On 28th February, the Indian stock market was for the first time open on a Saturday in many years. In a country that has nominally been socialist, the budget is always read, well beyond the specifics of policy, as a coded message about how supportive the government of the day intends to be when it comes to markets. As an annual exercise, the Indian budget thus carries much more meaning and purpose than being a mere presentation of the financial accounts (outlays for the next financial year) by the Finance Minister. Particularly, this years’ budget has set roaring expectations. In the months since his swearing-in, Prime Minister Narendra Modi has announced a number of initiatives aiming to slash red tape, boost manufacturing, improve sanitation, and increase foreign investment. However, what has been lacking up until the budget has been a coherent strategy for tying these worthy goals together. Some in India Inc. have even started to question the pro-growth and Acche Din (Good Days) rhetoric.
Clearly, Mr. Arun Jaitley, India’s Finance Minister, had a lot to prove and cover in India’s most important annual statement of accounts since 1991. While no significant structural reforms have been announced, the budget seems to focus more on mending the current imbalances and fundamental concerns in India’s existing business and economic system. This article seeks to elucidate the significant takeaways from the budget and raise a few associated concerns.
To his credit, Mr. Jaitley has managed to present an expertly crafted budget while attempting to deftly reconcile the interests of business and the markets on one hand and that of the masses on the other hand. By pledging to abolish wealth tax and defer the applicability of GAAR (General Anti Avoidance Rule), as well as by cutting the corporate tax rate from 30% to 25% in the next four years, the government’s intention clearly seems to focus on working towards an investor-friendly and globally-competitive India.
Moreover, the personal income tax exemptions have been raised, with the maximum claimable exemptions increasing from Rs 3.8 lakh to Rs 4.4 lakh. An additional 2 percent surcharge has been added to the tax paid on Income over Rs. 1 crore, i.e. for the super-rich (quite similar to what P. Chidambaram did in the budget the year before election). The higher-spending middle income salaried class faces a higher tax burden with the basic rate of service tax raised to 14% (on the indirect side), which seems to ensure that the Finance Mister can raise approximately Rs. 15,000 crore more from taxes.
In simpler terms, cigarettes, mobile bills, Internet service, and going out to multiplexes, restaurants, etc. is going to cost more. Other than that, several tweaks were made to indirect taxes, presumably to aid the ‘Make in India’ effort, along with a promise to roll out the Goods and Services Tax (GST) by April 1, 2016. The idea of an electronic bill-discounting platform for Micro, Small and Medium Enterprises (MSMEs) is an excellent one that will address the cash flow problems of the smallest of businesses.
One of the facets of the budget that seems to stand out is the conscious push towards spreading the social security net, especially with respect to retirement pension coverage, using the Jan Dhan platform. The Pradhan Mantri Suraksha Bima Yojna (PMSBY) will offer accident coverage of Rs. 2 lakh at a premium of just Rs.12 per year; the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) will offer life coverage of Rs. 2 lakh at a premium of just Rs. 330 per annum. Both these are creditable plans that should take social security to the poor, the group who needs it the most.
For the middle class, there is a slippery slope here. The indirect tax base is increasing on the one hand; on the other hand, the Finance Minister has tried to incentivize the push for retirement coverage with the promise of a generous tax break, which will likely help channelize savings in one stroke by ensuring a pension net. Before the budget, there was a strong expectation from the FM to take adequate steps in increasing the gross domestic savings to encourage more investment in the long run. Mr. Jaitley seems to have done this by raising the total tax exemption limit up to Rs. 444,200. The question, however, remains whether, with a high indirect tax base, an assumption of high growth (8% real GDP growth rate), and a consistent low inflation rate (4%-5% level or below), the disposable income drastically changes if the assumptions do not hold (especially noting the fact fuel prices are going to only rise in the future after the recent slump).
There are some caveats to the propositions offered in the budget:
“All the budget projections made assume that the economy will roar along at between 8.1% and 8.5% next year, up from 7.4% this year. But actual trends in corporate profits, tax collections, job growth, exports and other indicators suggest an economy struggling to break free rather than one soaring into the stratosphere. Indeed, new orders for capital goods and construction are at dismal levels, and it is far from certain that the binding constraint lies in infrastructure finance.”
Furthermore, the middle class will be unhappy with no change proposed in either the income tax slabs or the rates. The decision to increase the import duty on petrol and diesel is unlikely to go down well, as retail prices have increased due to the trade parity pricing formula followed by the oil companies.
The tax proposals, along with the recommendations for devolution of the Fourteenth Finance Commission and a push to reinvigorate infrastructure, has also meant that the FM delayed the fiscal consolidation path by a year. The fiscal deficit for 2015-16 will stand at 3.9% of GDP instead of the expected 3.6%, but with a commitment to the 3% target in the medium term.
One of my major concerns with the budget is that it lacks a concrete financial vision for addressing some structural socioeconomic concerns for the Indian grassroots. There is no roadmap provided for outlays or for ensuring better accessibility to healthcare, primary education, security for women, or lower infant and childhood mortality rates.
The scheme of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) was highly criticized by the current government (when it was in opposition) for fund leakages and on other grounds seems now to be promoted (with an added allocation of 34,699 crores announced for the programme) as the main job creating force. So, if we assume that a higher growth rate in India (per se facilitated by a pro-investment and pro-business environment) is going to ensure a trickle-down effect in addressing challenges of basic services (particularly health and education, both of which need to be provided by the state), then, the government’s vision seems to be falling flat on these grounds.