Budget 2015: What's Arun Jaitley's recipe for economic growth?

Growth versus fiscal rectitude is a tough tightrope to walk. This is the crucible of combat for the Modi dispensation. The hour of reckoning has arrived. The designated date is February 28. For the BJP and its economic managers, it is the tipping point, when the arc of election promises intersects with the expectations of the people of India and domestic and international investors.

Since 1999 (16 instances of Budget presentation), on nine occasions, the equity markets have given a positive return in 30 days to the Budget (i.e pre-Budget period). In as many as seven out of such instances of Budget presentation, the equity markets have given positive return in 30 days after the Budget (i.e post-Budget period).

Out of the nine instances where the markets have given positive results in pre-30 days period, in only three instances did it succeed to remain positive after the event. The hype is immense. And in the hype versus reality test, the BJP has failed the test irrevocably. Under the NDA/BJP regime (2000-2004), the equity markets have always rallied 30 days before the Budget on account of high expectations from the event, but have corrected after the event.

Surprisingly, in recent years (in the main the last five), the impact of Budget expectations on short-term performance and volatility has been declining (see graphic). But the Budget is not about markets, though it has now been decided that the stock markets will remain open on Saturday, February 28.

What is important is that Arun Jaitley and his team provide a directional call on the economy to lay down the edifice for sustained high growth. An achievable Budget more than anything else, one that provides to the people of India Modi's vision for the economy. A blueprint for the next several years which is a spitting image of all his promises. And one that can be actualised.

If the flavour is disinvestment, then is it merely lip service to bridge the fiscal deficit by hawking PSU equity to government owned financial institutions, or are we looking at something more dramatic where we actually bite the bullet and go ahead with strategic sale of loss-making public sector units? And there is a multitude of those abounding.

Take a basket of 10 such companies which have been making steep losses for 10 or 15 years running, put them on the block, do something unpalatable, make a difference. Cut the flab. Which should be the big theme in the Budget anyway.

Subsidy Reform

The convergence of the Aadhaar infrastructure, the 100mn additional bank accounts (led by the Prime Minister's Jan Dhan Yojana, a scheme to encourage financial inclusion) and the spread of mobile telephony have opened the space for digitising welfare delivery systems.

The result is better targeting (by removing ghosts and duplicates) which can lead to both lower subsidy bills and enhanced social welfare. Moving to a cash-based subsidy over time is likely to raise efficiency and minimise price distortions.

Need bigger neon signs on specific reforms for the delivery of food, fuel and fertiliser subsidies. Increasing the scope of Direct Benefit Transfer in a bid to control the subsidy burden is crucial.

Expenditure Streamlining

The government's planned expenditure programmes consist of 'central assistance to state plans' (where the central government gives funds and state governments implement), and 'central sector schemes' (which the central government implements) . Sixty-six schemes and several block grants make up the first category, and over a thousand schemes make up the second.

HSBC, for one, believes it is possible to streamline expenditure by merging/removing sub-scale legacy schemes. Estimates suggest that a revamp could bring savings of at least 0.25 per cent of GDP.

Revenue Reforms

Direct tax collection in India is abysmally low with corporate tax collection at 3.5 per cent of GDP and income tax at 2.1 per cent. Removing concessional rates and special exemptions from excise and custom duties would not only reduce market distortions, but also add to the tax kitty.

Strengthening tax administration by plugging gaps in collection/reporting procedures, strengthening data warehousing infrastructure, increasing manpower and fast tracking tax disputes are potential reforms. But this is something that has been discussed endlessly and is probably as old as the Aravali Hills.

Higher Public Investments

With the private sector overleveraged and the banking system stressed, the onus on kickstarting the capital expenditure cycle falls squarely on the government. Untangling stalled projects via the efforts of the Project Monitoring Group is one big pillar for relaunching capex, and increasing outlays on public investments is the other.

With the oil subsidy bill savings acting as a cushion, bundled with better targeting, the government can switch about 0.6 per cent of GDP ($2 trillion) from current to capital expenditure in this financial year. Much of these public investments will be driven towards railways, roads and ports.

Railways

With Suresh Prabhu being a reformist technocrat, expect an overhaul in railway finances and investment. Prabhu understands that investing in railways is vital to support higher urbanisation over time.

Cross-subsidisation of fares has bled the railways, losses are upwards of Rs 25,000 crore and it is important to set the rot right. Emergence of the special purpose vehicle model will make viable investments in last-mile rail projects like railway station upgrades, port-to-mine connectivity, intra city and high speed intercity rail lines. Propose moves to attract private capital through bond financing, using government financing as leverage. Propose independent railway tariffs commission that will take pricing out of political control leading to greater financial sustainability and resource mobilisation. And invest in passenger amenities at railway stations eligible under corporate CSR spend.

These are some of the themes that should stand up and be read in Jaitley's Budget. It will be a travesty if the Budget makes the usual promises which add up to being incrementally positive for the economy, instead of a clear articulation of bridging the trust deficit amongst investors, especially related to taxation (GAAR and retrospective).

The canvas is available, it requires bold strokes and more than anything else a grand vision for India's stuttering economy where slow manufacturing activity is threatening revenue collection by a wide margin.

Paint a future to free us from the suffering of the past. Problems aplenty, solutions innumerable, appetite unknown. What we don't want is dark clouds rolling in and then opening up.