Union Budget 2025-26: Many small measures but lacks big ideas

Union Budget 2025-26: Many small measures but lacks big ideas, Ideas for India, Feb 5, 2025.

Budget 2025: Balancing reforms and fiscal consolidation to revive growth

Business Standard January 21, 2025

In less than two weeks, the Finance Minister will present the Union Budget for 2025-26. The budget will be presented against the backdrop of a slowing economy characterised by high levels of fiscal deficit and debt. That means the FM will have to find a way to announce policy initiatives to revive growth while also achieving fiscal discipline. While calls for tax cuts and increased infrastructure spending are loud, this Budget must do a lot more to drive sustained growth.

The two key questions are: What is the diagnosis of the economic slowdown? And what can the Budget do to address it?

Let's tackle the question of slowdown first. The consensus is that the slowdown is temporary, but data suggests otherwise. Barring one quarter, the economy has been slowing steadily since mid-2023, with real GDP growth rate falling from more than 8 percent to under 6 percent in just a year. High-frequency indicators also show that the post-Covid growth momentum is fading, possibly signalling a deeper, structural slowdown.

Before Covid, the economy was already struggling, growing at less than 4 percent in Q4 2019. Post-Covid, many high frequency indicators pointed to the emergence of two different economies within one: an "Old economy" in middle and rural India, and a "New economy" driven by a boom in service exports. The latter was fuelled by the rise of global capability centres (GCCs), mainly US-based, employing high-skilled Indian workers in sectors like Research and Development. The New economy boosted luxury consumption, like SUVs, and sparked a mini-boom in construction. In comparison, the Old economy has been weaker from even before the pandemic, the result of low private sector investment and weak goods exports. Workers in the Old economy have also been getting battered by high food inflation and falling real wages. And now, the New economy is slowing down too, normalizing to a more moderate growth pace. Together, these dynamics are creating a serious demand problem.

How should the Budget address this, while also reducing fiscal deficit? Two things are worth considering.

The Budget should focus on rationalizing expenditure to achieve fiscal consolidation. In February 2023, the FM had set a target to reduce the fiscal deficit to less than 4.5 percent by 2025-26, but this will be challenging in a slowing economy with nominal GDP growth under 10 percent. However, lowering the fiscal deficit is essential for macroeconomic stability, which is key for growth. To achieve fiscal consolidation, the government should reduce revenue expenditure, which includes schemes and transfers, and accounts for nearly 77 percent of total spending. For example, why is it important to provide free food grains to 800 million people annually when there is no pandemic emergency any more?

On the issue of growth, there is a lot of clamour for more government spending on infrastructure. While some infrastructure is needed, it is unclear if this alone will boost GDP growth. For sustained economic growth, a revival in private sector investment is crucial, but public infrastructure spending does not seem to encourage this. Moreover, with much infrastructure already built, the marginal benefits of new roads or highways are diminishing. In short, government infrastructure spending might be a blunt tool for stimulating growth when private sector confidence remains low.

Likewise, tax cuts can boost consumption, but given the limited fiscal space, there is little room for widespread cuts. Moreover, large segments of the Old economy, where falling wages and poor job prospects are hurting demand, aren't even in the tax base. As a result, some tweaks here and there with the tax structure are unlikely to make a significant impact.

To facilitate high, sustained growth, the Budget must revive a key element missing from India’s economic agenda: Reforms. Since the rollout of Goods and Services Tax (GST) in 2017, no major reforms have been introduced. Many say that no new reforms are needed since all the key policy initiatives have already been adopted. But this is not true. There is in fact much that needs to be done.

Given the current economic climate, the Budget could propose liberalizing import tariffs, removing non-tariff barriers where import-dumping is not a concern, scrapping Quality Control Orders that restrict the imports of vital supplies to the manufacturing sector, overhauling the tax system (including residence-based taxation to attract foreign investment), further simplifying the GST, eliminating cesses and surcharges, curbing excessive industrial policy so as to create a level playing field for all firms and incentivising states to do land and labour reforms. Long-overdue regulatory reforms should also be prioritized. The conversation around reforms has faded, but now is the time to bring it back.

This Budget must serve as a blueprint for the government’s long-term economic vision, laying out a comprehensive medium-term strategy to restore private sector confidence. Incremental changes to taxes or spending will not be enough to turn the tide, and the economy will continue to struggle. The time is ideal for a "dream budget" akin to the 1991 reforms that sparked high growth and unlocked significant gains in productivity.

The big question of 2025: where will growth come from?

Indian Express December 23, 2024

With the new year around the corner, it is useful to think ahead and ask: what is going to be the big economic issue in India in 2025? There is little doubt that it is going to be the growth slowdown. For a rich country like the US with an annual per capita GDP of $86,000, slowing growth does not hurt a lot. But for a poor country like India, with a per capita GDP of only $2,700, slowdowns are painful and worrisome. To become an advanced country, India will need to grow rapidly for a long period of time. And this is not easy. Only a handful of countries have made it into the elite club. In order to have a good shot at it, India will need a coherent and well-defined growth strategy.

The recently released GDP growth figures have triggered much discussion over whether the slowdown is merely a temporary blip or a warning of a more serious trend. Official statistics show that growth has declined in four out of the last five quarters. In the middle of 2023, the economy was growing at a healthy rate of more than 8 percent. But by the September 2024 quarter, growth had fallen to less than 5½ percent. Official data is plagued by measurement issues, but this slide does seem to reflect reality because it is confirmed by several high frequency indicators. Clearly, there is a growth problem in the Indian economy.

There are also no evident drivers that could reignite the engine of high growth. Consumption demand has been subdued, especially in urban India. Partly as a consequence, private investment has been weak, even though corporate balance sheets are healthy. After all, what is the point of building more factories when existing ones still have plenty of unused capacity? While government investment has been growing rapidly over the past few years, propping up demand, it is soon going to run into fiscal constraints.

So, is India doomed to slow growth? Fortunately the answer is no. There is one major opportunity out there waiting to be seized. Consider some basic data. India’s GDP is roughly $4 trillion while global GDP is a little more than $100 trillion. That means that India’s share of the global economy is around 4 percent. But its share in global goods exports is much smaller, less than 2 percent.

This mismatch suggests a thought experiment. Assume that India decides to bring its export share in sync with its share in the global economy. This would take some time but it seems reasonable to target pushing up India’s export share by 1 percentage point over the next five years. If this could be achieved, it would do wonders for growth.

To see why, let’s pursue the thought experiment further. Assume conservatively that the global market grows merely at the rate of inflation. In that case, an increase in market share from 2 percent to 3 percent would mean a 50 percent increase in India’s export volumes. Translated into annual growth rates, this would imply a 9 percent real increase in goods exports per year. Since goods exports constitute around 13 percent of GDP, this means that the export drive would add more than 1 percentage point to growth every year!

The best part is that such an opportunity is in fact knocking on our door. Many multinational companies are wanting to move out of China. And the only other country with a large population base and strong growth prospects is India. In other words, there is now an historic opening to attract foreign direct investment (FDI) in manufacturing, which all across Asia has been the key to increasing countries’ global export market share. The government, to its credit, has been trying to seize this opportunity by rolling out the well-funded Production Linked Incentives (PLI) subsidy scheme.

So far, however, the results have been disappointing. Last fiscal year, inward FDI was only $66 billion—exactly the same as it was back in 2019-20. Only about one-fifth of this total was in manufacturing. Partly as a result, from March 2022 to September 2024, average year-on-year growth in goods exports was just 4½ percent. In other words, we have not succeeded in taking advantage of the massive opportunity that still exists.

What therefore needs to be done? India needs to adopt a well-defined export-led growth strategy, the critical component of which would be minimising risk and policy uncertainty. To give an important example, the country needs a consistent and coherent trade policy that does not involve frequent changes in import tariffs or worse still, import or export bans. It also needs a re-liberalisation of the foreign trade regime, which has become increasingly protectionist and an exchange rate that responds to market forces as opposed to being very actively managed by the central bank in a way that erodes the competitiveness of Indian exports. And it needs a level playing field for all firms.

More generally, policy needs to be much more transparent and predictable, without sudden flip-flops. If we can create such an environment in India, not only would foreign firms feel confident to set up shop here and export from here, but this could provide a fillip to domestic investment as well. All firms look for the same thing when they contemplate a major investment that might last 10-20 years: they want an assurance of macroeconomic stability and policy certainty.

India is facing a historic opportunity to achieve rapid growth by increasing FDI and raising its share of global good exports. What is urgently needed for this growth strategy to work is predictability and certainty on the policy front, as well as a reorientation towards a free-trade mindset. It could be a costly mistake to let this opportunity pass, especially if India aspires to become a developed economy by 2047.

Unshackling the Indian Rupee

Indian Express November 9, 2024

Recently, there have been several reports about the stability of the rupee against the US dollar. This is typically described as a positive development. But the central bank’s decision to control the exchange rate is in fact deeply problematic.

Admittedly, the Reserve Bank of India (RBI) has always intervened in the foreign exchange market to smooth out fluctuations of the rupee. However, since 1991, the intervention has never been as great as it is today. The data speaks for itself. Over the two decades through 2020, the average annual volatility (that is to say, the movement) of the rupee-dollar (INR-USD) rate typically ran around 5 percent. But between April 2023 and August 2024, the average volatility collapsed to only 1.9 percent, a level that is extraordinarily low not only compared to India’s own past but also to all of its emerging economy peers.

To be clear, if exchange rate stability comes about as a natural outcome of market forces, then it is welcome. For example, the euro-dollar exchange rate is one of the most stable in the world, not because their central banks regularly intervene in the market—they do not—but because a vast number of players are freely able to take money in and out of these financial markets, creating huge but roughly balanced cross-border movements of capital which in turn keep the exchange rate stable.

The rupee's recent stability, however, has not been driven by market forces. On the contrary, it has come about due to an apparent change in the RBI’s currency policy. Since late 2022, the RBI has decided to actively intervene on both sides of the foreign exchange market, on some days buying dollars to prevent the rupee from appreciating and on other days selling dollars to prevent the rupee from depreciating. It is only a small exaggeration to say that without any announcement or public debate, the rupee has become pegged to the dollar.

There are several fundamental problems with this change in currency policy.

To begin with, it goes against basic economic principles. In any country that aspires to reach the ranks of the developed economies, the price of any good, service or asset should not be determined by the State. Just as we do not want the price of tomatoes or computers or restaurant meals to be fixed by the State, it is not a good idea to fix the price of the rupee either. The price should instead be left to the market.

This is because the price system in a market economy performs a crucial function: it conveys information about demand and supply to buyers and sellers, who can then adjust their behaviour accordingly. For example, a high price signals to sellers that they should supply more, while telling buyers that they should hold off on their purchases. As each group responds to this signal, demand is gradually brought into balance with supply.

In contrast, when the State sets the price, the information system gets distorted. One only needs to look at India’s own history to see what can go wrong. In the pre-1991 era, controlled prices led to shortages of nearly every major good that people wanted to buy, such as cars or telephones. Most scarce of all were imports, which people could not obtain easily because the pegged exchange rate led to shortages of foreign exchange. Ultimately, these problems led to the crisis of 1991, when the entire system broke down.

This is not a uniquely Indian story. The list of countries that got into serious trouble after pegging their exchange rate is a long one, including major economies such as Argentina, Brazil, Mexico, Russia, South Korea, Thailand, and Turkey. That is why nearly all emerging economies have decided in recent years to free their exchange rates.

So much for theoretical principles. What about practice? After all, sometimes the practical problems of a theoretically-best policy can be so large that it simply needs to be abandoned. But that was not the case here, which brings us to the next problem with the new currency policy: it did away with a long-standing system that was working perfectly well.

The previous flexible exchange rate policy had two practical advantages. First, the exchange rate moved up or down over the business cycle which in turn helped smooth out output fluctuations. During periods of high growth when exports were growing and foreign capital was flowing in, the rupee appreciated which prevented the economy from overheating. And when the economy was in a downturn, the rupee depreciated, making Indian goods and services more attractive to foreigners, thereby promoting an export-led recovery.

Second, because these ups and downs balanced each other out, over long periods there was stability in the real exchange rate, that is the exchange rate adjusted for the difference in inflation between India and its trading partners. In contrast, the new inflexible system has already led to a significant real exchange rate appreciation, thereby making India’s exports more costly to foreigners, and potentially undermining the Make in India drive.

All these bring us to the final problem, namely the lack of transparency. The central bank seldom communicates about its currency policy. As a result, it is not well understood why the RBI felt the need to break with a long-standing practice and bind the rupee so tightly to the dollar. It is also not clear whether this is a temporary policy or a more long-lasting change.

Consequently, private sector participants in the foreign exchange market are confused. They need to guess when they see imbalances in the market, such as capital flows exerting pressure on the exchange rate. Will the central bank intervene to prevent the exchange rate from moving? If so, when or by how much or in which direction? No one knows. So, they do not know how to respond.

The exchange rate is the most important price in a market economy. If India wants to become a high- income economy, the exchange rate needs to be able to respond freely to market forces, sending appropriate signals to market participants. If instead the market gets distorted merely to stabilise the currency, this may prove costly in the long-run.

Why going back on inflation targeting could erode credibility of RBI

Indian Express September 24, 2024

Should India modify its inflation targeting (IT) framework, or even abandon it completely? Several commentators have raised this question recently, ahead of an official review of the monetary policy framework due in March 2025. Without doubt, periodic policy reviews are important – that’s why they are mandated in the IT law. And it’s also true that policies can always be improved. But the big picture needs to be kept in mind, which in this case is that IT has succeeded beyond expectations, making it one of the most important reforms of the last decade. Going back on this reform or making substantial changes to "loosen" the framework would erode the credibility of the central bank, damage the economy, and backfire in a political sense. Let’s consider how.

Before going into the debate, it is important to recognise what the upcoming review entails. According to the amended RBI Act, "the Central Government shall, in consultation with the Reserve Bank of India, determine the inflation target in terms of the Consumer Price Index, once in every five years". Strictly speaking, this refers to the numerical target of 4 percent with a band of plus or minus 2 percentage points on either side. However, this instruction can also be interpreted more broadly. Hence, the debate triggered by the Chief Economic Advisor needs be taken seriously. If some of the changes proposed are adopted – in particular, the suggestion that the RBI target only a subset of the CPI, excluding food prices--they would soon have enormous impact on the public.

Three points are worth noting in the context of this debate.

First, it is important to remember why IT was implemented in the first place. During 2009-2012, the UPA-2 government let inflation go out of control. CPI inflation reached 15 percent in March 2010, the highest among all the major G20 countries. And yet no one was held responsible, because the RBI was following a “multiple objectives” approach, under which it wasn’t firmly committed to any particular target. The resulting public outcry was so strong that the UPA was voted out of office (for this and other reasons) and a new government voted in, which pledged it would not allow such an episode to occur on its watch. To make this promise concrete, it enshrined IT into law.

Second, the reform has proved successful, far more so than many people anticipated at the time IT was adopted. The RBI has generally kept inflation within the 4-6 percent band; even when inflation has breached the upper limit, the deviations have been modest. Notably, inflation has never gone back to double digits, despite the serious food, oil, and pandemic shocks of the last few years.

Third, this success has brought benefits, both economic and political. Price stability has helped fuel growth, because it has allowed businesses to plan without worrying too much that their projections will be upset by surging costs. It has also reduced interest rates because it has improved central bank credibility, meaning that the RBI no longer needs to raise interest rates by as much as it did in the 2010s to convince people that it is serious about tackling inflation. Recent research conducted by Vaishali Garga, Aeimit Lakdawala and myself shows that market participants view RBI’s commitment to IT as credible. And price stability has paid political dividends, or at least allowed the NDA to avoid the political costs of high inflation suffered by the UPA.

But what about the argument that the RBI should narrow its target, to exclude food prices which it cannot control? The problem is this is a theoretical argument. And in the end, the theoretical points are not relevant. After all, the purpose of a government is to provide services that the public needs and desires. And the Indian public has made it clear that it desires price stability. Not for a subset but for its entire consumption basket, especially including food. Put another way, there’s a reason why all major central banks target inflation. And there’s a reason why they all include food in their target indices. Because it is what the public wants, indeed demands.

That said, there are indeed theoretical factors that the RBI cannot ignore. Central banks worry about rising food prices because of what is referred to as “second-round effects” such as the spillover of food inflation to non-food inflation through a wage-price spiral. Workers faced with higher food prices, demand higher wages in order to compensate for their rising cost of living and this in turn pushes inflation up even more. Some commentators have argued this consideration does not apply in India, noting that recent food price increases have not had any spillover. That may be true, but again is irrelevant, as it confuses the particular for the general.

In recent months in India, declining core (non-food, non-fuel) inflation implies that the second round effect is weaker right now. This is because there is pervasive unemployment in the economy. When there is surplus labour or a lack of adequate jobs, as is the case now in India, the workers are not in a good position to demand. They have less bargaining power to demand higher wages when food prices go up. In such a situation the wage-price spiral may not get triggered and hence we are not seeing steep increases in non-food inflation. But in the mid 2000s when the economy was booming and the labour market was tight, high food prices set off a wage-price spiral. This situation could easily recur if the economy grows rapidly over the medium-term, in which case changing the framework to tell the RBI to ignore signals from rising food prices could prove disastrous.

What is instead required is for the RBI to strengthen its analytical framework, given that its inflation and growth forecasts have frequently been subject to large errors. This in turn requires improving the underlying data, especially the CPI and GDP, which are outdated and have methodological issues. And it also requires a better understanding of agriculture, to assess whether food inflation is temporary or a reflection of some deeper, structural issues.

Implementing reforms in a messy democracy like India requires years of work and discussion. Even after a decade, the IT framework is still in its nascent stages and is being put to test by various shocks. It’s important to let it mature, making incremental rather than major changes that would endanger the overarching goal of price stability. As they say: if it isn’t broken, don’t fix it.

Why RBI’s attempts to control the Rupee can have adverse consequences

Indian Express August 24, 2024

The Indian rupee follows a managed floating exchange rate regime. This means that the central bank intervenes in the foreign exchange market to buy or sell dollars in order to stabilise the value of the rupee. In recent times, however, the RBI seems to be using its regulatory powers to gain greater control over the rupee. We argue that currency management must not entail the use of regulations. The purpose of regulations is to address market failures. Currency volatility is not a market failure — it is the fluctuation of the currency in response to demand and supply forces. The use of regulatory powers for currency management introduces uncertainty in the central bank's currency policy, and also increases the cost of doing business in RBI-regulated sectors. We discuss three such regulatory measures and the problems associated with them.

First, prohibiting speculative trades on exchanges. This exacerbates the difficulties of taking rupee exposure in India. In 2008, the RBI allowed Indian exchanges to launch a currency derivatives segment. At that time, the RBI’s guidelines on currency Futures and Options allowed Indian residents to participate in this market "to hedge an exposure to foreign exchange rate risk or otherwise". While the RBI continued to prescribe the product design, position limits, and trading hours, the general trend was towards opening up this market. The idea was that as India became more globally integrated, the demand for such instruments and for liquidity in the derivatives market would increase. At some point, the 2008 guidelines were overtaken by several circulars, with the last version issued in 2016 having been amended at least 11 times. These regulations explicitly allowed taking positions in rupee-linked currency derivatives up to $100 million across all exchanges, ``without having to establish existence of underlying exposure".

Earlier this year, however, the RBI explicitly mandated exchanges to inform users that they "should be in a position to establish the existence of a valid underlying contracted exposure, if required". This warning compelled the bulk of retail traders to wind up their positions as a result of which trading volumes collapsed by about 80 per cent across all exchanges. This regulatory measure essentially restricts speculators from trading in the onshore rupee market. It overlooks the fact that a liquid market requires all kinds of traders, including speculators, who act as de facto market makers. This move is an irreversible blow to a reasonably liquid market, which allowed hedgers to take positions on the rupee at low costs. It is likely to drive away volumes to the offshore currency derivatives market.

Second, regulating offshore trading platforms. The RBI proposed to regulate offshore electronic trading platforms (ETPs), which facilitate rupee-linked derivative transactions. Published on its website in April 2024, this proposal seeks to empower the RBI to oversee the offshore currency forwards market, commonly called the non-deliverable forwards (NDF) market. The NDF market allows people to trade in the rupee without undertaking any physical delivery of the currency, thereby reducing the cost of trading. In the last few years, the rupee NDF market has grown substantially in size, and is now reported to be almost thrice as large as the onshore market. This has led to concerns in the RBI that the offshore market, over which it has no direct oversight or control, could be playing a significant role in determining the rupee’s value. The recent regulatory proposal requires ETPs to register themselves with the RBI, and confers fairly extensive powers on the central bank, such as the power to refuse registration, seek information, specify "eligible instruments" that Indian residents may trade in, and impose additional terms and conditions.

Legally, the RBI can restrict Indian entities’ rights to deal with non-residents or to transact in foreign currencies, but it is a jurisdictional leap to regulate offshore platforms on which Indian residents trade. This is akin to Sebi asking the New York Stock Exchange to register with itself, simply because Indian residents trade at these venues. Instead of expanding its regulatory powers, the RBI must make it easier for people to trade the rupee in India. This will help bring back rupee linked trading volumes and allied businesses onshore.

Third, the RBI's instructions to banks. Earlier this month, when the rupee-dollar exchange rate depreciated close to the 84 mark in the spot market, the RBI is reported to have orally instructed some large commercial banks to not add to their existing trading positions against the rupee. This step seems to have been taken to stem further rupee depreciation. On August 16, the RBI similarly instructed banks that handle trade with the United Arab Emirates to partially settle their trade payments using rupee instead of the dollar. This means that banks should directly convert rupees into dirhams and vice versa without first converting them into dollars. One objective of this move seems to be to reduce dollar dependence in international trade. But settling trade in rupee also helps insulate the currency from the impact of dollar outflows, that is, lower the extent of rupee depreciation against the dollar. In other words, this is yet another regulatory measure that helps to manage the currency.

Notwithstanding the debate on the costs and benefits of a "managed" currency for an emerging economy like India, the RBI must not seek to manage the rupee’s volatility through an indiscriminate expansion of its regulatory powers. Regulations are the rules of the game. Unlike market operations that involve central banks buying or selling the currency in the foreign exchange markets, changes to the rules of the game can have a more permanent, damaging effect on the incentives and the costs of doing business in the country.

Budget Hits and Misses

Indian Express July 27, 2024

The Union Budget presented yesterday was expected to set out a roadmap for the country’s growth and development. Did it live up to expectations?

To answer this question it is important to understand the economic context in which the Budget was presented. Despite official data showing that the Indian economy grew at 8.2 percent in 2023-24, evidence suggests a worrisome slowdown in aggregate demand. Concerns have already been expressed about consumption. In 2023-24, private consumption is estimated to have grown by a mere 4 percent, a steep decline from the 11 percent growth rate in 2021-22 when the economy was recovering from the pandemic. Much of this slowdown can be attributed to economic distress in rural India.

In addition, the two biggest drivers of growth, private investment and exports have not been performing well. The government has consistently increased its spending on infrastructure since 2020-21 in the hope that this would “crowd-in” private investment. However private investment continues to be weak, with no sign that things are going to turn around any time soon. In fact new project announcements (as measured by CMIE) have been declining since September 2023, suggesting that private investment might even start falling. The news is not great on the exports front either. Merchandise exports fell by 3 percent in US dollar terms during 2023-24. While services exports have been doing better, they have also slowed considerably.

The demand slowdown has created a jobs crisis, perhaps the biggest challenge confronting this government. By June 2024, India’s unemployment rate had increased to 9.2 percent according to CMIE data, up from 8 percent in 2023.

The ask from the Union Budget therefore was a policy framework that would encourage the private sector to expand capacity, generate employment and thereby pave the way for sustained, rapid growth. This growth strategy had to be accompanied by fiscal consolidation to bring down deficits and debt levels that have been running high since the pandemic.

Analysed against this ask, the Budget was characterised by both hits and misses.

From the macro stability perspective, this Budget exceeded expectations. It reduced the projected fiscal deficit for 2024-25 to 4.9 percent of GDP from 5.1 percent announced in the interim budget earlier. As a result, the government is now in a better position to achieve its long-stated goal of reducing the deficit to less than 4.5 percent of GDP in 2025-26. The Budget also improved the quality of government expenditure, increasing the share of capital expenditure in total expense to 23 percent in 2024-25, from 12.5 percent in 2019-20. This is the highest share of capex in 3 decades.

From the growth perspective the government, perhaps for the first time, acknowledged the problems in the Indian economy, albeit indirectly. The government's concerns showed in the announcement of a slew of measures targeted towards agriculture, employment, skilling, MSMEs, and even the tweaks in the direct tax regime. The concerns were also reflected in the decision to keep capex unchanged at Rs 11 lakh crore, the same level as the interim budget. Had the economy truly been growing rapidly, there would hardly be a need for the government to continue to stimulate it, especially given the fiscal constraints.

Having said that, the Budget did not outline an economic strategy to tackle the problems nor did it lay out an economic vision for the next few years. Instead, the plan seemed to be to address the deeper structural problems using schemes. It is not clear how these schemes will solve the problems, or even, how they will really work.

For instance, one of the main Employment Linked Incentive schemes is to give Rs 15,000 to new employees in the formal sector. It is not clear who is the targeted beneficiary of this incentive given that availability of formal sector jobs itself is a big problem. Likewise, reimbursing employers for their EPFO contributions on new employees for two years (upto Rs 3,000 per month) is likely to have only a marginal impact on the cost to companies and hence on job creation.

The other schemes also seem too small to address the problems. In the agricultural sector, the budgetary allocation for NREGA was kept unchanged at the same nominal level as in the interim budget, even though the rural economy is in significant stress. The tweaks in the direct tax slabs under the new tax regime are also likely to have only a marginal impact on household demand. Similarly, the Budget announced that additional tribunals would be set up to speed up resolution under the Insolvency and Bankruptcy Code (IBC, 2016), even though the real problem lies in staffing of the existing tribunals.

A glaring gap in the budget was a lack of mention of privatisation. PSUs have been witnessing high valuations in the stock market making it an opportune moment to sell them off to interested buyers. This could also help boost private investment. A good example of this has been Air India privatisation where the new owners have been making huge investments to turn around the company.

Another big miss was not providing a strong fillip to merchandise exports and making the most of foreign demand for goods, given sluggish domestic demand. The Budget did announce reductions in customs duties for some items but given the state of the economy, the need of the hour was a major reversal of the protectionist stance adopted since 2015 by significantly lowering import tariffs, dismantling trade barriers, and signing free trade agreements with major trading partners.

In summary, the Union Budget scored well on fiscal stability but could have done better by setting out a well-defined growth strategy. The Finance Minister did mention that the government is working on some fundamental, structural reforms without mentioning any details or timelines. We can only hope that these reforms will demonstrate that the government has a better grasp on the economy’s underlying problems.