Warning: I would like to state at the outset that I am not an economist by training and don’t have the slightest pretense of being one. Readers are more than welcome to post constructive criticism in the comments section.
The Modi Sarkaar was elected with much fanfare in 2014 on the promise of a complete overhaul of the status-quo and stem the fiscal stagnation that had set in during the last days of UPA-2. The buzzword among the business community was ‘big-bang’ reforms which would unleash the nascent growth potential unlike never before. In that respect, finance minister Jaitley’s first full budget didn’t quite live up to the dramatic hype, but it was far from a damp squib. First and foremost, the FM should be congratulated for not getting carried away by the election victory in 2014, the extreme expectations of the investor community post that victory, and most importantly, the recent electoral drubbing in Delhi. The budget (which includes Suresh Prabhu’s rail budget too) bears the quintessential hallmark of the Modi Govt so far, that of balancing economic pragmatism and deriving tangible and achievable solutions for existing problems.
The major takeaway was the reduction of corporate taxes from 30% to 25%. This was a brave step to take for the FM in this internet age, where the default position of a large fraction of the chattering class is to hypocritically be opposed to anything corporate. The 30% rate was among some of the highest in Asia, and also higher when compared to the average corporate tax rate in the world.
This “reduction” will be copled with removal of exemptions enjoyed by Corporates. These exemptions are often matter of litigation and removing them will boost confidence in Tax regime. This move is sure to boost growth over the next few years, more so considering that FM Jaitley has managed to boost investor sentiment by keeping the fiscal deficit within target for this year (2014-2015), though admittedly the 3 percent target has been pushed forward by an year (2017-2018).
The 70,000 crore increase in infrastructure investment, backed by Suresh Prabhu’s commitment to fulfill existing rail projects, will aid in India becoming a very attractive investment destination in the next few years. All of this will translate into more jobs, a key requirement for poverty alleviation as it’s impossible for agriculture and Government projects to provide most of the employment, particularly in the manufacturing and service sector.
Despite the naysayers, the BJP Government has also shown far more commitment in stemming black money than any Government before and this has already resulted in a sizeable sum of money recovered by the Government. (). This was also reflected in the budget where Mr. Jaitely has promised tougher anti black money measures. It is of course possible that the law could merely be a paper tiger, but the success or failure of this law can only be known after a few years.
Mr. Jaitley has also shown that he is willing to empower the states, indeed at the expense of the centre, in order to consolidate federalism and improve the delivery of welfare schemes. This does come with its share of pros and cons, but broadly speaking, competitive federalism fueled by large intra-state migration, would necessitate that state Governments would have to be more alert than before to the needs of their citizens and not depend excessively on special packages from the centre.
The NDA Government has long been considered by its opponents as being too pro-corporate and too anti-poor. Thus, it was unlikely that even from a pessimistic, political angle, welfare schemes would have seen a drastic cut in this budget. Indeed, Mr. Jaitley increased the MNREGA budget by 5000 crores, despite PM Modi tearing into the UPA’s pet scheme just a day earlier . This might seem a bit counter-intuitive, but it is clear that the Government does not want to completely abolish MNREGA, but streamline and make it more efficient (coupled with the Jan Dhan Yojna) which if executed properly, would actually result in sustainable asset creation for the Indian state.
The long-term vision of a universal social security system is also a very good one, the success of which of course will depend a lot on the Jan Dhan Yojna and the Aadhar card. The other steps taken by Mr. Jaitley such as complete exemption for Swachch Bharat Abhiyaan, the establishment of the MUDRA bank, the different insurance schemes, appropriating unclaimed PPF/EPF funds into a senior citizens fund; are all welcome and while seemingly simple in the letter, will go a long way in actually providing tangible results.
The one major negative point that sticks out quite strongly though is the unchanged IT rates. This is bound to pinch the middle-class a bit, more so considering that the service tax has increased from 12.36 to 14%. While this would most probably be the rate when the GST is introduced in 2016, and there is bound to be an increase in the IT limit then, the immediate pinch on the middle-class consumer which is the overwhelming base for large parts of the service sector, could have been addressed better by increasing the exemption limit by at least Rs. 25,000. Naively speaking, one would also expect that the service sector would also be hurt a bit in this fiscal because of this policy of the Government. Though Mr. Jaitley claims that an individual tax payer can save up to Rs. 4,44,200, this is nothing but the quintessential Indian Jugaad and while benefiting certain sectors, would not result in cold, hard cash in the hands of the individual.
Mr. Jaitley was forced to walk a financial tightrope this year with very little room for manoeuvring. His policies have largely addressed all sections of society, some more so than others. The broad vision of the Government is sound, and its vision long-term. Some of the more debatable ideas of the Modi Government requires adequate backing by the states and the overall bureaucracy, and will take time to implement. Time will tell if 2015 was the beginning of a sustained Achche Din for the Indian state.
-Robert Barker
