There are four criteria by which to evaluate the >budget . First, as this is a new government, is the vision and how it is going to be implemented clear? The desire to meet the aspirations of the people through higher growth and faster decision-making has been articulated, but how the measures in the budget are expected to help these have not been clarified.
Second, have the economy’s ailments been diagnosed correctly and are the remedies appropriate? The prime contributions of past budgets to bottlenecks the economy faced were the large government transfers for consumption without releasing restrictions on the supply response. This budget does attempt, but only on the margin, to change the composition of government expenditure toward investment.
The changes are marginal because there has not been much economising on revenue expenditure; there are some >tax concessions , and the fiscal deficit target has been maintained. But we should give the government some time before passing judgment. It may quickly act on the recommendations of the Expenditure Management Commission that has been announced. The allocation for subsidies has actually increased, although restricted to two per cent of GDP. But they still appear to be underfunded, with no clarity on how they will be financed. The >optimistic growth projections of 19.7 per cent for tax revenue, made in the interim budget, have been retained. But they are better founded now because of a real possibility of higher domestic and international growth. More resources can also be raised from divestment because of a booming domestic stock market.
Promoting FDI There is a push toward infrastructure, education, health, water — key constraints and the alleviation of which would make life much easier for the average citizen. New technologies are to be leveraged wherever possible.
Many schemes have been announced, with small initial seed capital. The Union Finance Minister Arun Jaitley seems to be using the inability of government spend effectively to ration initial allocations. It is a good strategy to conditional future allocations on demonstrated absorptive capacity and outcomes.
Apart from raising public investment, there are many measures to reverse the fall in private investment and increase its productivity. This is essential to reverse the slowdown in manufacturing. These include temporary tax credits for investment, with eligibility for an investment allowance extended to an investment of Rs.25 crore, from the earlier limit of Rs.100 crore. This will make many Small and Medium Enterprises (SME) eligible and help kick-start investment.
Promoting >foreign direct investment (FDI) in strategic sectors such as defence production and insurance will also directly increase domestic jobs, technology and financing. FDI limits have been raised from 26 per cent to 49 per cent so that management and control remain with India. Other concessions have been given with respect to land lock-in, especially for low cost housing.
Equity markets and households Additional finance for investment comes from measures to encourage household savings. There is a 50 per cent rise in the Public Provident Fund (PPF) limit eligible for tax exemption. An easier know-your-client (KYC) process and one single operating demat account will encourage financial savings. New instruments such as real estate investment trusts (REIT), which will be given pass-through tax status, and public sector unit (PSU) divestment, will bring households back into equity markets, allowing them to gain from India’s growth. Banks will find it easier to fund long-term infrastructure with permission to raise long-term funds exempted from minimum Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR) requirements.
Last year, firefighting reduced the current account deficit (CAD) and strengthened the rupee, but increasing domestic financial savings and deepening domestic markets are important among longer term measures to maintain a sustainable CAD. While taking measures to deepen domestic financial markets, it is good that Mr. Jaitley has not further liberalised foreign debt flows. This should be done only after domestic supply constraints are removed. Improving the >domestic business environment will also encourage exports.
There is a push toward infrastructure, education, health, water — key constraints and the alleviation of which would make life much easier for the average citizen
Although concrete action to reduce food inflation is limited, the budget has recognised the importance of coordination with States to modify the Agricultural Produce Marketing Committee (APMC) Act, taking other steps to improve agricultural marketing, and restructuring the Food Corporation of India. Allocations for the National Rural Employment Guarantee Act (NREGA) are to be maintained but directed toward asset creation.
A major shortcoming in the economy is high transaction costs and the possibility of unproductive arbitrage. There are a number of initiatives to reduce these, especially in the areas of tax structure and administration. There is a commitment to transparency, simplification, to listen to and rectify complaints. The government will not use retrospective amendments — it will set up a committee to review cases arising from past amendments; there are legal and administrative changes to reduce tax litigation; resident tax payers can also get an advance tax ruling; there are administrative provisions to ease access for them; a high-level committee will be set up to regularly interact with industry and respond to issues raised. Taxation issues related to transfer pricing and the withholding tax have been clarified. Dividend distribution tax is to be paid by the recipient, not the company; mutual fund earnings are subject to capital gains, not income tax, removing incentives for arbitrage in fund location.
Taxes The third assessment criterion, is the issue of who gains and who loses — the standard reason for budget hype. The salaried class which bears the largest tax burden has been given some concessions, even as selected industries have been given excise concessions. Investment and savings tax credits should repay by raising more taxes as they stimulate more growth. Subsidies and social sector spending have actually been raised, compared to the interim budget, so the lower income class does not lose; it stands to gain as more jobs become available. The major increase in tax revenue has come from increasing the tax base for services, in line with the expected change to Goods and Services Tax (GST). A low rates and large base philosophy suits India’s large population, and meet the criteria of fairness. Some increase in wealth tax for the very rich could also have been undertaken, given the growing class of Indian billionaires who can afford to contribute to the country’s development.
The negatives The final assessment is in evaluating the positives in the budget with the negatives. There are many positives, as outlined earlier, and its overall tactics are well aligned to this strategy. One negative is that they are not integrated to tell a coherent story of how they are going to help solve the country’s problems. But the measures to raise different types of investment and improve their financing will work well together to raise growth and jobs. Good sanitation and water are the most effective anti-poverty and pro-nutrition schemes, even as they raise productivity. But the budget does not clearly articulate such a story, preferring to hedge its bets through continuity with the old, and throwing in something for everyone.
Other negatives are the underlying institutional changes and incentives that will ensure implementation have not been clarified. A huge number of schemes have been announced but possible cost-saving synergies across schemes have not been examined.
The commitment to short- and long-run fiscal consolidation is very much a positive, especially in the Indian context where we are just recovering from extreme external fragility induced by government overspending. But the quality and the sincerity of fiscal consolidation is what matters more. It is the composition of expenditure that affects Indian growth, and it was a composition that was weighted towards consumption that raised inflation. Sticking to the letter of the deficit may result in losing an opportunity to improve the composition. In India, inflation gets emphasised but it is a fact that we have among the highest rates of youth unemployment in the world, and need to act vigorously, just as many western countries are doing to kick-start growth.
The interim budget was accused of achieving the 4.1 per cent fiscal deficit target by rolling over expenditures and using other tricks such as forcing PSUs to pay large dividends. The markets would have been happier with more transparency that acknowledged any past tricks and which took the resulting increase in fiscal deficit upfront.
A new government has the freedom to do so or else there is a fear of old productive strategies like cutting investment expenditures to reach deficit targets. In effect, there is a gamble on growth; that tax revenues will meet optimistic forecasts. The odds for such a gamble are more favourable, but there is a risk of old traps such as a cut in investment to meet targets hurting growth and raising inflation.
(Ashima Goyal is professor, Indira Gandhi Institute of Development Research, Mumbai.)
