Budget 2016: Tightrope, Tight-fist or Tradition-breaking?

On 16th February 2016, Meghnad Desai Academy of Economics hosted Lord Meghnad Desai, Dr. Ajit Ranade, Dr. Neeraj Hatekar and Dr. Tushar Poddar for a discussion on the upcoming Union Budget. Dr. Hatekar commenced the discussion by introducing the panel and remarked that this year’s budget is coming at a very important time because of two things:

1) Pessimism in the market due to slow growth in the manufacturing sector; and
2) A high fiscal deficit.

Lord Desai began his speech by saying that the importance of the budget is exaggerated, but India does have to deal with a few challenges. India has a lot of precarious spending programmes – many unfunded pension promises that it needs to deliver on. For these programmes to be sustainable, India needs to look at opportunities to increase mid and long-term revenues. However, the government has a lot of no-go areas when it comes to collecting revenue.

First, there is a constitutional provision which says that the government cannot tax the agricultural sector. Second, Lord Desai believes that Income tax should be dispensed with as it does not yield much revenue and is in turn an obstacle to ease of doing business. Instead, the government should introduce a consumption tax, which would ensure that everyone is taxed, and there would be no need to exempt the poor or the rich. Plus, the consumption tax will work more efficiently since it cannot be as manipulated as income. Thirdly, he believed that wealth tax should also be introduced. In sum, the government needs to find new and viable methods of collecting revenues. Finally, with regards to the budget, Lord Desai thinks that a fiscal stimulus is not required; the budget should be neutral. Instead, the focus should be directed to the long-run fiscal problem.

Dr. Ranade began by briefly explaining the mechanism of passing a budget in India, and how the general views regarding the budget have changed over the years; the budgets are now more predictable, stable and have garnered a lot of attention from the media. According to him, a tradition-breaking budget would include a huge spending plan in order to spur growth, whereas a tight-fisted budget would be fiscally prudent since India has one of the largest fiscal deficits in the world.

Macroeconomically, India is in a good place with stable inflation, moderate current account deficit, and a large foreign exchange reserve. However, a large fiscal deficit is a challenge to the economy. In the Union Budget 2015-16, the Finance Minister had laid out various targets, some of which the government has not met yet. For example, the FM said that the government would receive ₹70,000 crores through privatisation; however, the government has only collected ₹20,000 crores so far. Despite that, the economy is on its way to meet the 3.9% fiscal deficit target. This is largely due to the fall in oil prices, which provided the economy with a gain of about 1% of its GDP.

Therefore, Dr. Ranade expects the coming budget to have the following features:

  • Address the needs to reach a fiscal deficit target of 3.5% by FY2017
  • Include provision for infrastructure spending
  • Increase in Capital expenditure
  • Raise revenue through more privatisation as well as FDI in the railway sector

Dr. Poddar began by mentioning that the global economy is the weakest it has been since 2008. Domestically, India is dealing with lower exports, and weak rural demand. Moreover, the balance sheets of the corporate sector and private sector banks are stretched. Therefore, the budget might have provisions for expenditure in the rural sector, infrastructure, and the new pay commission for civil servants. On the revenue side, the government can expect higher excess revenues from oil. However, Dr. Poddar disagrees with Dr. Ranade, and believes that the fiscal deficit target of 3.5% will be very difficult to meet. This has the following implications: 1) A situation of crowding out, which could lead to higher bond yields 2) Higher government debt. Further, the government needs to avoid deviating from targets to maintain credibility and commit to fiscal consolidation. Lastly, Dr. Poddar thinks that the government might corner itself to a situation where higher permanent spending on wages and subsidies is financed by temporary revenue (Revenue from low oil prices).


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Date(s) - 16/02/2016
3:30 pm - 6:00 pm

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