The caravan of reforms keeps moving in full pace: Arvind Panagariya


By: Arvind Panagariya, Professor, Economics, Columbia University, US

As an economist, I am grateful that the PM hasn’t given up the path of fiscal rectitude. Rejecting calls by the ‘stimulus school’, the final budget pegs fiscal deficit for 2019-20 at 3.3%, down from the revised estimate of 3.4% for 2018-19 and 3.5% of actual level in 2017-18.

Growth has been sliding down for the last four quarters, and it fell down to 5.8% during the last quarter of 2018-19, the latest quarter for which we have GDP estimates. There have also been reports of a slowdown in both private consumption and private investment. So, the temptation, as well as a good excuse, to go to town with spending was there. But the PM, who has fought hard for an unprecedented five years to restore fiscal discipline, has stayed course.


While closer scrutiny will have to be done in the days to come, GoI has also continued to maintain a high quality of its expenditures. The budget, thus, provides generous allocations to building the country’s infrastructure, most notably, roads and railways. There are also generous incentives for investment in housing. In terms of social expenditures, the provision for piped water has been moved to the top of the agenda.

Those looking for a big-bang reform must carefully read the section on higher education in the speech by FM Nirmala Sitharaman. Prior to the recent grant of autonomy to the Indian Institutes of Management (IIMs) and best-performing universities and colleges, this area had remained off limits to reforms for three decades after the latter were launched in 1991.

The budget breaks new ground when it notes, “The regulatory systems of higher education would be reformed comprehensively to promote greater autonomy and focus on better academic outcomes. A draft legislation for setting up Higher Education Commission of India (HECI), would be presented in the year ahead.” The speech also proposes to “establish a National Research Foundation (NRF) to fund, coordinate and promote research in the country”.

These are the two key reforms that Prof B Venkatesh Kumar and I have advocated in a series of recent articles. As an essential complement to these reforms, we would also need to revamp the accreditation system by empowering public and private sector bodies to rapidly bring the universities and colleges into the ambit of accreditation. Another important reform in the budget relates to privatisation of Central Public Sector Enterprises (CPSEs). The budget speech states, “Government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.” This is as clear a statement of GoI’s intention to move ahead with sales of CPSEs as one could have asked for.

GoI has also proposed several urgently needed reforms to restore the health of the financial sector. It has committed another Rs 700 billion towards recapitalisation of PSBs. This will, of course, need to be complemented by measures to speed up the process of cleaning NPAs of PSBs. GoI must ensure that the processing of NPA cases under IBC follows stipulated timelines.

To unblock liquidity for non-banking financial companies (NBFCs) in the short term, the budget provides for a one-time partial six-month government guarantee to PSBs on their purchases of high-rated pooled assets of these institutions up to Rs 1 trillion. At the same time, the FM proposes to strengthen regulatory authority of RBI over NBFCs, while also returning to the central bank the regulation of housing finance from National Housing Bank.

The reform of corporate profit tax has made progress, but not as much as some of us had hoped. The tax rate has been lowered to 25% for companies with annual turnover below Rs 400 crore, but not above it. Though this covers 99.3% of all companies, it’s the remaining 0.7% that account for the bulk of the turnover of tax-paying entities. A key element missing from the budget is a focused strategy for the creation of wellpaid jobs. Economic transformation cannot be complete without a strategy that encourages firms to grow larger and compete in the global marketplace. To be sure, the budget provides for lowering tariff rates on a handful items. But it remains true that the overall framework remains wedded to the general philosophy of import-substitution, as reflected in tariff hikes on items such as chemicals, paper, textiles, ceramic products, steel and auto parts on grounds of levelling the playing field for industry.

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