A harbinger of more reforms

Charan Singh

The Finance Minister delivered an exceptional first full-year budget of the new government in difficult global conditions and a complex political situation in the country. The budget is carefully drafted, is practical in approach and undertakes course correction without disrupting the economy and investor sentiment.

In fact, the FM’s budget speech should not just be an accounting exercise but an important policy document laying down the fiscal policy framework for not only the current year but also beyond - for the medium and long term. The FM has made many long-pending and important policy announcements like setting up a debt management office and having a monetary policy framework.  The speech provided a panoramic view of the economy covering issues like social security, employment opportunities for the young demographic nation, and financial sector issues like a bankruptcy law. 

The FM identified five main challenges that the economy is facing, mainly low agricultural income, slowing manufacturing output and fiscal discipline. In case, the government is ensuring a committed path and using borrowings for growth purposes, the rule of GFD of 3 per cent of GDP should not necessarily be followed. It is not in most of the advanced and OECD countries, and justifiably defended by the current economic environment. 

The budget should lead to higher employment because of emphasis on skill formation and the scheme to build nearly six crore houses spread across the rural and urban areas over the next six years. Housing is a labour-intensive industry and absorbs output from nearly 270 industries. Therefore, a new housing policy is necessary to cater to this significantly ambitious target.

The focus of the new policies should be to convert youth from job seekers to job creators through the spirit of entrepreneurship and special provisions have been announced in terms of a techno-financial incubation facilitation programme to support start-ups. To enhance skill formation and employability, a national skills mission is being launched.  In most of the cases, soft skills are required in our young graduates to compete with the best in the world. Thus, there is need to identify and formulate a skilling strategy for meeting the challenge. 

Micro, small and medium enterprises (MSMEs) have strong potential for creating employment. MSMEs have been suffering from numerous difficulties in the past few years, especially pertaining to accessing finance, as most of these are in the informal sector and banks were only able to finance less than 5 per cent of the existing units. The government has proposed to create a Micro Units Development Refinance Agency (MUDRA) Bank to provide finance to these units. To improve liquidity for MSMEs, an electronic trading system has also been envisaged.  These measures are certainly useful and in the right direction but it would need to be clarified as to what would be the role of the Small Industries Development Bank of India (SIDBI) and the National Bank for Agricultural and Rural Development (NABARD).   Similarly, while problems of MSMEs have been discussed and some provisions for better availability of financial resources provided, the issue of delayed payments, especially from government departments and public sector enterprises, were not covered. MSMEs also suffer from difficult and archaic labour laws which need to be addressed to exploit the complete potential of these measures. Accordingly, a new MSME policy can be expected from the government.

After many years of uncertainty, the government has proposed to separate debt from monetary management and set up an independent Public Debt Management Agency (PDMA) to coordinate and undertake both external and domestic borrowings in a single agency. Having taken the debt management function out of the RBI, it was logical that the government assign some accountability and responsibility to the RBI.  Accordingly, the government has concluded a Monetary Policy Framework Agreement (MPFA) with the RBI. The MPFA, according to the FM, clearly states the objective of keeping inflation below 6 per cent but whether this would be observed every month or an average of quarter or that of a year was not clarified in the speech. The government may also consider placing the MPFA in public domain to inspire confidence in the markets, as is generally the practice in other inflation-targeting countries.

Indians have special attachment to gold and hold more than 20,000 tonnes.  The government's effort to  monetise gold holdings through a new scheme would lead to more economic activity in the country, helping people earn interest income as well as develop the gold market in India. But there may be a need to study in detail issues involved in monetising gold, necessary market infrastructure and an implementing strategy so that the new scheme does not meet the fate of the earlier unsuccessful schemes.  There also may be a need to have a regulator for the entities that operate in the gold market as well as a corporation to set gold standards and certify gold purity for gold products in India.

In addition to the setting up of IIMs and IITs, the government may also like to consider replicating excellent institutions that teach commerce, law, economics and liberal arts.  This is necessary to consider because most of the engineers trained in the IITs search for finance jobs after joining IIMs.  Thus, the implicit subsidy that the government provides in producing engineers from IITs probably gets wasted. 

This is a unique budget that has provided policy directions to important issues like debt management, monetary policy framework, gold policy, bankruptcy laws, black money and social security. The clarity in determination on the implementation of the goods and services tax, and support to MSMEs, in terms of finances and skill development are other positive factors.  The first full-year budget has met its expectations as the government has clearly delineated its policy on major economic issues. The speech clearly indicates that many more reforms can be expected and probably, is a harbinger of second-generation reforms which have been pending for more than a decade.

The writer is an RBI Chair Professor of Economics, IIM, Bangalore. The views are personal