoption and time bound implementation of the recommendations of the Committee. Need for RIA in India has been documented and it is a fairly non-controversial structural reform.

Similarly, the National Competition Policy has been pending with the Ministry of Corporate Affairs, directly under the finance minister, since November 2011. It has bipartisan support with senior leaders such as Yashwant Sinha, KC Tyagi and Veerappa Moily writing in its support. Unfortunately, explaining the benefits of NCP to this government is increasingly becoming difficult, which is surprising, given the leadership’s understanding of competition benefits.

In his address, Rajan further noted that structural reforms hurt protected constituencies that have become accustomed to the rents they get from the status quo. Moreover, the gains to constituencies that are benefited are typically later and uncertain.

He quoted Jean-Claude Juncker, the former Luxembourg Prime Minister, who said at the height of the Euro crisis, “We all know what to do, we just don’t know how to get re-elected after we’ve done it!”

The government must not be driven by impending elections. The Prime Minister has stated on record in the Parliament that governments will come and go, but let us work together and make the country. It is time to walk the talk.

The writer is the secretary general of CUTS International. With inputs from Amol Kulkarni