Budgeting for structural reforms
The Hindu BusinessLine, Mach 17,
2016 |
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By Pradeep S Mehta
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.
Ensuring progress
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.
Key reforms required
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.
What is stalling reforms?
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.
This news can
also be viewed at: www.thehindubusinessline.com
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