India’s budget

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Jaitley’s ‘quantum jump’

In a nut shell, India’s budget Saturday – rightly hailed as progressive inside the country and abroad – was mostly about removing barriers to investment in one of the world’s largest markets. Finance Minister Arun Jaitley is spot on that “incremental change is not going to take us anywhere”, posturing instead for a “quantum jump”. The idea, again, is simple yet ambitious. The economy must be made conducive to growth so India can shed the reputation of an economic elephant – impressive in size but limited in mobility. And the best way to do it is exploiting the vast market’s potential by flooding it with investment, both foreign and local.

For that, of course, ‘irritants’ to investment must be removed; a familiar concern in Dar sb’s ministry in Islamabad. Hence the stress on purposeful privatisation and a very ambitious tax policy. The recalibration of the latter, especially, will be crucial. If they can indeed restructure corporate and wealth tax problems, especially loopholes and exemptions for the super-rich, the economy will regain solvency. Combine that with privatisation proceeds – which removes painful and unnecessary leakages from the ministry’s books – and a turnaround is very likely.

Significantly, Jaitly did not take his eye off the ball and kept the deficit foremost in the argument. Tax receipts in the outgoing fiscal were weak owing to soft growth, but he seems to have ensured that the 4.1 percent mark still won’t be missed. And the three percent target will be pushed back a couple of years because whatever extra inflow is engineered will fail to impact if infrastructure remains inadequate. Therefore, the government will spend a little extra on social overhead capital, but just enough to keep the deficit in check. There’s an important lesson for Pakistan in this exercise, especially since our latest ‘success’ with the Fund has been getting them to understand yet another revision of the annual deficit. But Dar sb, too, made similar boasts in our last budget. We just failed to turn around because words were not matched with action; tax collection actually worsened, privatisation continues to be mishandled and infrastructure development is lopsided. The Indians, one the other hand, seem to have the capacity (which we did too) as well as the will (which, unfortunately, we did not) to complete this task. It will, however, have to keep the labour market in mind as well. Its reforms will not come full circle unless labour problems, which are very serious in India, are addressed urgently. On the whole, though, the political leadership has done a fine job of identifying what must be done first. It’s now just a matter of following through on the planning.