finance minister arun jaitley has delivered a bu dget which sacrifices structural reforms at the altar of growth. While india inc. has given a comprehensive thumbs up to the bu dget and it is definitely pro-bu siness, certain hitches and complications, like its reliance on low crude price and increased global liquidity, remain. the lack of agricultural reforms and increased service tax may also spoil the broth. And the contentious issue of economic inclusion of the poor is clearly missing
By Tathagata Bhattacharya
India’s Prime Minister Narendra Modi has hailed the Union budget 2015-2016 as one “with a clear vision”. “It is a budget that is progressive, positive, practical, pragmatic & prudent,” he contended on Twitter, his preferred mode of communication with people. And he has added that the budget would “further reignite our growth engine, signalling the dawn of a prosperous future”. And the fact is that though India’s Union Budget 2015-16 is markedly low on reforms and talks of somewhat unrealistic revenue targets and has been criticised by some for missing the chance to address deepseated structural issues, it has won sufficient plaudits from businesses and investors.
But if someone, more than anyone else, knew that this budget was a safe one and not one of hard choices, it would be Union Finance Minister Arun Jaitley who, while wrapping up his February 28 budget speech, said, ““People who urged us to undertake ‘big bang’ reforms also say the Indian economy is a super giant which moves slowly but surely.”
This year’s Budget is clearly focussed on growth and cutting fiscal deficit takes a clear backseat. Actually drastic reforms are not the best prescription for a government that is still enjoying its honeymoon period. Initiating big bang reforms in a democracy like India always involves the inherent risk of a rollback. That way, Jaitley has actually presented a prudent budget which does not expose vulnerable political capital, gained after a long time and a lot of meticulous planning, to undue and unforeseen risk. Now, before getting down to cleaving the meat, a bit of number crunching invariably comes in. And one is afraid that in this case, the bit may very well turn into a lot. The key ballpark figures are as follows with a few key observations:
The non-Plan expenditure for the Financial Year is estimated at Rs 13,12,200 crore and Plan expenditure at Rs 4,65,277 crore which is close to the Revenue Expenditure of 2014-15. Total Expenditure has accordingly been estimated at Rs 17,77,477 crore. The Gross Tax receipts are estimated to be to the tune of Rs 14,49,490 crore of which the Centre’s share will be Rs 9,19,842 crore. Devolution to the States is estimated to be around Rs 5,23,958 crore. There have been adequate provisions for expenditure on Defence, Internal Security.
The country’s fiscal deficit target has been set at 3.9 per cent of the GDP and the Union finance minister has said that the aim is to reduce it to 3 per cent in 2017-2018, which is a year later than expected.
Some of the key take-aways from the Budget are as follows
• Abolition of Wealth Tax
• Additional 2 per cent surcharge for the super rich with income of over Rs 1 crore
• Rate of corporate tax to be reduced to 25 per cent over the next four years
• No change in tax slabs
• Total exemption of up to Rs 4,44,200 can be achieved
• 100 per cent exemption for contribution to Swachch Bharat, apart from CSR
• Service tax increased to 14 per cent
• Rs 25,000 crore for Rural Infrastructure Development Bank
• Rs 5,300 crore to support Micro Irrigation Programme
• Farmers credit target has been set at Rs 8.5 lakh crore
• Rs 70,000 crore to infrastructure
• Tax-free bonds for projects in rail road and irrigation
• PPP model for infrastructure development to be revitalised and government to bear majority of the risk
• Atal Innovation Mission to be established to draw on expertise of entrepreneurs, and researchers to foster scientific innovations; allocation of Rs 150 crore
• Government proposes to set up 5 ultra mega power projects, each of 4,000 MW capacity
• AIIMS in Jammu and Kashmir, Punjab, Tamil Nadu, Himachal Pradesh, Bihar and Assam
• IIT in Karnataka; Indian School of Mines in Dhanbad to be upgraded to IIT.
• PG institute of Horticulture in Amritsar
• Kerala to have University of Disability Studies
• Centre of film production, animation and gaming to come up in Arunachal Pradesh
• IIMs for Jammu & Kashmir and Andhra Pradesh
• Allocation of Rs 2,46,726 crore, an increase of 9.87 per cent over last year
• Focus on ‘Make in India’ for quick manufacturing of Defence equipment
• GST and JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile) to improve quality of life and to pass benefits to common man
• Sixty million toilets across the country under the Swachh Bharat Abhiyan
• MUDRA bank will refinance micro finance organisations to encourage first generation SC/ ST entrepreneurs
• Housing for all by 2020
• Upgrade of 80,000 secondary schools
• Direct Benefits Transfer will be further expanded from 1 crore to 10.3 crore
• For the Atal Pension Yojana, government. will contribute 50 per cent of the premium limited to Rs 1,000 a year
• New scheme for physical aids and assisted living devices for people aged over 80
• Government to use Rs 9,000 crore unclaimed funds in PPF/EPF for Senior Citizens Fund • Rs 5,000 crore additional allocation for
• Government to create universal social security system for all Indians
• Rs 75 crore for electric cars production
• Renewable energy target for 2022: 100K MW in solar; 60K MW in wind; 10K MW in biomass and 5K MW in small hydro
• Develpoment schemes for churches and convents in old Goa; Hampi, Elephanta caves, forests of Rajasthan, Leh Palace, Varanasi, Jallianwala Bagh, Qutb Shahi tombs at Hyderabad to be under the new toursim scheme
• Visa on Arrival for 150 countries
• Sovereign Gold Bond as an alternative to purchasing metal gold
• Scheme for gold depositors to earn interest, jewellers to obtain loans on metal accounts
• To develop an Indian gold coin, which will carry the Ashok Chakra on its face, to reduce the demand for foreign coins and recycle the gold available in the country
• Forward Markets Commission to merge with the Securities and Exchange Board of India
• NBFCs registered with the RBI and having asset size of Rs 500 crore and above to be considered as ‘financial institution’ under Sarfaesi Act, 2002, enabling them to fund SME and midcorporate businesses
• Permanent Establishment norms to be modified so that mere presence of offshore fund managers in the country does not lead to “adverse tax consequence.”
Now, when it comes to deciding on the Union Budget of a country like India, one needs to realise it’s impossible to do a foolproof job. It is more about making hard choices at the cost of others. Let us take a look at the positives first.
The investment arena is likely to witness sunnier climes. The share of capital formation in 2014-15 has dropped from 30.8 per cent during the third quarter of 2013-14 to below 30 per cent to 29.1 per cent in the corresponding period. Recognising the need to ramp up capital formation, Jaitley has made a necessary intervention by providing increased allocation of public sector investments though it may very well cause some slippages in the fiscal deficit target. These include the establishment of the National Investment and Infrastructure Fund to fund infrastructure finance companies, establishment of the Gold Monetisation Scheme to channel physical gold savings among various others.
The provision of a roadmap for reduction in corporate tax rates to bring it at par with other Asian countries’ levels is one of the key takeaways being championed by India Inc. This may help the economy to get more competitive and may attract fresh investments. Also this may act as an incentive for the industries to expand their operations and thus lead to greater investment in research and development, apart from generating employment. The budget aims at reducing corporate taxes from the current level of 30 per cent to 25 per cent over the next 4 years which, the government hopes, will further encourage growth and employment creation.
Well, this is entirely not a positive. Welfare is on a clear backfoot but social security seems like there on the government’s radar. India still suffers from cyclically weak economic growth.
There are rising income inequalities, a large number of young people and trouble in the political-religious-economic milieu. The first step of the current government in this regard was with the initiation of the Pradhan Mantri Jan Dhan Yojana (PMJDY) in August 2014 though there are severe doubts whether this measure of financial inclusion can trigger the larger requirement of economic inclusion. But encouraged by the popular reception of PMJDY, Jaitley announced the Pradhan Mantri Suraksha Bima Yojna which will cover accidental death risk of Rs 2 lakh at a premium of Rs 12 per year. Yet another scheme called the Atal Pension Yojana has been launched, to which the government will contribute 50 per cent of the beneficiaries’ premium up to Rs 1,000 for 5 years in all new accounts opened before December 2015. A Senior Citizen Welfare Fund has also been announced.
Now, let us dive into the clear-cut minuses. First, the service tax rate has been increased to 14 per cent at the composite level. The increase in the service tax rate is unlikely to be warmly received garner support and there are apprehensions of increased unbilled transactions, thus robbing the government of necessary inflow. Also, raising service tax at a time of limited growth can lead to a re-adjustment of the demand-supply equilibrium as a lower point of demand. Given that services is the single largest contributor to the economy and the fastest of the sectors, a hike in service tax rate can lead to unforeseen slowdown. India’s industry has not been out of the well. The monthly industrial production figures have grown at an average annual rate of 2.1 per cent during the April-December 2014-15 period. Jaitley mentioned the much-branded ‘Make in India’ campaign as an important programme for manufacturing and has given boost to the nearly stalled capital expenditure cycle. But the steps being undertaken to revive industry and manufacturing lack clarity and clear outlines.
India’s inflation has been significantly lower at 5 per cent as per the consumer price index than the Reserve Bank of India had predicted. But food inflation has started going northwards again for quite some time. Reforms in the agriculture sector to ensure better storage, irrigation and steps towards less dependence on the vagaries of nature are crucially missing.
Also, the Budget has two other major points which can give a relaxed soul a worried mind. If the price of crude goes above $65 a barrel, a lot of Jaitley’s plans may be jeopardised and a lot of the figures may not be realised. The budget hinges on the premise that global crude will remain below $60 a barrel.