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Evolution or Revolution?

Will Mr Jaitley's budget be routinely competent, or will it go beyond to what India really needs?

Everyone who comments in the media has already declared this budget as the most important in years. Except, of course, those who have already declared it to be a failure. And except P Chidambaram who has already declared it to be a continuation of his budgets. In reality, of course, any of these might turn out to be true, including Mr Chidambaram. And since the true impact of any given Union Budget cannot be known for a long time (in fact, never, in isolation from other events), I'm sure that all of the above will claim to have been vindicated by the afternoon of the coming Saturday. That includes those who will instead have preferred to watch the India vs UAE World Cup match that will be going on simultaneously with the budget speech.

Based on what has happened over the last nine months since this government took over, I have little doubt that this budget will tick all the boxes. The macro numbers will be in place, there will be solid effort to tackle the core issue of infrastructure financing, there will be a productive set of changes in taxation, and some meaningful grants to a set of areas that are a focus for the government. Which is all well and good, but I think that's just the ground floor for what one must expect from this government.

The question is whether this be a breakthrough budget? That's a question which sounds a cliche but actually conveys exactly the right point. We know that a lot of economic reforms lie outside the budget, and that much of the budget hype is just there for its own sake. However, there is much that can be done in the budget beyond the obvious things. However, for that, Mr. Jaitley will have to step out of the comfort zone that he is in. Of the key economic ministries in the Narendra Modi government, finance is the one that now looks most afraid of stepping out of the tried and tested (and yet ineffective) ways of the past, and Mr. Jaitley the minister most often thought of being a gradualist, someone who is least distinguishable from his predecessor.

What are the kind of changes that one could classify as being something more than tame gradualism? One area that is ripe for a revolution is retirement savings. Our retirement savings system is in a mess. The National Pension System has not solved any problem except that of putting a lid on the government's future liabilities, and has no marketing model to penetrate the unorganised sector. Equity is a trivial part of its investment basket, resulting in only small real returns. The EPFO continues to channel the savings of the organised private sector into yet more inefficient and low-return asset classes.

On the other hand, there is a dearth of long-term domestic savings going into equity. This is a problem both from the perspective of returns that domestic investors get, as well as a huge reliance on foreign investors. There's no solution to these issues, except to junk the EPFO and create a route for domestic retirement savings to flow into equity, as they do in every country that has a high quality retirement savings system. This idea is something that has been floating around for at least decade. In fact, the NPS' original vision encompassed something like this. Will Mr Jaitley have the courage and the vision to implement this?

Or take the GST, which is widely seen as a panacea to practically every problem in our indirect tax system. If you think it is, then describe in detail how it will work to someone who runs a small or medium sized business and pays his indirect taxes. It's very likely that this business owner will tell you that if GST is implemented, all small and medium sized businesses will shut down. Pay attention to this reaction, because it comes from someone who deals every day with our tax administration. GST will be a panacea if it is implemented by a tax administration that miraculously descends from heaven to run it. In the hands of Mr Jaitley's current outfit, it could be a disaster for small and medium-sized businesses.

So do you think the budget be a revolutionary one? It could be a good, even great budget without being revolutionary, but let's hope for the best.