That the budget has not disappointed despite the sky high expectations is in itself creditable. More creditable is that it has not succumbed to populism despite the BJP’s loss in the Delhi elections and the forthcoming Bihar elections.
The Narendra Modi-Arun Jaitley team has done well to make this a growth and investment oriented budget while at the same time retaining and indeed increasing outlays on social welfare measures as reflected in the highest ever allocation of Rs 34,699 crore for Mahatma Gandhi National Rural Employment Guarantee Act.
Therefore, the budget’s biggest achievement is to counter the widespread perception of an irresolvable trade-off between promoting growth and enhancing public welfare.
The budget is replete with forward-looking reformist measures, whose cumulative positive impact will be significant in the coming years.
For me the five most important features of the budget are:
First, its emphasis on infrastructure investment by increasing budgetary allocation by a whopping Rs 70,000 crore. This is buttressed by allocating Rs 20,000 crore as seed capital for a National Investment and Infrastructure Fund and issuing of tax free infrastructure bonds for rail, road and irrigation. This infrastructure focus was necessary for promoting the ‘Make In India’ programme.
Second, the budget’s focus on improving the business environment especially for the micro, small and medium enterprises (MSME) is laudable. This includes the setting up of the Mudra bank, with seed capital of Rs 20,000 crore and a Rs 3,000 crore credit guarantee corpus for improving access to formal financing for the 57 million MSMEs. In addition, finance minister Arun Jaitley announced the launching of an e-biz portal which integrates 14 regulatory permissions at one source. Further, an expert committee is being set up to suggest a draft law for replacing multiple prior permissions with a pre-existing regulatory mechanism. This will reduce the procedural delays and regulatory complexities whose burden fell disproportionately on the MSMEs.
Third, initiating measures against the generation of black money and the related menace of widespread use of cash in our economy. These include incentives for using credit/debit cards combined with disincentives for cash transactions; stricter provisions and penalties against the use of cash in the construction industry, which it is notorious for; and the proposed stringent law against black money especially for wealth stashed abroad. The provisions for a 10-year rigorous imprisonment, making the offence non-compoundable; denial of access to the Settlement Commission; and a penalty of 300% will be deterrent and surely minimise the outflow of funds abroad. This is a courageous act as it goes against the interests of the political class and big business who are often considered beneficiaries of the present lax regime.
Fourth, the finance minister has shown that he is not beholden to any fiscal dogma and has his attention focused sharply on the need to raise investment. He has demonstrated this by opting for a more moderate glide path for meeting the medium-term fiscal deficit goal of 3% of GDP. This will now be achieved over three instead of two years as earlier targeted. Accordingly, the fiscal deficit next year will be pegged at 3.9%, giving the government greater fiscal space to make the much needed investments in infrastructure and agriculture. I would have been much happier, however, if the finance minister had chosen to reduce the revenue deficit more sharply than bringing it down only to 2.8% of the GDP in 2016. The move to a genuinely outcome-based budgeting will hopefully come once the GST has been successfully launched. That is a much needed reform for improving the efficiency of public expenditure.
Fifth, I am pleased that the finance minister accepted my suggestion to give the workers in smaller organisations the option to move out of the Employees’ Provident Fund Organisation to New Pension schemes and to choose medical insurance in place of compulsorily registering under the Employee’s State Insurance Corporation. The importance of these reforms lies in formalising the informal sector and slowing down the expansion of contract labour in Indian industry. This is the first important step in eliminating the unacceptable dualism that currently characterises Indian industry.
The budget has also given April 1, 2016, as the fixed date for the inception of the Goods and Service Tax (GST). It has raised service tax to 14% in an attempt to bring it line with the likely GST rate. It has also announced a phased reduction in the rate of corporate tax from the present 30% to 25% along with the elimination of exemptions. The budget has thus provided long term stability to the tax regime. The elimination of exemptions will minimise the discretionary behaviour of the tax officials and thereby reduce the number of tax disputes, which today account for a massive Rs 4.5 lakh crore in locked up revenues. The finance minister perhaps missed an opportunity to announce some measures for unlocking these disputed revenues that would have substantially added to his revenues.
There are several other reform suggestions tucked away in the speech. These include the move towards establishing a holding company for public sector banks; setting up a public debt management agency and taking the function out of the Reserve Banks of India; moving towards a monetary policy committee for bringing the Reserve Banks of India and the government in sync; reduction of tax rate on royalty payments from 25% to 10% to encourage younger entrepreneurs who are looking for new technology; and doing away with the obnoxious wealth tax whose administration costs were surely larger than the measly Rs 1,008 crore it garnered as revenues.
I also wish that Jaitley had included a clearer statement on doing away with retrospective taxation and spelled out the way forward for shifting both fertiliser and food subsidies to direct cash transfers. That would have given the budget a historical quality. As it is, the budget represents one of the boldest, though understated, and comprehensive attempts at giving a new direction to not only the fiscal regime but indeed to the economy. It will restore investors’ confidence and put India firmly on the path of inclusive and rapid growth. Modi-Jaitley have risen to the occasion.
Rajiv Kumar is senior fellow, Centre for Policy Research, and founder director of Pahle India Foundation
The views expressed by the author are personal