FIPB abolition, emphasis on housing are good gestures, but implementation holds key

Arun Jaitley certainly deserves congratulations for being able to diagnose the challenges faced by Indian economy at this juncture. In a way, he has tried to respond to the prevailing internal as well as external factors affecting Indian economy through appropriate measures. There are also a few out of the box thoughts. Steps initiated are, no doubt, in the right direction. However, in view of the serious challenges confronting the economy these steps are not adequate. At the most these measures may be seen as mere good gestures. Perhaps, the finance minister was aware of the gap between expectations and implementation when he being a shrewd lawyer cleverly articulated that the Economic Survey was meant to generate public debate.

Facilitating political parties to raise fund through corporate bond is certainly an out of box idea. This would compel donors and receivers to avail of transparent fund mobilisation facility. However, still, there is room for black money getting into the system. Reducing cash limitation from Rs 20,000 to Rs 2,000 may mean a little inconvenience. But splitting donations into ten more entries is not something which cannot to be ventured into. Ideal proposition would have been state funding. Perhaps, a wider debate among major political parties and also a public debate by the experts involved with electoral reforms would have facilitated workable solution to the satisfaction of all. On issues such as electoral reforms there should not be any space for ego let alone who gets credit. This should have been collective effort in the long-run interests of the nation.

Union Finance Minister Arun Jaitley. AP

Union Finance Minister Arun Jaitley. AP

Lowering income tax rates would help in reversing downward trend in consumption which is crucial for economic growth. Moreover, it was expected that government would suitably reward general public for wholeheartedly supporting fight against black money despite hardships due to cash crunch and going through trauma of standing in queue and often returning empty handed.


In this respect, the finance minister has done a fantastic job by reducing income tax rate from 10 percent to 5 percent for taxable slab between Rs 2,50,000 to Rs 5,00,000-in spite of the fact that our rates compares better.

Looking from a narrow angle, this step can be dubbed as an attempt to take care of the ruling party’s middle class vote bank. But the measure is backed by strong economic logic. Since marginal propensity to consume is high at lower level of income, putting more money in the hands of those at lower slab of income is bound to raise overall consumption leading to kick-starting economic revival.

Similarly, the decision to not bring down the  income tax rates for higher slabs too makes sense as people in higher brackets normally do not change their consumption pattern even in tough times. Putting additional money in their hands would have raised savings but not consumption.

There was expectation from the government to come out with big ticket reform measures in terms of targeting subsidies to the deserved. Had the proposed Universal Basic Income [UBI] idea been implemented replacing existing food and other welfare oriented schemes that would have been a game changer in terms of extending benefits to the needy and also, correcting unhealthy fiscal practice. Besides, this would have meant empowering the weaker in real sense. That would have helped the ruling party in expanding its support base beyond traditional segment apart from strengthening rural demand and sustaining economy in the long run.

The finance minister was certainly aware of challenges from external front be it slow down in world economy or growing protectionism, especially, restrictive attitude of President Donald Trump. We cannot afford to ignore these factors as these are our major export destinations. US have been the major export supporting country contributing around 16 percent of the total exports.

Moreover, as much as 80 percent of earnings of our IT majors depend on US market. In other words, a large number of middle class families which started enjoying comfortable living standards because of IT revolution are under dilemma, rather shock. Trump has also started putting pressure on US investors to shift back their manufacturing base as well as capital to be used for the benefit of native labour force.


The new President might have appeared a bit crude in his bold speech on 20 January followed by imposition of border tax. Here is the President determined to reverse outward move of American manufacturers since the last seventy years. But for countries like India it would mean a big blow, especially, the ones associated with US destined export units. In this background, the proposal to abolish Foreign Investment Promotion Board [FIPB] is a damp squib. Anyway, FIPB has lost its relevance under changed economic environment. Had the government come out with big ticket reforms such as labour laws reforms, banking reforms and administrative reforms, agricultural sector reforms with rationalisation of subsidies and user charges that would have helped in reversing negative impact of Trump and expected further increase in Federal rate.

Proposed amendment to laws facilitating confiscation of assets of a defaulter of bank loan is a right step. But how long we keep on responding to crisis with curative measures? Why cannot we think in terms of preventive measures so as to minimise such an eventuality. What is required is creating an environment facilitating different sections of the system to function without undue interference by the political bosses. Functional autonomy through banking sector reforms alone ensures healthy functioning of financial institutions. However, only visionary leadership is capable of initiating steps in overall interests as it would mean downsizing of empire to exercise political power.

Emphasis on housing by declaring it as an infrastructure is the one which construction industry has been demanding for a long. In fact horizontal expansion in housing construction is very much needed from the point of potential demand waiting for affordable houses and also from the point of employment generation and to boost to the economy as this sector has over 250 backward linkages.

However, good intention alone will not resolve the problem. Right now there surplus supply of built houses in all parts of the country. Proposal on notional tax on vacant built houses not only indicated that the finance minister was aware of this fact but he also meant to control black money flowing into this sector. At the same time, measures should have been initiated to make dwelling units really affordable for those who badly in need of them. Efforts should have been made to include housing construction within the GST regime in order to bring down prices substantially.

Some of the supportive measures mentioned above may be still be initiated if the government means business. Otherwise, good intentions expressed through the current year’s budget may remain pipe-dream.

(The author is an Economics Professor at BIMTECH and formerly, Member of the Prime Minister’s Economic Advisory Council)


Published Date: Feb 06, 2017 04:18 pm | Updated Date: Feb 06, 2017 04:36 pm



Also See