Straight and Narrow

This was Finance Minister Arun Jaitley's fourth Budget, plumb in the middle of his government's five-year tenure. At this juncture, it would not be inappropriate to expect a big-bang Budget. However, the finance minister was hemmed in by several factors. First, the state elections meant that nothing could be announced that would be construed as a poll freebie. Second, fiscal adventurism could hurt badly, putting pressure on inflation and interest rates. Not to speak of adverse action from the much-maligned rating agencies. As such, foreign indebtedness of the private sector is uncomfortably high, and a sharply weaker rupee and higher rates can hurt badly. Third, tax giveaways are constrained by the fact that India has one of the lowest tax-to-GDP ratios among G20 peers. Indeed, in his speech, the finance minister made funny, and partly caustic, references to the disparity between what's disclosed in income tax returns and what is revealed by sale of luxury cars in India. Hence, he eschewed big-bang decisions and stuck to the straight and narrow. That "narrow" corridor managed to include measures to boost consumption, to provide growth stimulus, and to ensure fiscal discipline.

There were practically no new taxes, barring for very high earners. Middle class earners actually got lower tax rates. Small enterprises got a lower corporate tax rate of 25 per cent. Affordable housing got a huge boost in terms of a more liberal definition and interest subsidy. All this contributes to maintaining the momentum in consumer spending, one of the key drivers of growth. The additional growth stimulus was given via the focus on infrastructure and rural areas. It has also come via a proposal for record spending of Rs3.9 lakh crore on infrastructure, including roads, rail, ports, airports and irrigation schemes. This will lead to increase in demand for materials such as steel and cement, apart from creating jobs.

Perforce there were no explicit and discernible announcements which would spur jobs growth and massive private sector investment, which is at a multi-year low. The much-awaited reduction in the corporate income tax rate for all (not just small) companies has been postponed. However, the incentives for the digital economy by way of lower service tax burden could act as an investment incentive. In terms of reforms, it must be mentioned that a lot of reformist steps have been announced outside the Budget. The abolition of the foreign investment promotion board or FIPB, in this Budget must count as a mini-big bang announcement. As such, we should see an uptick in private investment due to "crowding-in" effect of large public investment and continuing consumption spending.

By far the standout feature was the focus on agriculture and rural development. Almost Rs1.9 lakh crore have been earmarked for this part of the economy. India cannot make a significant dent on poverty without increasing farmers' incomes, which the government aims to double in five years. The government also proposes to bring a model law on contract farming that will hopefully also enable flow of credit to tenant farmers. Tenancy farming is more than 30 per cent of all farming. The ambitious target of Rs10 lakh crore credit flow to agriculture is timely and has not come a day too soon. Presumably a large chunk of this will go to tenant farmers, who otherwise have no access to institutional credit. The computerisation and networking of more than 60,000 agriculture finance co-operatives will help in meeting the target of credit to the farm sector. The linking of the e-marketplace for farm products, the loosening of the stranglehold of the Agriculture Produce Marketing Committee are all laudable steps. Increased allocation to the National Rural Employment Guarantee Scheme is also an acknowledgement of its efficacy as a proxy for unemployment insurance in times of distress and as potential vehicle for rural asset creation.

The other standout feature of the Budget is its commitment to fiscal prudence. The capping of the fiscal deficit at 3.2 per cent of GDP might bring some cheer to bond markets, which in turn will provide capital gains to bank treasuries. The total Budget size has increased by just 6 per cent, whereas national income next year will go up by 12 per cent. That shows admirable restraint. Direct tax collections will go up by more than 15 per cent (the record of past two years shows these taxes are growing much faster than the economy). Next year's tax growth will come from greater tax compliance. In his speech, the finance minister said that "India is largely a tax non-compliant economy". Our already low tax-to-GDP ratio is further made worse by the much lower share of direct taxes compared to indirect taxes. This potential direct tax net has widened thanks to new information coming from bank deposits which surged post demonetisation. Preliminary investigation has revealed some 18 lakh individuals whose huge bank deposits do not tally with their known sources of income. So, at some stage, they will all enter the tax net. This year's Economic Survey also points out that for every 100 voters, only seven pay direct taxes. In a country like Norway, there are 100 taxpayers for every 100 voters. How to reconcile the political constituency (which votes for governments) and the taxpayer constituency (which helps fund and run the government)? There's no point in relying excessively on indirect taxes, because they are unfair. Indeed, the coming GST is basically an indirect tax.

Finally, this is the first Budget to mention the issue of transparency in political funding and takes several steps for that. In its fight against black money, the government cannot ignore the issue of unaccounted money in politics. Hopefully, this sunshine will eventually mean that political parties will also come under the ambit of the Right to Information. ~

The writer is Chief Economist of the Aditya Birla Group