There is near consensus, excluding of course from major opposition parties, that the 2017-18 budget, fourth for Finance Minister Arun Jaitley, while doing no harm has done enough good. The rally Dalal Street On Wednesday was apparently a result of markets having factored in serious populist setbacks and responding euphorically at their absence. The Modi-Jaitley duo deserves our appreciation for not succumbing to electoral compulsions and instead producing a budget that is better than business as usual.
The budget has three firsts to its credit and each one of them will have positive long-term structural impact. First, by advancing the presentation date by nearly a month, it has laid the basis for doing away with the ‘vote of account’ and all the inefficiencies tied to that archaic practice. The budget will henceforth be approved before the end of the current financial year. All ministries, agencies and schemes will receive their fully approved allocations in the first half of April. The first quarter financial constraint will thus be avoided and the government’s working period extended. This implies more effective management of public expenditure and hopefully more bang for the buck. This is an important reform that must be continued by successive governments.
Second, the patently dysfunctional distinction between the plan and non-plan expenditure has been done away with making it possible henceforth to clearly distinguish and monitor the share and progress of capital and revenue expenditures. Third, the ninety-seven-year-old colonial legacy of a separate railway budget has been jettisoned. This would facilitate higher capital investment in railways as also signal a move towards uniformity across all government departments. The much needed shift to accrual accounting for railways from April 2018 is perhaps the first step in this regard. All three changes strengthen institutional capacity and refute the charge hurled by the opposition that the Modi government is unmindful of the need to build institutional capacity in the system.
The budget also has several very important positive features. I want to highlight those that have appealed to me, perhaps because I had suggested them in my pre-budget writings. First, capital expenditure has been ramped up by 24.5% to compensate for the weakness in and encourage ‘crowding in’ by private investment. It is unfair to compare, as some have done, budget estimates (BE) for capital allocation to revised estimates (RE) for the same in 2016-17, which put the increase at less than half. It is standard practice to compare likes with likes.
Second, to try and give further impetus to private investment, a huge push has been given to the affordable housing sector, which has nearly 200 backward linkages with other industries. Affordable housing has been given infrastructure status that will enable it secure resources at lower costs and the criteria for affordable housing have also been liberalized. Third, in another attempt to boost investment, corporate tax for SMEs with turnover of up Rs 50 crore has been slashed to 25 percent from 30 percent. This will raise profitability of nearly 96 percent of total number of companies in the country and bring greater dynamism and employment generation potential to this key sector. Fourth, with an eye on encouraging FDI, the foreign investment promotion board (FIPB), which had come to represent an unnecessary hurdle, has been abolished.
Fifth, the finance minister persisted with efforts to improve the environment for doing business. Several micro but key measures were announced. These include: extending holding period for minimum alternate tax to 15 years; shortening the period for capital gains from immovable properties from three to two years and leaving capital gains tax untouched; advancing the base year for calculation of capital gains from 1981 to 2001, which will result in lower taxable gains; sparing foreign portfolio investors from indirect transfer provisions.
The question should necessarily be asked about why did the FM shy away from the logical step of pursuing his own promise of lowering corporation income tax for all companies, including the largest, to 25% along with removing all exemptions. This could be a result of either a commitment to maintaining fiscal balance or a fear of opposition’s charge of being aligned with the super rich, specially ahead of critical elections.
On the fear of being chastised and lampooned as ‘friends of capitalists’, Mr Venkaiah Naidu let it slip in one of this TV interactions, that this indeed was the case that may have held them back from taking this desirable step to boost private investor confidence. This is indeed a pity on two counts. One, it seems impossible in our hyper-competitive and super-selfish democracy for political players from different parties to come on the same page to push the national economy forward. Such coming together does happen, but only and only in face of external threat. It is time that political leaderships recognize that a failure to generate sufficient number of jobs for want of required investment can also pose severe national security risks. It is time to pull together in this fragile situation, which can be and will be exploited by fundamentalists and others opposed to India’s progress as a market based pluralistic democracy.
Two, it is indeed a real pity that a coalition between the political class and domestic Indian business, as existed during the national movement, is simply not a possibility now. Is it that we are currently missing national business leaders like G D Birla, Kamalnayan Bajaj and Jamshydji Tata with whom the Mahatma could confer and discuss the national situation without the slightest fear of bear tagged as a crony capitalist? Should our present doyens of industry not introspect deeply about reasons for which they are not considered as pursuing national interests? It is time that our business leaders, formidable as they are, come up with ideas on how our political leaders could align with them without being perceived as a coalition of self-seekers and ranged against the common people of this country.
I should revert to the enumeration of the budget’s positive features. Sixth, in order to try and bring consumption back on track, after the knock it has taken from demonetization, the FM announced a 50% percent reduction in the rate of personal income tax for the lowest income slab of up to Rs 5.00 lakh. This was reduced from 10 to 5% and will put greater disposal income in the hands of the salaried and lower echelons of the middle class.
This is good but perhaps not good enough. Investors currently regularly complain of an acute demand deficiency in the economy. This could well be a result of a sudden withdrawal of ‘cash driven demand’ post demonetization. To make up for this palpable shortfall, the FM needed to extend this tax concession to upper income brackets as well. For example he should have raised the income level at which the highest income tax rate is levied to Rs 24 lakh as compared to Rs 10 lakh at present. This would surely have unleashed a much stronger demand for consumer durables and better quality housing. Both are much needed.
Clearly, the FM could not extend his cuts in corporation and personal income taxes for fear of slipping on the fiscal front. His reluctance to grasp the lifeline handed by the FRBM committee, which has permitted a 0.5% deviation in times of structural reforms, can only be explained by his fear of bring called a fiscal profligate by domestic and international fiscal hawks and unfavorably assessed by credit rating agencies. This premium on fiscal prudence, for which he has received bouquets by ‘pink press’ commentators, is inexplicable in the face of a major demand slump and private investment having virtually turned turtle. With this unnecessary fiscal prudence, that only appeals to the ideologues, he may have taken a big risk.
A continued weakness in private investment could see him lose both the economic plot and also unfortunately the electoral game in 2019. This would be disastrous. Therefore, my appeal to him is to use the next phase of the budget session that conveniently starts after the state elections results have been announced, to introduce these tax cuts and ensure that both domestic consumption and investment are given the major boost required at this time.
I want to commend the Modi-Jaitley duo for their continued push on cleaning up the economy and exorcising the deeply entrenched and systemic cancer of illegal incomes and black money. Several steps have been taken already of which demonetization was the strongest as it helped to weaken the powerful coalition of the corrupt by effectively draining the swamp. The budget has announced some further steps as well in this regard apart from clearly signaling government’s resolve to go after illegally deposited ‘black cash’ by enumerating the number of bank accounts that have received large volumes of deposits between 9 November and 31 December.
Lowering of the limit for individual contribution to political parties from Rs 20,000 to Rs 2,000, as recommended by the Election Commission, is a major step on stemming political corruption. At the same time the introduction of electoral bonds, which can be bought and traded by corporates desirous of making political contributions, will further kill cash use in political campaigning. This should be reinforced by the Election Commission imposing a strict ceiling on the amount that can be collected through private individual and virtually anonymous contributions.
There are other steps as well to reduce the use of cash in the economy. These are, reducing the presumptive tax for small and medium tax payers from 8 to 6% receipts are by non-cash means; limiting cash expenditure allowed as deduction to Rs. 10,000; limiting cash donation received by charities to Rs. 2,000 from Rs. 10,000; and disallowing cash transactions above Rs. 3 lakh. These measures combined with the enforcement of the provision of benami properties transactions law and the law on illegal incomes have the potential to create a ‘new normal’ in our society in which the dishonest will hopefully not rule the roost and be scared of flaunting their ill-gotten wealth. This would, to my mind, be the biggest structural reform, which if successful, could bring the Indian economy on to a new trajectory of higher, sustainable, cleaner and hence inclusive growth.
The writer is Founder Director Pahle India Foundatin and Senior Fellow, Centre for Policy Research
Published Date: Feb 03, 2017 12:48 PM | Updated Date: Feb 03, 2017 12:48 PM