Why the Budget just got a little harder

| | in Oped

Recent Gross Domestic Product growth estimates have put the Finance Ministry in a tight spot. Balancing shorter-term economic imperatives and longer-term goals has just become a little more challenging as the General Election looms large

India’s Gross Domestic Product (GDP) is estimated to grow at 6.5 per cent during the financial year 2017-18 as per data released by the Central Statistical Organisation (CSO). This growth is, perhaps, the lowest in the last four years.

As soon as the growth estimates were released, leaders from the Opposition were quick to seize the moment: Congress President Rahul Gandhi accused the Government of “ignoring economic wisdom” and dealing a “catastrophic” blow to India’s growth.

Senior Congress leader P Chidambaram remarked that the worst fears of an imminent economic slowdown have come true. Such reactions do not surprise as leaders from the Opposition have all along been critical of the Union Government’s two major structural reforms: Demonetisation and the roll out of the Goods and Services Tax (GST) last year.

While Opposition leaders are cautioning the Government about dark clouds hovering over India’s economic space, the Government is seeing a silver lining in those dark clouds. Indeed, vice chairman of the Government’s think-tank, NITI Aayog,  Rajiv Kumar, was quick to point out an upward movement in quarterly growth rates, indicating a pickup in India’s economic activity, which promises a robust growth in 2018-19.

Similarly, the agricultural Ministry was quick to cite reasons why agricultural growth is expected to be higher than what the CSO put in its estimates.

Both, demonetisation and the GST have been two major structural reforms of the Modi Government. It would be naïve to expect these reforms to not lead to any short-term economic costs in terms of economic growth, job creation and credit uptake, even as the reforms promise huge medium to long-term gains.

If the effect of demonetisation is viewed narrowly, in terms of the extent to which it could flush out illicit currency from the system, it will surely appear to be an utter failure. But this is not a correct view. Demonetisation is expected to have far reaching ramifications.

The fact that almost the entire quantum of banned currency notes managed to find its way back into the banking system indicated that people outsmarted the Government. This fact not only surprised the Government but also some experts. It became clear that the success of demonetisation lay in the follow-up measures.

To this end, the Government didn’t shy away from taking those measures: It gave a strong push to digital transactions, used data analytics to track large deposits in banned currency notes, promoted Aadhaar-linking of bank accounts and so forth.

It also saw a merit in the speedy roll out of the GST, which is aimed at simplifying the tax system and also fixing one major avenue for the creation of black money.

However, the roll out of a single tax system nationwide is bound to have some problems. What matters the most is how speedily the issues being faced in GST implementation are tackled. Frequent reviews and adaptations of the system by the GST council is a proof of how quickly the body has been fine-tuning the system and will continue tweaking it in near future too.

However, there is one lesser known and little appreciated effect that these twin structural reforms have unleashed. It has jolted the people out of their usual thought processes. In some ways, it has changed the way people and businessmen view their business, conduct and practice the same.

What had once become widely accepted business practice in our society — paying and accepting bribe, transacting in black money, evading taxes and laundering money — the twin reforms have forced the people to rethink on the way they conduct their businesses.

As a result, the people are beginning to realise that it is far better to do clean business, to earn with dignity and respect, and to live with confidence than to bribe one’s way and live in constant fear. They are beginning to realise that it is far better to play by the rules than to cut corners.

This psychological effect has the potential to play out in terms of both robust and cleaner economic growth over medium to longer period. However, to realise this potential, the Government will need to constantly educate the people of the several advantages of clean business, conduct and practices.

Social media campaigns similar to what we’ve seen in other contexts, such as making India open defecation free or waging war against tuberculosis need to be designed for promoting business norms and preferences for cleaner conduct.

Such messaging will also reassure the public of the Government’s anti-corruption resolve, which as some fear, may get compromised in the run-up to the next General Election in 2019.

As for now, the lower-than-expected growth estimates of the CSO has put the Finance Ministry folks in a tight spot. As they give final touches to the next Union Budget, they have an arduous task of balancing multiple objectives of sustaining consumption, encouraging private investment, energising agriculture, giving stimulus to exports and much more.

And all of this at a time when the fiscal situation of the country is tight and political imperatives of General Election looms large.

(The writer is a development economist, formerly with the Bill & Melinda Gates Foundation and the World Bank)

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