Budget special: If it ain't broke, then don't fix it

The Economic Survey provided a backdrop to the Budget speech. It said that the economy was on a roll and growth would be even higher next year. Both savings and investment ratios would improve next year.

The tax revenue has grown much faster than expected, implying an unexpected buoyancy. This was possible due to better tax administration, higher growth in nominal GDP and a steep increase in custom duty collections, also causing the uncomfortably high current account deficit. But overall due to the pink health of the economy, the burden of expectations on the Finance Minister was rather heavy.

He was expected to do at least three things. Firstly he was required to continue to support the growth impulse.

Secondly, since high inflation was the subtext and context, he was supposed to provide a substantial anti inflationary stance. Thirdly, since the growth momentum looked ok, this was also the time for a sharp fiscal consolidation. Meeting three- in- one expectations is difficult if not impossible in the best of times. The objective of fiscal correction caused many to expect that the fiscal stimulus would be rolled back and general excise duty would be restored to 12% from the current 10%. That did not happen. This was the first positive surprise.

Industry was relieved, since the recent IIP data had caused a lot of anxiety about industrial growth maintaining its steam. But was the non- tinkering of excise duty, like the proverbial dog that did not bark? As in The Hound of Baskervilles? How come the fiscal deficit is projected to come down to 4.6 percent next year without resorting to an increase in excise this year, which was actually within the FM's legitimate rights.

Some elementary sleuthing a la Sherlock Holmes reveals that indeed there's more than meets the eye. The clues are to be found in heroic assumptions in the growth of nominal GDP, tax collections and the extremely modest hikes assumed in the growth of fertilizer subsidies. Even the oil " under- recoveries" are assumed to be very small. That is what is making impressive fiscal target achievable.

But this is quibbling about details. The larger approach of this budget is that " if it ain't broke, then don't fix it". Besides this also happens to be the last year before two major tax reforms will be rolled out i.e. the DTC and GST. Hence it would be unwise and unrealistic to have assumed that major tax policy change was possible in this budget. Therefore the focus was on expenditure reform and big bang reform.

But of course many critics would have then said, that reform announcements don't belong to the budget speech. It is as if damned if you do, and damned if you don't. Much of the focus of the budget is on three sectors; namely; agriculture, infrastructure and the financial sector. While there is great emphasis in reducing the inefficiency in the supply chain from farm to fork and in providing incentives in storage and cold chain, the FM stopped short of opening the retail sector for FDI. In the financial sector a slew of reforms have been announced which will be in the form of new legislations to be tabled in this session of Parliament.

The increase in the quota of FII investment in the bond market and the liberalization of allowing direct investment in the stock market will increase foreign financial inflow significantly, that would help to curtail the current account deficit. The success of the other legislations will depend upon Parliament. For a Finance Minister presenting the 6th Budget it is always a challenge to meet heightened expectations.

The list of reforms that could be undertaken are always long, but what is achievable within the framework of anti- inflation and fiscal prudence is very short. The Finance Minister has done well to stay within the boundary of what is doable.