FEBRUARY 15, 2015

By TIOL Edit Team

THE Finance Minister Arun Jaitley's articulation of Modi Government's resolve to roll out reforms in spite of BJP's stunning defeat in Delhi State Assembly elections is timely. It should keep all of us glued to the usual excitement in the run-up to the annual Central budget.

The other day Mr. Jaitley reportedly stated that "The fact that four (state assembly) elections have been won and one has not been won is absolutely no ground for believing that there will be any slowdown on the path which we have undertaken."

This reassuring statement would obviously be welcomed by the industry, which has been patiently waiting for substantial, macro and sector-specific reforms. The poll results would obviously be one of the political considerations that Mr. Jaitley is expected to reckon in preparing the reforms-packed budget for 2015-16.

Before discussing the underlying macro considerations in preparation of the budget for 2015-16, we need to interpret the Delhi Mandate differently. It is vote for governance reforms. It is not a mandate against economic reforms that would facilitate inclusive growth and generate work opportunities for all.

It is actually a mandate against slow pace of reforms. It is a blow against failure to fulfill Lok Sabha poll promises including putting repatriated black money into accounts of Janata. It is a disapproval of BJP's machinations to form the Delhi Government through perceived but failed horse-trading of MLAs.

It is a mandate against failure to check crimes including rapes and frequent attacks on the policemen who are neither properly equipped nor empowered to take on goons. It is a vote against attempt to substitute substantive reforms with rhetoric and image makeovers. Above all, it is mandate against political arrogance. It is vote against Modi's Government's indifference to the hatred towards minorities spearheaded by aggressive members of Sangh Parivar.

It is a crystal-clear mandate against the usual-mode governance of national capital by Modi Sarkar through prolonged suspended animation of Delhi Assembly. Modi Government opted for Delhi elections only after it got a reprimand from the judiciary.

Thus, the reforms to be unveiled by Mr. Jaitley in the forthcoming Union Budget and in the subsequent months should adequately address political promises that helped Modi Sarkar get decisive mandate in Lok Sabha polls.

Without listing unfulfilled promises, we can presume that BJP's Lok Sabha Manifesto would serve as the most important consideration in the preparation of the Budget.

The second consideration in preparing the budget would be the globally benign prices of commodities including petroleum. These should serve as a springboard for unpopular reforms such aligning prices of energy and fertilizers with the import prices. Thus, reduction in the subsidies as well as their effective targeting should be figure in the ‘Do-Must List' of Finance Minister.

The budget should signal the shift towards integrated development of energy markets through taxation and pricing reforms to create level-playing field for all sources of energy.

The third consideration should be expenditure reforms, which should be undertaken taken on the basis of recommendations of Expenditure Management Commission as well as numerous suggestions made by various committees over the years.

The fourth consideration would be implementation of the recommendations of 14th Finance Commission (FC) relating to the Centre-State fiscal relations.

Finance Ministry normally organizes the recommendations into three categories – 1) the mandatory ones relating to sharing of central taxes by the Centre and the States that are executed through the Presidential Order; 2) the recommendations relating to Central grants to the States that fall in the domain of executive powers and 3) the recommendations relating to sharing of non-tax revenue such as telecom radio-frequency charges and profit petroleum and profit gas, etc. The Centre usually shelves the third category by announcing that these issues would be examined further.

Mr. Jaitley's stance on the 2nd and 3rd categories of recommendations would show whether he would articulate Modi's vision for cooperative federalism and Centre-State team for economic development.

His stance would thus indicate whether the Centre would empower States with more funds for balanced and inclusive growth of all regions or whether he would opt for status quo.

Finance Commission's observations about delayed roll-out of goods and service tax (GST) and direct tax code (DTC) would bring clarity to their impact on fiscal resources and economic growth.

There are also a whole lot of tax reforms including recommendations of Tax Administration Reform Commission (TARC) on which Mr. Jaitley would have to take a call. The three underlying factors for tax reforms would be making tax collections buoyant, stimulating investment and growth and improving tax compliance.

Yet another crucial macro consideration in formulating the budget would be reduction in reduction in the fiscal and revenue deficits to minimise inflationary potential of the budget.

Last but not the least is the consideration for the advance planning for the rainy day. An issue that comes in this category is the setting up of petroleum price stabilization fund (PPSF), which can be created by setting apart a certain percentage of taxes levied on crude oil and petroleum products. PPSF would be the key to managing inflation when the fresh wave of commodity boom starts, perhaps after a couple of years.

Another issue that falls in the rainy day planning sphere is creating fiscal and inflation cushion for the implementation of recommendations of 7th Pay Commission in 2016-17 and for its cascading impact on State finances and the economy over the next three years.