VIEW: Most remedies for curing economy's ills lie outside Budget

Union Budgets have always been about a fine balance between fiscal prudence and growth inducing expenditures. But the debate on fiscal deficit reduction versus increased spending seems to be at its loudest this year.Given that economic recovery so far has been patchy and erratic, there is pressure on the finance minister to step up public spending in the hope that it will spur the investment cycle in the country. Higher spending may or may not achieve the desired objective of growth, but giving priority to fiscal deficit reduction will achieve nothing, say the pro-growth camp.The most vocal votary of the pro-fiscal discipline camp has been none other than RBI Governor Raghuram Rajan. Pointing out countries like Brazil and Russia, which are paying the price for aggressively chasing growth, Rajan maintains that macroeconomic stability is the key to sustainable growth. He argues that increased government spending will not have expected multiplier effect on other parts of the economy, at this juncture. At the same time, increased borrowing to support the spending plans could push up interest rates in the system, and further worsen the government’s finances.An ideal solution to this impasse would be to increase spending on infrastructure, by finding innovative ways to fund them outside the Budget.Last year’s Economic Survey had pointed out the flaws in the existing framework of Public Private Partnership (PPP) agreements and suggested improvements so as to attract private capital into infrastructure projects. Acting on the recommendations — which include allowing states the freedom to experiment, and a financing structure attractive to long-term money like pension insurance funds — should be a priority.A tricky challenge for Jaitley will be providing capital for state-owned banks which had to make huge provisions for their bad assets. Under the Indradhanush plan, the banks are eligible for Rs 25,000 crore this fiscal. But that is woefully inadequate, given that a sizeable chunk of non-performing assets are yet to be recognized.Given abysmally low valuations, banks are in no position to raise equity capital from the market. If the government does not provide capital, the banks’ finances will worsen. But for investors to put money in public sector banks, they need to be convinced that the government will adopt a hands-off approach. Capital alone cannot solve the problem of state-owned banks at this point; the government needs to show a stomach for some radical reforms.The Budget is expected to have some major policy measures for the rural sector, which is reeling under the double whammy of back-to-back drought and unseasonal rains. A section of the market feels the government may not be in a position to revive the rural economy anytime soon however noble its intentions. That is because fiscal constraints will limit the funds that can be allocated. Also, a recovery in construction activity—which looks unlikely in the near term—will be key to rural recovery.But more importantly, a series of wide ranging agricultural reforms is required for the government to meaningfully alleviate rural distress. These include addressing issues of productivity, mechanization, access to credit, crop pricing, marketing regulations, to name a few. Finance ministry officials have said that the Budget will have policies to boost its ongoing initiatives like Start-up India, Standup India, Make In India, Digital India and the Skill mission, which can help create more jobs. Here too, more than just fund allocation, the key to job creation would be to improve the ease of starting a business. And that means a streamlined approval process, consistent and simple tax structures and labour laws reforms.Expectations from the Finance Minister are low this time around, compared to last year. Awareness of resource limitations apart, there is also a growing realization that the solutions to most problems of the economy lie outside the Budget.