Arvind Virmani, a former chief economic advisor to the Union government, tells Arindam Majumder the Union Budget proposals have several small steps which will boost growth but the government should have done more on the fiscal deficit. Edited excerpts:



What are the biggest takeaways from the Budget?



This Budget is significant in the context of the abolition of the Planning Commission and the Finance Commission report. These two, taken together, are a big step towards fiscal federalism. The basic idea is that states should have the money and responsibility to implement issues on matters under the state list in the Constitution.

Put simply, on the extra 10 per cent devolution (to states, in the Finance Commission report), the Budget made a start but it didn't go the full way. But it made a real effort in moving away from the ‘one size fits all’ policy. The Centre reduced revenue expenditure and pushed up the total capital expenditure.

Also, the share of capital expenditure went up because there is a need to stimulate public goods infrastructure and only the government can do this --- as we often say, there is a gap between the social and private benefit, and the role of the state is to fill this gap.

There were earlier expectations of a ‘big bang’ Budget.



There can’t be any big-ticket reforms but I think there is enough in the Budget to take annual growth above eight per cent, according to the new numbers. A lot of people have missed the small reforms in the Budget. In the banking sector, the proposal to merge FMC (the commodity markets regulator) and Sebi (the capital markets monitor) has been pending for long. It has finally been done, cutting through bureaucratic resistance.

Then, the (proposed) bankruptcy law is very important for a modern economy; it should have actually been (enacted) in the (recent) Companies Act. It will help companies to wind up swiftly and monetise the assets that are stuck. Then, the new procurement law and the contract resolution disputes Bill will help make things transparent. There are many small things like these, which if implemented properly will drive growth.

There has been criticism from states like Bengal that there has been a half-hearted approach to fiscal federalism. In the guise of higher tax devolution, the Centre has actually curtailed allocation under various schemes.



The prime minister announced that the Centre will still provide assistance beyond what the Finance Commission has recommended. States like Bengal should actually be happy about it. For, in principle, all plan revenue schemes could be cut because the Finance Commission has taken account of it. They have given enough funds for sectors under the purview of states. In my view, there should be no revenue expenditure on state schemes. Capital grants can be given but there is no need for revenue expenditure.

The finance minister has delayed the target on fiscal consolidation and pegged the fiscal deficit at 3.9 per cent (of gross domestic product) for 2015-16. Your views?



In my view, it would have been better to stick to the target of 3.6 per cent that was recommended by the Finance Commission. If the government could have tightened the fiscal gap more and allowed monetary policy to expand in a greater amount, it would have been better. The Reserve Bank has announced a rate cut of 0.25 per cent. Had there been more tightening in the fiscal situation, it would have been possible to ease monetary policy even further. Sectors such as housing, automobiles and real estate would have got a bigger boost, had the revenue been adjusted more. It’s not only fiscal expenditure that benefits but if there is an overall expansion of the economy, if there is more interest fall, it also helps.

A lot of emphasis has been put on the JAM trinity (combination of Jan Dhan, Aadhaar and mobiles) to plug the leakage in subsidies. But the Budget numbers say the expense on non-fuel subsidies remain almost the same. Is there a gap between rhetoric and implementation?



For a long time, our approach has been on how much money is being spent on subsidies, rather than focusing on the mechanism on how to make it reach the people. This is a work in process. In that, the JAM is a welcome step forward. The interesting thing about this is that the government is looking to move away from old methods like the banking system, towards mobile banking.

This is a very efficient way but it will take time to show results. But, the commitment is there.