India’s budget: A scattergun budget had plenty of good reforms but lacked a unifying pitch

“IT IS quite obvious that incremental change is not going to take us anywhere,” claimed Arun Jaitley, India’s finance minister, at the start of his 95-minute budget speech on February 28th. “We have to think of a quantum jump.” Mr Jaitley thus set the scene for a bold, visionary and reforming budget of the sort that would convince investors, foreign and home-grown, that India was a country on which to place long-term bets. The budget was undoubtedly a reforming one: Mr Jaitley announced a welter of initiatives, many of them ambitious, almost all conducive to economic growth. What was missing was vision of where it would all lead. There were plenty of strong threads in the budget, but Mr Jaitley missed a chance to twist them into a good yarn. One wondered what a more gifted speaker might have made of this material.

The basic macro-economics of the budget were solid enough. The Reserve Bank of India (RBI) will soon have a formal inflation target enshrined in a new RBI Act, said Mr Jaitley. Yet it was odd that such an important reform was dashed off so quickly in the speech and with so little detail. Tax revenue in the current fiscal year had proved weaker than expected, in part because GDP in cash terms was weaker than forecast, reflecting low inflation. Even so the pledge to keep the national government’s budget deficit to 4.1% of GDP would be met, said Mr Jaitley. The goal of getting the deficit to 3% of GDP would be pushed back a year to 2017-18, however, to allow for extra spending on roads and power stations.

Rating agencies and fiscal hawks are unlikely to quibble too much: what matters for fiscal discipline is that day-to-day spending is pruned. So Mr Jaitley’s promise to streamline subsidies must be kept. Disinvestment (India-speak for sales of state assets) will be stepped up, he said. Loss-making firms will be sold. But there was no detail on the sorts of assets that will be on the block.

There were eye-catching announcements on tax and much else. A harmonised goods-and-services tax (GST), to replace the myriad of state and federal levies, would be in place by April 2016, said Mr Jaitley. This long-awaited reform could add up to 2% of GDP by creating a common market in India. A firm date will concentrate minds, even if it is hard to believe the IT system needed to track payments across states and to calculate rebates for taxed inputs by businesses can be in place in a short time.

Mr Jaitley announced plans to put the direct-tax system on a rational footing, too. India suffers the worst of all worlds on corporate tax, he said: it has a high headline rate of 30%, yet it yields meagre revenues. This is in part because of a dizzying array of tax exemptions. To address this Mr Jaitley says he will cut the main corporate-tax rate to 25% over four years from 2016-17, and pay for it by pruning tax breaks. He junked an ineffective wealth tax in favour of a 2% income-tax surcharge on the rich. There will be stiffer jail sentences for tax evaders who hid money offshore. The changes to corporate tax will not be immediate, said Mr Jaitley, because he did not want to spring surprises. On that note he reiterated that retrospective changes to taxes will be avoided. And he said the application of a generalised anti-avoidance rule (GAAR) for taxes will be delayed for two years to allow time to think it through.

Such changes matter. Business folk are put off by the vagaries of India’s tax system. Making it simpler and more rational will boost investment and create jobs. Mr Jaitley might have done better to spell that out. There were plenty of other pro-enterprise threads to his budget. An e-business portal has been set up as a one-stop shop for 14 of the permits needed to start a business. Mr Jaitley promised to quicken this process by pushing new legislation to allow for pre-clearing companies who want to set up in India. He pledged progress on bankruptcy reform, including the introduction of a specialist corporate court, so that high barriers to exit do not put off businesses from investing in India. Mr Jaitley conceded that India’s infrastructure does not match its growth ambitions. New ways of funding roads, ports and power stations are need to plug this gap. So India’s state-owned ports will be nudged into becoming companies so they can lure investment and sell their land holdings. The government will provide equity capital for a new infrastructure fund. Mr Jaitley said the state will bear greater risk in PPP (public-private partnership) projects, such as power stations, and he will push legislation to help curb costly disputes over public contracts.

Mr Jaitley thus went quite some way to removing barriers to investment in India. True, he did not in his speech address the problems industry has in acquiring land. That was probably because the government is already in a difficult battle to amend the law that governs land-acquisition. The really big issue he missed was India’s labour laws. Only a small minority of workers in India are covered by them, because they apply only to biggish formal enterprises. These are just the sort of concerns that India must attract if it is to create jobs for the 13m people who join the workforce each year. To be fair (or perhaps generous) to Mr Jaitley, he did unveil an ambitious plan to create a social-security system for India based on private insurance. Protect jobs, as India’s labour laws do, and jobs are not created; it is far better to protect people from the impact of joblessness. If this was intended as a first step on a journey to labour-market reform, why not spell that out? Mr Jaitley used the world “road map” several times in his speech. Yet on many reforms he took his listeners only as far as the first big junction.