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Mon, Jul 07 2014. 07 28 PM

For Arun Jaitley, there is no easy way to meet these

expectations given that the budget will be presented against

the backdrop of slugg ish econom ic growth, high inflation

and the precarious state of government finances. Photo:

Hindustan Times

Budget 2014: Finance minister Arun Jaitley’s top challengesThe expectations from the finance minister’s maiden budget are sky high. Here are the six biggest challenges he faces

Mumbai: The expectations from finance minis ter Arun Jaitley’smaiden budget are s ky high, as is evident from the fact that Indian

stocks are s caling new highs daily. For Jaitley, there is no eas y wa

to meet these expectations given that the budget will be presented

against the backdrop of sluggish economic growth, high inflation

and the precarious state of government finances. The finance

minister has to attack the core problems facing the economy. Here

are the six biggest challenges faced by Jaitley, along with their 

solutions.

1) Declare war on subsidies

The subs idy bill was allowed to balloon over the past 10 years. Thi

was not due to benign neglect alone. Handouts were central to the

political s trategy of the pas t two United Progress ive Alliance

governments. Such subs idies are often captured by vocal groups

such as large farmers in the case of fertilizer subsidies and the

urban middle class in the case of fuel subsidies. Jaitley has to s la

subs idies at a time when the National Food Security Act has to be

funded.

Key reform: Keep increasing fuel prices till the subsidy is eliminat

while committing to follow whatever the 14th Finance Commiss ion, headed by Y.V. Reddy, suggests on how to insulate the pricing of 

public utility services from pol itics.

2) Increase public investment

India cannot have a s ustainable economic recovery unless the investment cycle is revived, according to mos t economis ts. The private

sector is still wary about funding new capacity; many corporate balance sheets are burdened by excessive debt. Public investment has

been indis criminately cut in recent years whenever the government has had to trim spending. India needs more capi tal spending by the

government to improve its creaking infrastructure. Jaitley will have to switch his s pending priorities from subs idies to asset creation.

Key reform: Revive the defunct National Investment Fund that will d irect public funds into new infrastructure projects. The m oney available

for such overdue capital spending s hould be ring-fenced by ensuring that all money collected from privatization and sale of telecom

spectrum is s ent into this investment fund rather than wasted in populis t spending schemes that do not create ass ets for the future.

3) Sell assets to generate funds

 A weak economy means that tax revenue will continue to be sluggish this year. That is why non-tax revenue from privatization wil l be

especial ly important if the fiscal deficit has to be narrowed. But privatization shou ld not be s een only as a tactical necess ity. The Indian

public sector is inefficient. The government has created assets that it cannot manage well . It should sell them and us e the money for new

projects, the way a private equity fund juggles its investment portfolio.

Key reform: Announce a credible privatization road map that will be overseen by an independent commiss ion. The sale of s tate-run

companies has to be done in a fair manner to avoid the sort of crony capitalist practices that have given privatization a bad name in s o ma

countries from Russia to India.

4) Increase tax-to-GDP ratio

The government collects too few taxes to run its daily show, create quality infrastructure and build even a minimal wel fare state. The tax-to

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GDP ratio is low even by Asian s tandards—though the two decades since the 1991 reforms have seen i t become more progress ive thank

to the growing contribution of direct taxes and the declining contribution of indirect taxes. Increasing tax rates is a bad idea. The more usef

strategy is to get more people into the tax net by having a sim ple and stable tax system.

Key reform: The introduction of the goods and services tax (GST) has been delayed for far too long; the constitutional s ettlement has to b

driven by the finance minis ter’s boss, Prime Minister Narendra Modi.

5) Put public finances back on track

The splendid increase in the national savings rate after 2003 was because of fiscal consolidation. The sharp increase in the revenue def

after February 2008—six months before the global financial crisis—was the biggest reason why the savings rate has declined

subs equently (while deteriorating company financials also reduced corporate savings). India won’t have adequate domes tic resources to

fund faster growth unless public finances are repaired.

Key Reform: Move towards a new version of the landmark Fis cal Responsibility and Budget Management Act that was introduced by the

previous National Dem ocratic Alliance government led by Atal Bihari Vajpayee .

6) Shift savings into the financial system

Years of high inflation combined with negative real interest rates on financial ass ets have encouraged Indian households to shift money o

of the financial s ystem. Physical savings have grown in im portance. India cannot fund its econom ic revival unless financial savings becom

more attractive. The likely end to the gold super-cycle may help, but the eventual s olution is to contain inflation.

Key reform: Tax breaks on financial s avings can be increas ed, but the more viable s trategy is to back Res erve Bank of India governor 

Raghuram Rajan in his battle agains t high inflation.