As last week’s Economic Survey pointed out, the global economy, while still relatively strong, is characterised by significant geopolitical and economic uncertainty. While all budgets must respond to current imperatives, here are some deeper shifts in direction that the budget signals that collectively represent the articulation of Gen 2 reforms:
Reshaping government-citizen relationship This is partly anticipated in the tax administration proposals in the budget speech, but will presumably become clearer when a cleaned-up direct tax Bill is presented to parliament next week. Even if the general thrust of Gen 2 reforms unleashes India’s deep entrepreneurial and risk-taking culture, the budget makes it clear that there will remain an important role for better-focused government action, partly to bridge till the policy environment is fixed, and partly to compensate for geographic and social disadvantages.
New trust Creating a new trust-based, economic freedom- driven compact between government at all levels and private initiative across the spectrum from small-holder farmers and street vendors through startups and MSMEs to large corporates and MNCs will step up ‘ease of doing business’. The commitment to undertake an external review of non-financial sector regulation also belongs in this category.
The emphasis on PPP in infrastructure should also further such cooperation while increasing investment and operational efficiency. But all this cannot be one way. The corporate sector needs to do its part in welcoming global competition, increasing its R&D spending and, as the Economic Survey points out, sharing its prosperity with its workforce. Centre-state dynamics Fashioning new tools to stimulate cooperation between the Union and states is exemplified by the range of challenge grants and concessional funding in areas such as urban investment and intra-state electricity reform. These complement the usual tools of competitive and cooperative federalism, such as participation in centrally sponsored schemes and rigorous, data-based state-level rankings, including a new one on investment climate in states. Home and away Redefining the relationship between India and the rest of the world in preparation for India becoming the world’s third-largest economy by the end of this decade. Examples include the willingness to grab the nettle of reform of the Atomic Energy and Nuclear Liability Acts, and the openness to outside advice to support the new thrust on ‘rural prosperity and resilience’. The first of these – and associated commitment to support domestic innovation and production of small modular reactors – is critical for ensuring that India enjoys stable, clean baseload power to support its growth, including energy-hungry data centres and AI development.
That is also the insight of those economists who believe in the existence of a ‘middle-income trap’. Economies get stuck when institutions are too rigid to respond to the complexities of a more sophisticated economy. The challenge facing India’s policy managers is particularly daunting, since they need to make a case for radical change at a time when things are going reasonably well.
The global environment constrains conventional instruments of fiscal and monetary policy to propel India to a higher growth path. Structural (or supply-side) reforms, if executed with conviction, should help to stimulate the private sector’s ‘animal spirits’. That is the sensible bet of this budget.
The writer is vice-chairman, NITI Aayog