Budget FY15 doesn?t present any overarching vision of how the Indian economy would shape up over the next five years. It seems more a continuation of the Interim Budget presented by the UPA earlier this year, even retaining the deficit target at 4.1% of the GDP, something which the BJP had trashed before it came to power. The Budget posts deficit targets at 3.6% for FY16 and 3.0% for FY17 but gives no indication of how this can be achieved. In fairness, the Modi government has been in office for only a month-and-a-half now, and the finance minister also holds the portfolios of defence and corporate affairs in addition to party responsibilities. Thus, we must expect many announcements in the coming months which should otherwise have come in the Budget.
The broad expectation was that Budget FY15 would reduce the fiscal deficit (it does not); propose actions to generate employment (it does); stimulate savings and investment (there are many tax concessions and allowances as well as expenditures and administrative changes that will do this); reduce inflation (the Budget can only reduce spending, which could reduce inflation in the medium-term, but the government had announced earlier direct actions like anti-hoarding, imports, distribution of grains in stock, etc), and prune expenditures (it does not).
Besides, it was expected to lay out the plan for disinvestment and the privatisation of state-owned enterprises (SOEs). Sebi has suggested that the government reduce its holding in SOEs from the currently permitted limit of 90% to 75%, resulting in significant disinvestments. However, the Budget makes no mention of such privatisation. It projects an income of around R75,800 crore from the disinvestment front, but this figure seems inordinately high and presupposes a buoyant market.
On the FDI front, the Budget manages to keep up hopes, raising the caps for defence manufacturing and insurance. However, the condition attached, of Indian management control, will not help. Another shot in the arm for FDI is the government committing to vastly limit the application of retrospective taxation?it is proposed that all such demands in the future must pass the assessment of a high-level committee. The clarity in transfer-pricing norms the Budget offers will be encouraging for existing companies with foreign linkages as well as new entrants. At the same time, remaining mum on the Vodafone matter, the Budget failed to tackle the potential erosion of investor confidence.
It also tries to remove bottlenecks related to compliance and tax for industry to combat tax terrorism. However, a critical flaw with the Budget is that it assumes higher GDP growth and non-tax revenues than what appears reasonable.
There are a few other key areas where the Budget raises hope; banks? recapitalisation is one of them. The sale of government shares in banks to bring the government holding below 51% seems more likely now. By providing almost R36,000 per annum in tax savings at the lowest tax slabs (increasing 80C exemptions, raising PPF investment limit), the Budget also looks at improving small savings which, in turn, could buffer the impact of inflation on household budgets while pushing consumption. At the same time, kick-starting the creation of 100 smart cities is likely to generate a more favourable atmosphere for investment.
The target of fully enabling all ministries for e-governance by the end of this year, if achieved, will help better coordination on clearances and approvals. One marked improvement over other Budgets is that this one opens up the North-East as an important investment destination.
Some of the other measures that the Budget has for bolstering the country?s economic strength include: making advance rulings applicable to domestic investors as well as foreign ones and introducing more fora for the purpose and the stimulus to the manufacturing sector and real estate. The Budget proposes changes to the Apprenticeship Act which could be a precursor to the much-needed labour law reforms. The R10,000-crore entrepreneurship fund for start-ups that the Budget creates is also a unique and refreshing change. Infrastructure, clearly, is high on the government?s mind as the Budget proposes the setting up of ten new ports, eight airports, national highways and rural roads and a fund for Ganga development, aided by an NRI Ganga Fund.
But, significantly, the Budget doesn?t cut subsidies or prune social welfare programmes, though it does tie MGNREGA to creating agricultural assets. There is also no initiative to make social schemes more effective and efficient?glaringly evident in the failure to announce the restarting of the direct transfer of benefits through cash payments by linking them to Aadhaar. On the indirect taxes front, it was expected that the BJP-led government would now get active on GST. But the Budget only promises to proceed on the same without outlining definite steps in the near-term.
The Budget announces 28 schemes with allocations of R100 crore or slightly above?a fraction of what each will require. The finance minister later explained that expenditures will be spread over many years, and these small initial allocations are more a statement of intent. Some of these allocations are for innovative projects?new AIIMS, IIMs, IITs; tribal welfare; rural power infrastructure; 24×7 power to all households; start-ups for rural youth and modernising madrasas?with a long-term vision in mind.
A promising new development that the Budget brings is the setting up of an Expenditure Management Commission to assess government spending for efficacy and suggest reforms to maximise value creation from this.
In brief, the Budget is a good one when it comes to generating employment, boosting savings and investment. The threats to the Budget realising its full promise remain a poor monsoon, oil prices flaring up because of the Iraq crisis, and the time it takes for the economy to pick up.
The author is former director general, NCAER, and was the first chairman of the CERC
