Budget 2017: Jaitley goes in for a degree of populism | union-budget$budget-analysis | Hindustan Times
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Budget 2017: Jaitley goes in for a degree of populism

The Union finance minister has focused specially on farmers, rural employment, poverty alleviation and infrastructure development. But it would be important to see how the budget is able to make a difference to the sagging industrial sector, and the alarmingly low rate of job creation.

union budget Updated: Feb 01, 2017 20:30 IST
A large number of initiatives have been proposed in the budget. Like in the past year’s budget, the government has again stated its commitment to double farm incomes in five years’ time
A large number of initiatives have been proposed in the budget. Like in the past year’s budget, the government has again stated its commitment to double farm incomes in five years’ time(REUTERS)

At least three factors make this year’s budget somewhat unusual. This is the first budget to have been presented a full month in advance, on the first rather than the last day in February. Secondly, there has been no separate rail budget this year, a tradition that went back to 1924, and this year’s rail budget was subsumed within the general budget. Finally, the budget comes in the aftermath of the demonetisation drive that brought about a serious break in the growth momentum.

Union finance minister Arun Jaitley covered a very wide ground in his long budget speech in the Lok Sabha . There was a sense of purposive action on several fronts. Jaitley has focused specially on farmers, rural employment, poverty alleviation and infrastructure development. A large number of initiatives have been proposed. Like in the past year’s budget, the government has again stated its commitment to double farm incomes in five years’ time. The coverage under the crop insurance scheme is to be increased. The highest ever allocation of Rs 48,000 crore has been made for MGNREGA. All of these measures should be welcome, especially in a situation where there continues to be reports of considerable distress in the farm sector.

Read: Budget 2017: Jaitley halves income tax for those earning Rs 2.5L-Rs 5L

Coming to the tax proposals, the minister has proposed a tax cut for small and medium scale enterprises to 25%. This is expected to benefit 96% of the Indian SMSEs. Personal income tax rates in the Rs 2.5-5 lakh slab has been cut to 5%, but there is a surcharge of 10% for those with income between Rs 50 lakhs to Rs 1 crore. The 15% surcharge for those with incomes above Rs 1 crore remains. All of these measures indicate a degree of populism, and the only justification could be that it would help the bulk of the low end income tax assesses. It is also possible to argue that the smaller companies needed some relief in a setting where the performance of the industrial sector has been lacklustre in recent times.

There had been a lot of hype before the budget for a lowering of personal income tax rates across the whole income range. Contrary to popular opinion, India’s personal income tax rates, with a 30% top marginal rate, are not particularly high by international standards. The top marginal tax rates in the US, UK and major European countries are higher. As is well-known from public finance theory, what one should aim for is moderation in tax rates and a widening of the base.

From the figures of car purchases and foreign trips made by Indians last year as mentioned by the minister, one should expect much higher numbers of potential income tax assesses from the 3.7 crore we have at the moment. The need of the hour in the Indian context is base widening. It is therefore good that Jaitley has not pandered to any reduction in the top marginal tax rates.

We now come to the overall growth picture. It is already apparent that the GDP growth rate would be less than the rate of 7.1% forecast earlier by the Central Statistical Organisation. The Economic Survey observes that the demonetisation measure could possibly reduce the 2016-17 growth rate by 0.25 to 0.5 percentage points ‘compared to the baseline of 7%’. This could take the present year’s growth rate to as low as 6.5%.

Read:  Budget 2017: Arun Jaitley announces sops for demonetisation-hit MSME

Last year’s figure of 7.6% had placed India as the fastest growing major economy of the world. Why the prime minister should have dragged the economy onto the demonetisation path, bringing in its wake job losses and a serious slowdown of the economy must remain a deep conundrum. Both the Survey and the budget speech try to offer a rationalisation of the measure, but they lack conviction.

The demonetisation measure was originally supposed to bring out the black income and counterfeit currency. It was soon found that this rationalisation was untenable, and the discourse was altered to argue for a cashless economy. There appears to be a delusional presumption that going cashless is inherently better than having a normal cash based economy. There is nothing in economic theory that suggests that having a cash economy is in any sense problematic. Adam Smith believed that the propensity to truck, barter and exchange is inherent in human nature. If cash facilitates this process there can be no case for discouraging its use.

It is important to state here that budget making is a mammoth and complex exercise in which a huge amount of effort goes in by the varied arms of the government. A perusal of the Economic Survey reveals a substantial and commendable effort at analysing the key developmental issues confronting the Indian economy. There is, for example, an interesting analysis of internal migration in India using railway passenger data. It is shown that almost 9 million workers migrate each year in search of better job opportunities. The Survey also shows that there is a high level of internal trade in goods, and contrary to expectations, India trades more than China.There are major issues pertaining to poverty alleviation and expenditure on the social sector. Public expenditure on health continues to be a paltry 1.3% of GDP. The investment scenario in the private sector is weak and there is a major need for the government to step up public investment, particularly on rural infrastructure. At the end of the day it would be important to see how the budget is able to make a difference to the sagging industrial sector, and the alarmingly low rate of job creation. The budget appears to be weak on these issues.

Pulin Nayak is a former professor of economics, Delhi School of Economics

The views expressed are personal