Amidst all the underscoring hype, the Modi Government’s first Union Budget inspired polarized opinion, indeed as expected. At the outset, I must insist on the skepticism I wish to convey through the title of the write-up which includes exclamation as well as an interrogative mark. In the wake of the mount of expectations generated by the change of government, has the new finance minister been able to address all those conclusively, is the question I am yet to settle with. Having said that however, one thing is certain, given the constraints, the Finance Minister has at least assured that the efforts in his maiden budget may not have been in devising novel manoeuvres to shape up the economy as projected all along during the campaign, but they certainly were aimed at getting things back on track first and that well may be a commendable step. And so, despite the skepticism, the budget inspires a lot of optimism and my endeavor is to explain the reason behind this.
Finance Minister Jaitley’s long, verbose and tiring budget speech began with a caveat which is worth mentioning at the very beginning which set the stage for his deliverance. “Should we be victims of populism? We need to introduce fiscal prudence. We have no option but to take some bold steps to spurt economy; these are only the first steps and are directional”. With these words, Jaitley confessed that the daunting task before his government is to meet the target of the fiscal deficit of 4.1% set by his predecessor which many including some in his government found ‘too’ optimistic given the current state of the economy. Having assigned the target nonetheless, Jaitley’s efforts in his maiden budget could be broadly viewed in the following components – Fiscal Consolidation, a Boost in the investment climate and manufacture, attention to social welfare schemes and most importantly, review the growth – the last one has lately known to be underpinning economic principle of the new government and can only be achieved if the first three components are dealt with pragmatically. Containing the fiscal deficit to this ambitious level can only be done in two ways – controlling expenditure (read as checking and subsequently reducing unnecessary subsidies and other dole expenditures) and increasing revenues. Jaitley here played a smart card by not directly attacking the subsidies and unnecessary expenditure which he and his party all along have been attacking but delegated the task of looking into these expenditure to Expenditure Management Commission, one of few fancy committees which the budget proposes, to look into expenditure reforms. This may have disappointed some of those economists who have long advocated the reduction of expenditure and had high hopes from the government to do so. We may subsequently hope for reduction in the expenditure in the future with the report of the commission providing a sound rationale to do so but as of now, the budget did not provide any concrete direction regarding this aspect. Also, considering the projected troubled monsoon there was limited hope for curtailing subsidies now and subsidies like fertilizer subsidy saw an incremental surge. As far as the revenues are concerned, rather than increasing rates, the minister aimed at increasing the tax base which again was a smart move. Thus we see no substantial change in the tax rates, the income tax rates remaining same, only the personal income tax limit raised from 2 lakh to 2.5 lakh. To increase the tax base government announces pruning of negative and exemption list of service tax. A very important and sought after work of looking into retrospective taxes and reviewing indirect taxes was assigned to high level committee of CBDT which would scrutinize the tax structures followed by taking desired actions. Though, the minister announced that there would be no retrospective taxation, the decision is expected to come from the committee.
One thing where the budget scored the maximum is in its effort to boost manufacturing and its attention towards infrastructure development. Admitting that the manufacturing in India is still at its nascent stage, the minister announced that the Manufacturing units will be allowed to sell their products through retail and e-commerce. The awaited step of allowing FDI in defence was given green signal finally by allowing it up to 49%. An estimated amount of 2.29 lakh crore allocated for Defence budget. Similarly, Equal amount of FDI will be allowed in the insurance as well. How far will the investment come given the management still under the government is another issue and government will have to take conscious steps to attract investments. An innovative attempt of injecting synergy into India’s well known hand-loom hubs by creating trade facilitation centers and creating textile clusters in Rae Bareily, Lucknow, Surat, Bhagalpur, Mysore and Tamil Nadu is a fresh attempt indeed. Excise duties of various commodities reduced to boost up manufacturing and on the other hand excise duties on commodities like tobacco or aerated water for instance, whose demand in principle is inelastic, is raised to compensate for the revenues. To facilitate the manufacturing, Jaitley made it clear that its backbone – infrastructure would be strengthened which was fairly neglected in the last years. A lot of investment, to the amount of seed capital up to 7000 crore has been allotted in building and developing ports and airports, smart cities, building and connecting cities with expressways and connect them to the industrial corridors etc. Deen Dayal Upadhaya Gram Jyoti Yojana to be launched to augment power supply in rural areas.
Another significant area where government has dedicated a lot of attention, and rightfully so, is at the capitalization of the banking sector. With a view of infusing around 2.40 lakh crore in banks government is now proposing different ways through which banks can raise capital, for instance capital can be raised by retail sale of shares and banks will also be permitted to raise long-term funds without regulatory hindrances. A promise of more autonomy to banks and least interference by the government should send comforting signals. To reduce the burden on the banks an Infrastructure Investment Trust being set up to finance infra projects which should bring relief to banks. The government in principle has agreed to the consolidation of the PSU banks which is a welcome sign and we could in future see some bigger banks with high penetration. The recognition of the disconnect of the region like North East in the budget is clear with special emphasis of connecting the neglected region with the country by innovative attempts like starting “Arun Prabha”, 24×7 channel for NE region. Also a promised investment of about 1000 crore for the rail connectivity in north-east region and proposed investment of about 500 crore for the organic farming in the region is a welcome effort to tap into the vast potential of the region and bring the region to the mainstream.
The sector where the budget would get its share of beating is in the agricultural sector where, it so appears that the minister did little more than cosmetics and tokenism. With a troubled time for the agriculture given the state of monsoon and the rising food inflation, the minister was expected to do a lot more. There was no concrete explanation as to how the rising prices would be tackled in the coming times and no enough explanation for storage capacities and effective supply of the food commodities. A token of 500 crore is allocated as a price stabilisation fund which appears feeble given the constrained situation of the agriculture. Though there are some long-term measures like setting up agri-infrastructure fund at a cost of Rs 100 crore and two more agri-research institutes in Jharkhand and Assam, which should benefit the sector in long run, there was hardly any relief for a foreseen problem that farmers and consumers might face in the recent future. The budget again is criticized, and rightfully so, for allocating 200 crore for the Unity Statue and mere 100 crore for ‘Beti Bachao, Beti Padhao’, a scheme announced for saving and welfare of girl child. Given the nature of the budget, we can resolve that it has all the right signals to send. Right from setting up more IITs and IIMs and AIIMS, to preserving the cultural heritage and boosting tourism, to attempts of improving sanitation and continuation of welfare schemes along with emphasis on manufacturing and infrastructure, the budget appears to be a well thought of mixture of essentials. What the budget is lacking is the ‘doctrine of implementation’ and future road map. There are a lot of ‘what is to be done’ and less of ‘how it is to be done’. The one distinct feature of the budget is that it has not been ideologically dogmatic and has curious blend of private-public approach, the new mantra thus emerging out to be ‘Public-Private Partnership’ (PPP). Though the budget lacks essentially some new vision and some highly expected ‘out-of –box-ideas’, but given Jaitley first budget in the troubled times and by his own admission, this essentially being a directional budget, we can spare the harsh criticism. Also, I believe with towering claims of the government and the crusading mandate we are sort of customized to expect heavily, not entirely wrong. It may not have met the towering expectations, but with all fairness, Jaitley has taken the path of setting things right and reviving the growth story India deserves.