Union Budget 2016: Need for Major Decisions

The Union Government is formulating the budget to be announced on February 29, 2016. The officials in Ministry of Finance are busy with budgetary consultations. At the outset, it needs to be recognised that the Budget, especially the Union Budget, is more than a mere accounting exercise as it lays out a vision of the Government and then on a mission mode, provides a strategy to implement it during the course of that year or next. In fact, to achieve steady growth, fiscal policy of the country is embodied in the Union Budget. And the challenges in fiscal policy are a many which needs to be addressed immediately. The important concerns are that despite best efforts, industrial growth continues to be tepid; unemployment, especially amongst youth is high; agricultural output because of El Nino and other climatic conditions is low; consumer inflation is heading northward; and overall growth in the country is beginning to stagnate around 7- 7.5 percent when country has a potential to grow at 9 percent per annum.

The Central Government is aware of the situation and has consistently been making efforts to revive the economy by announcing schemes like start-up India, MUDRA, Jan Dhan Yojana, make in India, Skill India, Digital India, and Smart Cities. The implementation of these schemes have yet not yielded higher growth. Therefore, probably, the Union Budget of 2016 needs to exclusively focus on measures to increase growth. To increase national output, three ingredients are most important – labor, capital and entrepreneurship.

Women Participation in Workforce
There are numerous empirical, studies that have demonstrated that increased female workforce participation can lead to significant macroeconomics gains. Similarly, equal access to inputs by women would raise productivity of female-owned companies. Further getting women to work would also help in improving the per capita income of the country. Increased income by women also leads to reduction in income equalities, as well as poverty.

The participation of women in labour force can lead to increasing GDP of India by 27 per cent according to research done at International Monetary Fund, Washington, DC. In India, only about 30 percent of women are in workforce. In contrast, in Nepal, nearly 80 percent of women are in the workforce followed by China (71 per cent), Bhutan (67 per cent), and Russia (57 per cent). Closely co-related to low workforce participation are issues like persistency in preference for a male child reflected in adverse sex-ratio. As per the Census data, the state-wise child sex ratio (CSR; number of females per 1000 males in 0-6 year’s age group) in India during 2001-2011 has deteriorated though overall sex ratio recorded a marginal improvement over the years.

To enhance female workforce participation, the Government could also consider more recruitment of women in armed and police forces. According to some estimates, women constitute only 3 percent of police force in India and a small number in Indian army. In contrast, women play an important role in armies of many countries, including the US, Israel, China, Russia, Sri Lanka and Pakistan. India could consider Sainik and Military schools/colleges for training female students and National Cadet Corps can be extensively used in colleges and Universities to show-case job opportunities in defence areas.

There is substantial potential of jobs in defence forces. Illustratively, in the recent Central Seventh Pay Commission Report, it was mentioned that Indian Army is short of officers by nearly 25 percent while Navy is short by 17 percent and Air-Force by 4 percent. The defence forces have a provision of short service commission (SSC) which can be tailor-made to suit the psychology of Indian families which insist that females should get married and start their own family before thirty years of age. The SSC, with a provision of 5 or ten years of service is most suitable in such circumstances in India.

Similarly, judiciary suffers from serious shortage of courts and legal staff especially in international comparison. It would be useful to have more female participation in legal services. This effort of encouraging women to work in defence and judiciary may also help in making India a safe place for women.

To enhance female workforce participation, another out-of-the-box view needs to be considered. It is established that women generally demonstrate responsible behaviour in financial matters and their income is generally used to finance family expenditure. Therefore, the Government could consider offering higher or complete exemption from income tax for women participating in workforce. As the income earned by women is spent on family expenditure, and more women will be encouraged by this measure to enter the workforce, indirect tax collection on goods and services would improve, and therefore, in net, not impact the national or state fisc. Similarly, to incentivise female participation in self-employment, especially under micro, small and medium enterprises (MSMEs), tax holiday could be offered to MSMEs run by women entrepreneurs. The Government could also consider special provisions for women entrepreneurs and longer tax holidays under SUI, announced recently.

Capital Mobilisation
To provide opportunity to monetize gold, and financial resources for developmental activities, in a resource constraint economy, the Government had launched Gold Monetisation Schemes (GMS), including Gold Sovereign Bonds (GSB) in November 2015. The response is tepid with less than 4 tonnes of gold mobilised in last few months, and mobilisation seems miniscule compared to nearly 1,000 tonnes that the country imported annually, and holds a stock of nearly 21,000 tonnes. The reasons for the lacklustre response of GMS are manifold. The need is to actively extend the campaign to households, may be through use of vernacular press and electronic media. Also, from the market, the feedback on the scheme suggests that there are problems with collection and assessment of value, as only about 54 assayers in 30 cities are recognised, nation-wide. To make the scheme market friendly, assaying could also be assigned to select jewellers, especially branded chains, to ensure presence in at least all districts. To incentivize collection of gold, commission that is being offered to commercial banks, 2.5 percent including handling charges, could also be offered to select jewellers.

Nurturing Entrepreneurship
To nurture entrepreneurship, the Government has launched the Start-up initiative (SUI) which is expected to take India in the much needed fast forward ‘job-creation’ mode. India is poised to be the fastest growing economy in the world according to the IMF, and expected to average about 8 per cent in next five years. In addition, India has a very young population and the demographic dividends are waiting to be tapped.

More importantly, young population of India, in substantial numbers, generally wastes 2 to 5 years of their age in preparing for competitive exams for government jobs. The number of years lost in such preparation, generally in vain for most students, could have been used more productively. As a matter of fact, seminal work done by research scholars which many times fetches them coveted Nobel Price is undertaken at young age, when taking risk in extending the frontiers of knowledge is easier. The SUI would be helpful in tapping that young age and creative mind for building industrial base of the nation. For the success of SUI, there is need to create an eco-system to produce entrepreneurs. The emphasis of the government should be setting up more world-class colleges, across India, specializing in commerce, law and business studies. The educational requirements of nurturing entrepreneurs is very different from producing managers and administrators for which our present educational system already has world ranking management institutes. India, now needs, world-class institutes on entrepreneurship, illustratively, Indian Institute of Entrepreneurs.

Further, in Indian system of education and training, tolerance of failure is low but in Silicon Valley, in contrast, the practicing mantra is that failures are pillars to success. In fact, angel investors are more comfortable funding entrepreneurs who have failed in their maiden attempt. Such failures help to steel resolve, build passion to stay ahead of the race, and strengthen faith to face fierce competition as well as undertake meticulous planning. More than the young, mentors, parents and teachers also need to understand that SUI will result in some set-backs and should not get discouraged. To address the fear of failure, there is need to have a fall-back mechanism, and therefore the Government can consider some form of social security for entrepreneurs which could take a shape of insurance against such failures. In the US, in view of social security, the fear of failure is reduced, and therefore risk taking and entrepreneurial activity abounds.

Conclusion
The Union Budget needs to show way forward for an economy which is beginning to lose growth potential despite various policy initiatives. In addition to traditional tweaking of taxes and expenditure, there is need to formulate a vision or a long term fiscal policy to help steady expectations for growth initiatives from the government. That will help create conducive environment for private sector to flourish and take India on a higher growth path.


(The article is authored by Professor Charan Singh. He is the RBI chair professor of Economics at IIM Bangalore. He was a Visiting Fellow at Stanford University and Harvard University. Currently, he is also a consultant for IMF and his previous professional appointments include senior economist IMF , Director ( research department and debt management) at RBI)