Financial Express, March 8, 2013

Betting on India

 At my university, I help run a new initiative that focuses on finance, and we just hosted a visiting speaker, a prominent statistician known for some innovative algorithms for analysing data. He is also apparently a lifelong—and successful—bettor on horse racing.

He was asking me about India’s economic prospects and, in formulating my answer, it struck me that the metaphor from his passion is apt: it is time to bet on India.

Why do I now think so? For the past few months, I have been gloomy about India’s policy paralysis and missteps. Indeed, many of the core problems are still there. But there is evidence that India has turned the corner. The place to begin is with the Economic Survey of India. (By the way, our visitor to UC Santa Cruz has been a long time colleague of India’s present Chief Economic Advisor). The first two chapters of the Survey lay out India’s current situation and long term growth prospects with unprecedented clarity. The quality of the overall analysis itself is cause for optimism. If this analysis truly begins to guide policy, India will be getting on the right track.

The Economic Survey predicts growth of 6.1-6.7% in the coming fiscal year. This is conditional on a decent monsoon, moderating inflation and reasonable global growth. Barring problems on these fronts, the prediction seems a reasonable one. Even a moderate improvement in growth can make a big difference to confidence at this stage. This growth projection feeds into the numbers used for budget estimates, so it is a critical number.

In addition to the factors mentioned, economic policy decisions will also be crucial. This brings me to the Union Budget.

Writing a few days after the Budget has the advantage of being able to see a slew of more immediate reactions. Most of the reactions were positive, from mildly so to enthusiastic. Some comments were simply based on relief that there were no new government giveaways of the scale and kind that have strained the fisc in recent years. Indeed, the budget was circumspect in this regard, with the need to reassure investors, both foreign and domestic, that the government is serious about managing its finances. A major negative comment was driven by the view that the revenue projections are wildly over-optimistic. If they do not pan out, the budgeted expenditure would be veer into unsustainable territory. But in the current year, it was the ability to pull back on expenditure (especially plan expenditure) that allowed the government to rein in the fiscal deficit despite lower than projected growth and revenues.

This kind of pulling back is not the best way to achieve fiscal consolidation, but my guess is that the coming year will be better. First, the GST keeps getting closer, and the steps that lead to it also have positive impacts. Second, if growth does recover next year, that should help revenues. Third, my overall sense of the tax proposals is that they contain few gimmicks and nothing like the major misstep of last year. They pay attention to principles such as maintaining broad bases for taxation. There are a few proposals here and there that will enhance revenues without too much distortion. The revenue side may well provide good news in the coming year.

On the expenditure side, the main welcome feature of the Budget, as noted, is the restraint shown in expanding transfers or subsidies. This restraint may come under pressure as the general election nears, but for now, it is the official position. The quality of expenditure remains problematic, and one misses the promises of a few years ago to monitor outcomes and test the effectiveness of public expenditure, but perhaps that should be outside the budget in any case.

Tax expenditures seem to be a strong feature of the budget, with several policies intended to spur investment in manufacturing. Similarly pro-growth are measures to streamline regulation of areas such as foreign investment. Indeed, the finance minister has promised more measures along these lines through non-legislative actions outside the Budget’s legislative process.

Overall, then, my sense of this Budget was that it is one of the better ones I have seen, in terms of avoiding silly policy measures, taking a host of small steps in the right direction, and most of all, being intellectually consistent with the rigorous analysis of the Economic Survey. It is still possible that political calculations of the worst kind will derail the possibility of progress. But I am betting that the ruling political elite have realized how far things were going wrong. They have also been given a clear picture of why they have been going wrong (the Economic Survey is again an excellent summary source, presented with clarity and directness), and seem to be betting themselves that they can do better politically by performing rather than pandering. If this is right, then it is time to bet on India once again.