In ideal circumstances, reforms and policy-making should not be linked to a calendar event such as the Union budget. Yet sometimes, it is useful to use the budget as a platform to announce, in unequivocal terms, the government’s blueprint for development. Rarely in recent times has the overhang of anticipation been so heavy in the run-up to the budget as this year.
By all measures, this is probably the last budget as we know it. If things work to plan, India’s finance minister will have ceded a significant part of his discretionary power over indirect tax rates by the time the next budget is presented. A single tax on goods and services across the land would be set by a collegium of ministers from the states. Besides, the 14th Finance Commission recommendations of sharing 42% of central tax revenues with states had made the elbow room in the treasury that much tighter. Union finance minister Arun Jaitley thus had to scour for that extra rupee to be wrung out of the coffers to balance the books.
By incentivising household financial savings, tax breaks for a host of sectors to push manufacturing and job creation, and raising the service tax rates to 14%, Mr Jaitley is ushering in a new era in India’s tax architecture. Shifting the incidence of tax from income to consumption, and goading deeper financial savings, the minister has assumed that the resultant investment, should also nurse the recovery along with improving the fiscal balance. The risk in this gambit is to the price line as producers pass on the higher tax.
The regime change also envelops a calibrated roll-out of a new development framework. Even though overall subsidies are stubbornly stuck at 13.17% of total government expenditure, the minister has also laid out a roadmap for reforming India’s infamously porous welfare handout regime to make it more efficient. Bureaucrats and economists may love shooting down subsidies because they bloat the fiscal deficit and burden the government but the simple fact is that in a one-billion strong nation, in which nearly one in every three live below the poverty line, one needs an efficient method through which privileged tax payers can support the poor.
As welfare entitlements become legally enforceable, the onus will be on cutting back revenue expenditure. Mr Jaitley’s plan for 2015-16 is aimed at keeping subsidies at less than 2% of gross domestic product (GDP). The government’s argument: It is critical to bring down expenditure that do not yield intended objectives.
Equally, the finance ministry’s zeal is directed more towards pruning the fiscal deficit. One in three rupees Mr Jaitley spends in 2015-16 will be borrowed, a prospect the bond market could greet with some degree of trepidation. With inflation the foremost concern, the cost of fiscal consolidation could also be pretty high. For now, he has stuck to the broad medium-term fiscal policy roadmap and pegged the fiscal deficit at 3.9% of GDP in 2015-16. Accomplishing this goal is based on two basic assumptions: Tax revenues will grow by 15% in 2015-16 compared to the previous year; and non-tax revenues will yield expected earnings of Rs 221,732.59 crore. Mr Jaitley has dipped into receipts like divestment and spectrum auction proceeds to help shave 0.2 percentage point off the fiscal deficit, but the risk is that these revenue streams are not in perpetuity and cannot be a substitute for expenditure control.
The stock markets found cheer in lower corporate tax rates, although analysts said effectively the tax outgo for companies actually would have gone up. Investors would have preferred more clarity on the retrospective tax laws. Investment decisions, besides yields and returns, are also guided by perception. Foreign direct investment (FDI), apart from bringing in the crucial dollars, also plays an ambassadorial role. Seen through the prism of trans-continental conduct, corporate giants are akin to global citizens helping countries reap the benefits of comparative and competitive advantage. Investors wanted a complete roll-back on the retrospective taxes on corporate acquisitions. The minister stopped short of it, but said it will be imposed only sparingly.
He announced plans to enact a law to deal with India’s infamous and bustling parallel economy. But the government should be careful that the new law is robust enough and not prone to misuse
Mr Jaitley probably was also acutely conscious of the fact that India needs to propel the investment rate to over 40% of GDP. He did not wield the knife to cut capital expenditure, which as a proportion of the Centre’s total spending has been pegged at Rs 24,1430 crore, or 13% of the Rs 17.7 lakh crore budget in 2015-16, from 11.4 % in 2014-15.
If the last nine months were about proof of concept through a raft of new initiatives such as Make in India, Jan Dhan, and Swachh Bharat, the next 12 months could be about proof of delivery. Half-measures tend to linger and time was fast running out. So, this was just the right moment for taking ‘gut’ decisions for the economy to accelerate. There were enough signs in Mr Jaitley’s first full budget that he was willing to come out of the crease and hit a six.