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Not a Harbinger of Growth

Is it yet another Budget of Modi Govt or a roadmap for stepped up growth? View among experts is Arun Jaitley tried to play safe. Yet, Sanjeev Sinha credits him for initiatives

Policy Pulse
Publish Date: Mar 18 2016 6:26PM | Updated Date: Mar 21 2016 4:44PM

Not a Harbinger of Growthphoto: Hrishikesh bhatt

Is it yet another Budget of the Modi Government or a roadmap for stepped up growth? The view among experts on this is largely that Arun Jaitley preferred prudence, trying to play safe, rather than spelling out any new mantra. Yet, Sanjeev Sinha credits him for the initiatives taken in the Budget to rev up farm sector and cut the fiscal deficit  

 
Someone has rightly said that a budget is like an artwork which can never be perfect. So, howsoever hard a Government tries, its budget can’t meet the expectations of everyone. Still, a budget is bound to invite criticism if it fails to be a well-balanced exercise, particularly in such challenging times which the country is currently facing.
 
There is no doubt that Finance Minister Arun Jaitley’s third budget – unlike his previous two budgets -- was somewhat better, but was it also good enough?
 
According to experts, Budget 2016 has done a great job of ensuring fiscal prudence, increasing indirect tax collection and ensuring an accommodative stance with regard to domestic industry. Besides, a focus on rural incomes and an increase in allocation to the MNREGA scheme signal a more inclusive approach to economic development.
 
However, what was supposed to articulate a clear vision of the Modi Government’s economic policy as well as emerge as a harbinger of growth, ended up as a mere annual ritual without spelling out the agenda for growth.
 
A big positive of the Union Budget has been its thrust on the rural economy, which may be the right approach in the context of agrarian distress. The provisions include increased outlays across investment (roads and irrigation) and rural safety nets (crop insurance and MGNREGA). The move to allow 100 percent FDI in marketing food products may also contribute to farmer welfare, but is not likely to make any immediate difference.
 
Experts say that agriculture badly needed some oxygen after two successive years of drought and with agricultural commodity prices falling. Therefore, the Union Budget’s allocation of Rs 35,984 crore for agriculture and farmer welfare is a promising step in bolstering confidence and reviving demand in the rural economy.
 
The Budget, in fact, seeks to empower about 45 percent of the population in the low income category by giving them social security in the form of health insurance besides insuring the risk of agriculture for the farmers, thus giving them freedom to venture into extensive farming without the fear of loss of capital deployed. “This will bring a kind of revolution in the rural economy which will restart the consumption cycle at the grass-root level,” says Jimeet Modi, CEO, SAMCO Securities.
 
Critics, however, argue that while the measures appear praise worthy, allocations under a clutch of schemes have not produced sufficient benefits for rural India earlier. Also, the Government’s plan to double the farmers’ income in the next five years is an impossible idea as “there is no inclination, no way of telling the country how it will be achieved because it implies a 14 percent annual increase in the farm income in each of the five years,” former Prime Minister Dr Manmohan Singh said in his reaction to the Budget. According to experts, the trick is to secure for the farmer a larger share of the price paid by the consumer, cutting out layers of inefficient intermediation, by reform of market design.
 
Another thing that stands out in this Budget is the commitment to maintain fiscal deficit at 3.5 percent of GDP. The Economic Survey had mentioned that the Government was on track to adhere to the 2015-16 budget fiscal deficit target of 3.9 percent of GDP. The Government demonstrated laudable restraint by sticking to the pre-announced fiscal deficit target of 3.5 percent of GDP in FY17 from 3.9 percent in FY16. This was not easy for a Government which was trying to protect growth as well as preserve macro stability.
 
However, it is not clear how this commitment is consistent with the increase in public spending on several schemes enumerated. “It is also unclear as to what extent the burden implicit in the Seventh Pay Commission is reflected in the Budget. Tax revenue net to the Centre is expected to increase by 11.2 percent over revised estimates, while expenditure is to increase by 10.8 percent. This is against nominal GDP growing at 11 percent. So, one has to wait and see how credible the commitment to contain fiscal deficit is,” says C Rangarajan, Former Governor, RBI.
 
A Citigroup report released recently had also stated that “considering the rise in wage expenditure by 0.5 percent of GDP next fiscal and a likely reduction in corporate tax rate, the Central Government's target to reduce fiscal deficit from 3.9 peercent of GDP this fiscal year to 3.5 percent in 2016-17 becomes even more challenging.” The global financial services major had also sounded a warning that if the fiscal deficit target is achieved through a cut in public investments, it could offset the gains on economic activity somewhat.
 
The Budget has also promised to carry forward reforms in the financial sector. But there are hardly any solutions for banks’ bad loan mess except recapitalisation. In fact, “the Rs 25,000 crore for bank recapitalisation is well below expectations, and could mean a slower revival of public sector bank lending,” informs Swaminathan S Anklesaria Aiyar, adding that the tax amnesty to black money assets can encourage further such accumulation in anticipation of future amnesties. And dozens of changes in indirect taxes, supposedly to stimulate production, sit ill with Jaitley’s pledge to limit exemptions and exceptions.
 
Disinvestment target of Rs 56,500 crore and voluntary disclosure of income to target the black money have been introduced in the Budget to keep the fiscal deficit target at 3.5 percent of the GDP, creating the ground for the RBI to reduce the interest rates in the economy. Experts, however, argue that disinvestment and privatisation of public enterprises and banks must be not just for raising revenues, but for improving economic efficiency.
 
On the tax front too, there are no major changes. Some minor concessions have been provided to small taxpayers and first-time home buyers, but there is hardly anything for the middle class. For instance, first-time home buyers have been given the benefit of an additional deduction of Rs 50,000 on home loan interest for loans not exceeding Rs 35 lakh, where the value of the house is no more than Rs 50 lakh. This may result in improved home buying sentiment in smaller cities with lower housing costs. Similarly, the annual housing rent reduction limit has been increased from Rs 24000 to Rs 60000 which could lead to an immediate uplift for rental housing across the major cities. Direct tax rates for the vast majority of taxpayers, however, remain unchanged, although those with taxable income above Rs 1 crore will pay a higher surcharge.
 
The expected reduction in corporate tax rate has also not happened. The main disappointment is that the reduction in corporate tax from 30 to 29 percent is limited to small companies, new manufacturing units and start-ups which won’t have any immediate profits anyway. “The FM has merely tinkered with old exemptions, not slashed them. At this rate, he will find it difficult, probably impossible, to get corporate tax down to 25 percent by the end of his term,” says Swaminathan S Anklesaria Aiyar.
 
According to C Rangarajan, the Budget has not made any dramatic changes. It has sought to increase public expenditure in critical areas, which will have the desired impact only if they are implemented in a time-bound manner. “The FM could have indicated how well the programmes initiated last year have fared and what impact they have had,” he says.
 
Thankfully, facing a strong backlash from salaried taxpayers over his proposal to tax withdrawal from EPF, the finance minister has finally announced the roll-back of the budget proposal that sought to create a pensioned society by discouraging full withdrawal. The FM says the idea behind the proposal was not to raise revenues, but to achieve the policy objective of creating a pensioned society. The Government had earlier even issued a statement clarifying the intent behind the proposal, but the criticism continued prompting the Government to withdraw the tax. Now the roll-back is expected to give some relief to the nation’s large middle class taxpayers for whom EPF serves as the most important social security provision to meet unforeseen expenditures and also provides financial security post retirement.
 
Whatever be the case, a majority of experts are of the view that contrary to the general perception, Budget 2016 goes back to an old approach of squeezing the aspirational class, extracting as much as possible from salaried people and expanding the breadth of indirect taxes – which is in no way a clear-sighted approach to transform the nation’s economy!