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In a conversation with Arindam Majumder, former Chief Economic Advisor Arvind Virmani (bottom, left)says that despite not having any big ticket reforms the Union Budget has several small steps which will boost growth, but the government should have tightened the fiscal deficit further. Excerpts:
What are the biggest takeaways from the Budget according to you?
This budget is significant in the context of the abolition of Planning Commission and Finance Commission report. These two taken together is a big step towards fiscal federalism. The basic idea is that states should have the money and responsibility to implement issues on matters that fall under the state list. To put it very simply, the extra 10 per cent devolution I think the budget made a start but it didn't go the full way. But it made a real effort of moving away from the one-size-fits-all policy. The Centre reduced revenue expenditure and pushed up the total capital expenditure.
Also, the share of the capital expenditure went up because there is a need to stimulate public goods infrastructure and only the government can do because we often say, there is a gap between the social and private benefit, the role of the state is to fill this gap.
There were expectation of a big bang budget. But the CEA ruled out scope of any big ticket reforms. Your views on that.
There can't be any big ticket reforms but I think there is enough in the budget to take the growth above 8 per cent according to the new numbers. A lot of people have missed the small reforms that are there in the budget. In the banking sector, the proposal to merge the FMC and Sebi has been pending for long.
It has finally been done cutting through bureaucratic resistance. Then the bankruptcy law is very important for a modern economy- it should have been actually in the Company Law. It will help companies to wind up swiftly and let monetise the asset that are stuck. Then, the new procurement law and the contract resolution disputes bill will help making things transparent. There are many small things like these which if implemented properly will drive growth.
There have been criticism from states like Bengal that there has been a half hearted approach towards fiscal federalism. In the guise of higher tax devolution the Centre has actually curtailed allocation under various schemes.
I am actually not that happy because they have gone the halfway. The Prime Minister announced that the Centre will still provide assistance beyond what the Finance Commission has recommended. States like Bengal should actually be happy about it. Because in-principle, all plan revenue schemes could be cut because the finance commission has taken account of it.
They have given enough funds for sectors under the purview of the states. In my view, there should be no revenue expenditure on state schemes. Capital grants can be given but there is no need for revenue expenditure.
The FM has delayed the target of fiscal consolidation and pegged fiscal deficit at 3.9 per cent for 2015-16. Your views on that.
In my view, it would have been better to stick to the target of 3.6 per cent that was recommended by the finance commission. If the government could have tightened the fiscal more and allowed monetary policy to expand in a greater amount it would have been better. The RBI has announced a rate cut of 0.25 per cent.
Had there been more tightening in the fiscal, it would have been possible to ease the monetary policy even further. Sectors like housing, automobile, real estate would have got a bigger boost had the revenue been adjusted more. It's not only fiscal expenditure that benefits but if there is an overall expansion of the economy, if there is more interest fall it also helps.
A lot of emphasis has been put on the JAM trinity to plug the leakage in subsidies. But the budget numbers say that the expense on non-fuel subsidies remain almost similar. Is there a gap in rhetoric and implementation?
For a long time our approach has been on how much money is being spent on subsidies rather than focusing on the mechanism on how to make it reach the people. This is a work in process. In that, the JAM is a welcome step forward. The interesting thing about that is the government is looking to move away from old methods like banking system towards mobile banking. This is a very efficient way but it will take time to show results. But, the commitment is there.
