This is a budget that the doctor ordered for the economy and indeed for the polity. It has disappointed those who predicted a rank populist budget in advance of the “electoral semi-final” currently unfolding in five states. It also did not succumb to fiscal puritans and hawks hellbent on the strictest adherence to the 3% of GDP limit on the fiscal deficit. It has refused to pander to intellectuals rooting for the universal basic income.
Rather than pander to new ideational paradigms, the budget has stuck to the critical tasks at hand of generating employment, promoting private investment, pushing up consumption, improving delivery of subsidies and public services. Most importantly, it attempts a radical cleansing of the economy, necessary for India to get on to a robust growth path with macro-economic stability and greater equity along with greater transparency and accountability and declining corruption.
The budget assumes a nominal rate of growth of GDP of 11.85%, which I am assuming works out to a real GDP growth of 7.25% and an average annual rate of consumer inflation of 4.6%. India will likely reclaim the bragging rights of being the fastest growing large economy.
The budget has two measures for employment generation. First, the reduction in corporate tax rate from 30% to 25% for small and medium enterprise with a turnover of less than Rs 50 crore. These account for 96% of the total number of companies and are predominantly responsible for fresh job opportunities. They cover the entire gamut of economic activity, including IT, defence, textiles, leather, light engineering and a very wide range of services sectors. The tax cut will energise these enterprises and generate a sizable number of good quality jobs.
Employment will also get a boost with the push given to affordable housing. This is a labour intensive sector with as many as 200 backward linkages to other industries. Arun Jaitley announced a clutch of measures including infrastructure status for affordable housing, higher corpus for refinancing by the NHB, relaxing the definition of affordable housing to 60 square metres except in four metros. These are over and above interest rate subventions announced by Prime Minister Narendra Modi on December 31.
Consumption needed a push in the wake of demonetisation. It will get this push from the reduction in personal income tax of the lowest taxable category of Rs 2.5 to Rs 5 lakh, from 10 to 5%. Disposable incomes will increase by at least Rs 2,000 per month in this slab and by Rs 12,000 for higher income groups. I wish though that the Union finance minister had taken another step of applying the highest tax rate of 30% to incomes higher than Rs 24 lakh. This would not have implied a larger revenue loss due to better compliance and widening of tax base.
Rural consumption will also get a lift from rising farmers’ incomes, which will benefit from a host of measures in the budget. Finally, consumption will get a boost when lower GST rates of indirect taxes on goods come into effect in July.
Private corporate investment has reached negative territories. Non-food credit offtake from commercial banks is lowest in six-decades. The share of investment in GDP has fallen to below 30% — the lowest in years.
Investment needed a boost. Arun Jaitley has not left this to chance or to the dampened animal spirits of the investors. Instead he has chosen to address the problem frontally by ramping up public capital expenditure by as much as 24.5% over last year. To this one must add the Rs 70,000 crore that Railways would raise from non-government sources. One hopes that the government will ensure efficient and effective utilisation of these higher capital allocations as capacity expansion in infrastructure, agriculture and social sectors, which will receive this enhanced capital allocation are critical for generating employment and raising economic growth.
The Modi-Jaitley duo has organised their fiscal strategy quite smartly. The first budget in July 2014 essentially signalled continuity, to the chagrin of the free-marketeers. The next two budgets were used essentially to aggressively promote inclusion including financial inclusion and the promotion of JAM — Jan Dhan Yojana, Aadhar and Mobile — based payment of subsidies to existing and new beneficiaries. This has effectively taken the Left of centre space from the Opposition.
The 2017-18 budget displays the government’s growth and investment credentials. This should, therefore, spur private investment, which will get a fillip from the “crowding in” nature of ramped up public capital expenditure. With the Reserve Bank of India keeping a hawk eye on inflation and declining costs of capital as a result of mounting bank deposits post demonetisation, this budget may well have moved the Indian economy tantalisingly close to the sweet spot from which it could embark on sustained high growth trajectory with macro-economic stability and inclusion.
This sentiment is further reinforced by the government’s commitment to bringing about a new normal in the use of cash and squeezing out the parallel economy. By lowering the limit of anonymous cash donations to political parties to Rs 2,000 as recommended by the Election Commission of India, the budget has directly attacked the fountainhead of political corruption.
The prime minister has surely established his credentials as a warrior against black and illegal incomes and a supporter of the honest entrepreneur, professional and ordinary worker. This reveals the pursuit of national and not partisan interests. Three cheers to that.
Rajiv Kumar is founder director, Pahle India Foundation and senior fellow, CPR, Delhi
The views expressed are personal