Budget 2014-15: The speech Arun Jaitley ought to make on 10 July

Madam Speaker

I rise to present the budget for 2014-15. I will keep my speech as brief as possible and will not bore the house with the minutiae of changes and accounting details. I will use this opportunity to outline the NDA’s approach to budget-making, reforms, inflation, growth, and poverty elimination rather than just list all the details that are already there in the budget documents. I am sure during the debate that will follow we will discuss these things in more detail.

We all know about the state of the economy when we took over on 26 May and so I will not talk about it. This government has been elected to fix what is broken, not complain about what it inherited or apportion blame. The only reference to the last government and its budget will be this: we have restated the accounts to estimate the correct level of fiscal deficit for 2013-14 - which according to this restatement is now at 5.1 percent. It is from this new base that we will get into a phase of honest accounting. Though it is not always possible to estimate revenues and expenditures for the year ahead, we have taken a policy decision to present future budgets, starting with the one to be presented in February 2015, based on the accrual system. This is what good companies do and it would be a healthy practice.

That said, Madam Speaker, let me get to the challenges facing the economy and how we plan to deal with them. Our alliance led by Shri Narendra Modi won the general elections on the promise of bringing back growth with jobs and low inflation. We have started work in right earnest. We expect to start delivering results on this promise from the second half of fiscal 2015-16. This is because we have to first do the repair work this year. And many of the things we need to do have little to do with the budget itself. For example, making it easier to do business, improving supplies of items that are contributing to food inflation, skilling labour for better jobs, etc. Those issues will be tackled directly by my cabinet colleagues and the partnership we are building with state governments. My job as finance minister is to make the necessary enabling budgetary allocations to help them do their jobs.

We are not looking for quick-fixes, and we have identified five or six key areas for emphasis. These are:

First, inflation: I hope you will all agree that inflation is the worst kind of tax on the poor. This is the NDA government’s priority No 1. At the macroeconomic level, this means we have to curb fiscal deficits, and at the micro-economic level we have to remove supply side bottlenecks in food production - especially protein items like milk, pulses, vegetables and eggs, meat and fish. My colleague in the agriculture ministry will announce the measures intended to improve supplies.

We also believe that high interest rates are a consequence of high inflation. We will thus encourage and support the Reserve Bank of India to manage interest rate policies that complement the fiscal efforts to reduce inflation. We do not see the RBI and the finance ministry as antagonists in the fight against inflation.

We also plan to shift our macroeconomic targeting to getting the revenue deficit to zero by the end of the NDA government’s term in 2018-19 - which means a cut of around 0.5 percent annually. The Fiscal Responsibility and Budget Management Act - which is currently too loose and amenable to frequent change - is being tightened so that no government in future is able to change the goalposts on a whim and a fancy - except in exceptional circumstances which will be clearly defined.

Second, subsidies: A key reason for high fiscal deficits is the uncontrolled growth in non-merit subsidies - mostly in the energy sector, but also in related areas like fertiliser and food. My colleagues in the fertiliser and food ministries will announce these changes in separate interactions, but the gist is this: diesel is being deregulated once the subsidies become zero after the monthly increases of 50 paise neutralise the losses faced by oil marketing companies. Subsidies on LPG, kerosene and fertiliser are being capped at specific levels - and their market prices deregulated. This means prices will be determined by the producer companies after taking the fixed subsidy element into account. It will be our endeavour to reduce LPG subsidies by Rs 10 a month till they are eliminated, and kerosene by 25 paise a quarter, till the subsidies are eliminated. We may, however, retain the subsidies for a small group of people clearly identified as living below the official poverty line - currently estimated at around 360 million people, or around 70 million households.

As for fertiliser, the regulated price of urea - the most commonly used fertiliser due to its heavily subsidised price - is less than 30 percent of production cost. This subsidy will be eliminated over four years by regular monthly subsidy reductions. Overall, the goal of this government is to bring all subsidies to within 2 percent of GDP. They are currently an unsustainable 2.5 percent.

Third, poverty: The Prime minister has repeatedly said that the first charge on the state’s resources will be the needs of the poor. However, the current system of catering to the poor is prone to leakages, and more than half the money spent on anti-poverty schemes ends up somewhere else. Under the new methodology evolved by the Rangarajan committee, the poverty line has been set at Rs 47 per day in urban areas and Rs 32 in rural areas. This gives us a figure of 363 million people living below the new poverty line. It is these people we must focus on. Accordingly, we are planning to modify the Food Security Act to focus on two things - retargeting subsidies at these 363 million rather than at 800 million people. Secondly, we will progressively shift to cash-based transfers based on a revamped Aadhaar scheme, where the primary purpose is identification of the really poor. The MNREGA scheme will also be retargeted at India’s most poverty-prone districts. If needed, we will extend it beyond 100 days and connect it to building real assets that will improve agricultural productivity.

Fourth, growth: Madam Speaker, we did not get elected just to tighten belts. Without investing in infrastructure and restarting the investment cycle, we cannot expect growth to revive. It is fashionable to presume that there is a tradeoff between inflation and growth. While this may be true in the short term, in the medium term growth is the only antidote to inflation. Growth means an increase in supplies and the economy’s capabilities, so inflation cannot be fought without boosting growth as well. The key is to do this without fiscal profligacy and money printing.

I propose to get the growth engines revved up this year by raising more non-tax revenues from asset sales - public sector shares and residual stakes of private companies held by SUUTI or the government. I expect to raise Rs 1,00,000 crore this year from this exercise. I know many skeptics will remind us that nothing like this was ever achieved in the past. But given the buoyancy in the markets, we believe this is the time to get ambitious. Will I be able to sustain this pace of asset sales next year? I believe so. I believe the government has enough assets - in terms of land, public sector shares, and airwaves - to sell without losing control for at least through the next three-to four years. After that, I expect the renewed buoyancy in tax revenues to drive growth.

Fifth, tax revenues and expenditure. Madam Speaker, tax revenues can be raised if there is less evasion. And expenditure can be controlled if there is continuous monitoring in all ministries. To boost tax revenues, I propose a grand compromise with the states so that we adopt the goods and services tax (GST) latest by 1 October 2015. I know many states have concerns about loss of revenues, but I will deal with it by assuring them that the centre will compensate any loss of revenue in the first three years with grants. We have also devised a way out of past issues about consignment tax. GST will start boosting tax revenues both at centre and states a year or two after implementation. We are therefore giving top priority to creating the IT infrastructure that will enable GST to come into force by 1 October 2015. We will start testing it three months before that.

A lot has been said about bringing black money held abroad illegally and also domestic black money generation. Actually, there is no difference between the two as black money flows in an out depending on returns from investment. To discourage black money generation and to tap some of the stock accumulated in various hands, I am announcing a one-time amnesty scheme for wealth brought in from abroad and wealth/income declared domestically. The scheme will be open for three months from 1 October 2014 to 31 December 2014, and the key elements of the two schemes are the following: a flat 10 percent tax on foreign inflows, with identity protection for those bringing in the money; a flat 30 percent tax for domestically declared incomes.

Those disclosing these details will be issued zero-interest bonds that will be listed on the stock markets. We hope everybody who has such wealth will disclose them. I must warn tax-evaders that once the deadline expires, we will spare no effort to bring them to book. A special tax fraud centre is being set up under the Central Board of Direct and Indirect Taxes to go after evaders. Anyone caught with illegal assets abroad or not paying taxes in India will face upto 10 years of jail after a time-bound trial in special courts that won’t take more than six months. I ask evaders to use this opportunity of face the consequences.

Sixth, taxation. I know taxation is the most eagerly awaited part of the budget speech. However, let me be a killjoy and tell you that in future I want to pull no rabbits out of my hat on this front. Taxation should be stable and predictable, and not yo-yo from year to year. This has largely been the case over the last few years, but in future we will have even stabler regimes.

My proposals in terms of individual income tax are the following. The basic exemption rate, currently Rs 2 lakh, and somewhat more for senior citizens, will be indexed to CPI inflation. The base rate will rise based on increases in the CPI every year. This means no annual announcements on basic rate changes. That will happen automatically. The other change relates to savings - which have been declining. I propose to allow a Rs 3 lakh limit for section 80 C savings - which includes PF, NSCs, PPF, insurance premia, etc. I now propose to bring principal and interest payments for home loans also under this section. Individuals can save or take tax benefits under any of these heads. This Rs 3 lakh limit will also be indexed to inflation, but only upto 80 percent of CPI increases.

A big debate has been going on about the reintroduction of estate duty. I believe that inherited wealth is really unearned wealth in the hands of inheritors, and contributes to the perpetuation of inter-generational inequalities. I am making a start this year by introducing a 15 percent inheritance tax, with a generous exemption limit of Rs 10 crore for each inheritor of an estate, plus one house each. Those distributing their wealth to designated charities will be exempt to the extent of the amount willed. The basic inheritance tax exemption limit will also be indexed to inflation. We will observe the performance of this tax and make course corrections as we go along.

All these changes will be reflected in the new Direct Taxes Code being announced separately later this month, which will be effective from 1 April 2014-15 - or the assessment year 2015-16.

Coming to corporate taxes, we plan to move towards lower taxes and gradual elimination of exemptions.

First, I am eliminating the surcharge on income taxes for all classes of companies.

Second, a major share of revenues forgone emanates from concessions given to companies for setting up industries in certain areas or for boosting exports or to boosting domestic investment. Strictly speaking, these are deliberate tax breaks given to promote a particular end. Nevertheless, over a period of time, these incentives have tended to proliferate and grow unwieldy. Currently the direct and indirect tax revenues forgone due to these concessions exceed Rs 5,00,000 crore. Starting this year, we plan to start whittling down these incentives. Barring those for investment in hilly territories and the north-east, I propose a 10 percent cut in the deductions currently available under all categories of concessions for the corporate sector from this year - hopefully bringing in around Rs 50,000 crore in additional taxes. Simultaneously, I propose to reduce the minimum alternate tax rate by 1 percent - since the purpose of MAT is to ensure a certain minimum tax payment.

We will monitor the performance of this cut and keep extending it every year by a further 10 percent till all tax breaks are down to reasonable levels - say, to, a maximum of 2 percent of GDP.

Madam Speaker, I have indicated the broad direction of change this government proposes to bring. Taking these changes into account, I expect the fiscal deficit to come down to 4.5 percent this year, but it could be more. The revenue deficit will also be down by 0.5 percent from the revised estimate of 3 percent indicated in the interim budget.

I do not propose to give you my estimates of growth or inflation right now, for these could change. I don’t plan to make a fool of myself by pretending these things can be precisely estimated in a dynamic economy. However, what is important is the trajectory. I believe we will revive growth and start bringing down inflation by the next financial year.

With these thoughts, I commend the budget to the House.