Budget 2014: Will Arun Jaitley's gamble on growth work for India?

Jaitley’s first budget is done. And how does it rate? Is it what the doctor ordered? Will it bring down inflation, boost investment, and set the economy on a new virtuous cycle of self-sustaining growth? Let’s be clear. This is not a budget that breaks the mould and is very much on the lines of what one could have expected from any government. Moreover, by announcing initiatives for everything from cleaning the Ganga, to clean energy, to girl child schemes, to expansion of gas grids, to providing urban amenities in rural areas and starting work on Narendra Modi’s pet idea of smart cities, one cannot escape the impression that small outlays have been spread thinly over many, many ideas. Smart cities, though, get a fairly substantial Rs 7,060 crore. The budget should thus be seen as a statement of intent and directional change – and not as something that will have high short-term impact. But then, Arun Jaitley warned us upfront that reviving the economy will take three to four years, and the initiatives taken in this budget have to be carried forward to the next one due in February 2015. So, if we judge it from the perspective of the short time available to a new government to start making its priorities clear, it is a good, but conventional, effort. One can give Jaitley an A-. [caption id=“attachment_1612847” align=“alignleft” width=“380”]  Image from PIB[/caption] However, one cannot be sure the final budget numbers will all add up, for Jaitley has taken a gamble: he has gambled that he will boost growth to reduce his fiscal deficit, and not immediately cut expenditures it to bring finances in order. In this way he has done the opposite of what Chidambaram did: the latter cut spending to reduce the deficit, Jaitley is gambling that higher growth will improve tax revenues and obviate the need for cutting subsidies sharply. In a sense, Jaitley’s is a budget of hope over experience. Here are some of the key takeouts from Jaitley’s budget speech. Fiscal consolidation: Jaitley has promised to try and meet the 4.1 percent target proposed by P Chidambaram, but this will be daunting. A lot depends on how the economy shapes up in the remaining half of the year, and whether tax revenues start rising. The budget says tax receipts will rise 19.7 percent – which will not be easy given the slowdown. A lot depends on whether subsidies can be reined in, but all that we have is a statement that Jaitley will overhaul the subsidy regime, and that there will be an expenditure reforms commission which will give its report by the end of this financial year. This means, the reforms will happen only in the next budget. However some tentative “tough” steps cannot be ruled out after the assembly elections are done. Reforms: The finance minister has formally committed the NDA government to the goods and services tax (GST). The direct taxes code will come later, but no specifics were given. Even for GST, while giving states an assurance that he will lend a sympathetic ear, there is no timeline given for its implementation. No reforms have been announced in energy pricing – fuels, food or fertiliser beyond general assurances. Growth: The big impetus for growth will come from three announcements - the 27 percent hike in plan outlays over what was actually spent in 2013-14, the 15 percent investment allowance for corporate investments above Rs 25 crore for three years, and the freedom for banks to avoid CRR/SLR on long-term deposits raised to fund infrastructure. Banks are currently allowed to lend up to seven years, but their deposits attract CRR of 4 percent and SLR of 22 percent – which raises costs. But one should take the hike in plan outlay with a pinch of salt. When the deficit widens, the tendency is to cut plan expenditure – which is what Chidambaram had been doing over the last two years. However, Jaitley said public sector undertakings will invest Rs 2.5 lakh crore this year. Whether this is an addition to what they did last year or not, if this materialises in full, it will boost the investment cycle. Employment: Will jobs boom as a result of this budget? The positive vibes in the market suggest that India Inc will now begin investing in new projects and upgrade existing ones – especially if government plan spending improves this year. The Rs 10,000 crore fund for start-ups suggests that the government is keen on boosting enterprise. It is small and medium enterprises that create jobs, and if this sector starts looking up, job growth will improve. But this will happen from next year, not this one. These things take time to implement. The 15 percent investment allowance for investments upto Rs 25 crore – last year Chidambaram had put the threshold at Rs 100 crore – will benefit medium and smaller enterprises, which are engines of employment. Taxation: There will be more money in the hands of marginal taxpayers – with the basic exemption limit going up by Rs 50,000 for all categories – including senior citizens. The 80 C tax deduction limit is up by Rs 50,000 to Rs 1.5 lakh, and the public provident fund (PPF) limit is up to Rs 1.5 lakh. The deductions available on EMI interest on housing loans are up to Rs 2 lakh for self-occupied property. All these will allow consumers to spend more and save more – whatever they choose. Depending on what they choose, it could boost growth or inflation, or both. Tax terrorism: Jaitley promised to avoid retrospective taxation, but did not roll back the one legislated by Pranab Mukherjee in 2012 to deal with the Vodafone judgment. This may be tactical, since without the law there would be no pressure on Vodafone to even offer a compromise. In any case, the matter is going into arbitration and the government has asserted its sovereign right to impose retrospective taxes if it chooses to. But Jaitley had emollient words that ordinarily the government would avoid retro taxes, and announced some changes in the approach to transfer pricing and advance rulings so as to reduce tax disputes. Privatisation: Jaitley declined to make any mention of privatising banks, and said government holdings will not fall below 51 percent even when banks raise more capital. The disinvestment target is only Rs 63,000 crore this year. This shows a cautious approach to privatisation and raising more resources for growth. Markets: The announcement that foreign portfolio investments will be taxed as capital gains will prompt fund managers sitting abroad to move back here and invest more. However, corporate investors in debt funds have been disincentivised as the long-term capital gains tax has been raised to 20 percent and the definition of long-term has been extended to three years. This will indirectly benefit banks – who will now be able to attract more direct deposits. Banks shares form a huge chunk of stock market capitalisation and when bank shares rise, the markets cannot remain behind. This is one reason why the Sensex has shot up after the budget speech. Sin taxes: The bulk of the tax-raising effort is focused on sin taxes – on cigarettes (up 11-72 percent), pan masala, gutka, unmanufactured tobacco, and aerated soft drinks. The clean energy cess on the use of coal, peat and lignite, all dirty fuels, has been doubled from Rs 50 to Rs 100 a tonne. This will push up thermal power costs but raise revenues. Political messaging: In keeping with the fact that Modi promised a Congress-mukt Bharat and would like to herald a directional shift away from the Nehru-Gandhi brand of politics, many of the budget schemes are named after BJP or non-Congress icons. Thus the Sardar Patel statue planned in Gujarat gets a Rs 200 crore allocation, there is a Deendayal Upadhyaya power scheme for rural areas, there is a Shyama Prasad Mookerji Rurban Mission, and there is a scheme named after Loknayak Jayaprakash Narayan. The conclusion is this: this is a decent effort given time constraints. But it is not something to shout about from the rooftops. It is not radical or revolutionary. Will we see more radicalism in February 2015, or will it be incrementalism all the way? That question is still unanswered.