Arun Jaitley's third Budget is doubly impressive given he had to deal with the PM's hard pivot to the economic left, says Mihir S Sharma.
The overwhelming response to the Union Budget for 2016-17 has been one of relief.
There’s relief partly because Finance Minister Arun Jaitley and his team have wisely stuck to the fiscal consolidation road map that they had rolled out last year, and reduced the fiscal deficit in the coming year to 3.5 per cent of gross domestic product or GDP.
But there’s also relief that the Budget itself comes across as a better thought through and thorough document than most of what has emerged from this government in its nearly two years in power.
The Modi government has drastically lowered expectations in its tenure so far, and this Budget has benefited from that process.
That said, it is important to note those aspects of an apparently incremental Budget that demonstrate indisputable forward movement. Several stand out.
First, the emphasis on structural transformation of both the revenue and expenditure side.
This was something that this column’s pre-Budget iteration had hoped for, and, thankfully, something has indeed been done.
Several ways to make tax assessments less confrontational, or to more easily settle disputes, have been proposed; easier presumptive tax may bring large numbers of self-employed professionals into the tax net; tax officers’ wings have been clipped slightly.
Second, the push to improve the welfare plumbing, something that the last government should have done, but failed to put in place before it left office.
A Bill to back Aadhaar has finally been introduced; fertiliser subsidies are being given a trial; and various other schemes to operationalise alternatives to a faltering welfare system are being put in place.
Third, we’ve heard, for the first time, of the possibility of a state-controlled bank being privatised – in this case, IDBI Bank.
This has been accompanied by a promise of bank consolidation in which stressed banks are taken over by healthier banks, although many believe this process may not be wise as it penalises systems that worked well and not the other way around.
Yet, at least these are the maximum steps allowed without changing the Banks Nationalisation Act (IDBI Bank is not subject to the Act) and so the government has a chance of making it happen – otherwise the fossils in the Congress would be up in arms about the sacrilege of rolling back Indira Gandhi’s nationalisation, epochal error or not.
There are other thrusts to the Budget that are, however, worrying. One is the continued devotion to tinkering with Customs and excise code in the service of import substitution.
This pre-1991 mindset imagines that Make in India and Start-up India will be served by overt and covert protectionism; it is a grievous error, and misses the point that, worldwide, manufacturing has changed since the 1970s.
We need to fit into global supply chains now. As Rahul Jacob pointed out on these pages yesterday, “hefty duties on imports [of man-made fibre from China] leaves producers such as Cotton Blossom heavily reliant for poly cottons on the high priced products of Reliance Industries.
Since fabric usually accounts for 60 per cent of the garment’s cost, this is a deal-breaker for companies pitching for the business of European and US retailers.”
This is the case in industry after industry – whether automakers facing higher-priced steel or electronics makers suffering under duties on circuit boards.
Under the pretext of helping Make in India, a backward-looking bureaucracy is actually undermining mass manufacturing, exports – and making things pricier for Indian consumers.
Finally, there are reasonable questions to be asked about the numbers that Mr Jaitley has presented.
Growth assumptions, tax buoyancy assumptions and so on appear reasonable.
Spending has been compressed, especially defence spending – all to the good. But the big fiscal hole has been filled by non-tax revenue – from disinvestment, from telecom spectrum, and from public sector companies’ dividends.
It is very dangerous in particular to put all your eggs in the auction proceeds basket.
The Rs 1 lakh crore budgeted from telecom companies will depend on too many things beyond your control, including market conditions, their level of debt, and ongoing court cases.
And as for disinvestment, well let’s just say the government hasn’t had a great track record on meeting its targets, so a little scepticism about the numbers is warranted.
Senior finance ministry officials have argued that we could fall a bit short on these two and it wouldn’t matter because other possible revenue streams have not been included in the Budget – for example, additional tax revenue arising from settlements of outstanding disputes. (By some estimates, almost Rs 6 lakh crore is tied up in such disputes.) But even so, the Budget is actually a little less fiscally conservative than it appears at first sight.
Overall, however, this is an impressive Budget in many ways, particularly given the multiple political imperatives that Mr Jaitley had to serve.
The most pressing such imperative, of course, was his boss’ sudden pivot to the left – visible in, for example, the prime minister’s speech to industrialists recently where he asked why subsidies to the rich were never called subsidies, but instead incentives. (I cannot argue with the PM’s logic there.)
In addition, after two poor monsoons, a rural and agriculture focus is both politically and ethically correct.
If this Budget was not packaged and sold as a Budget for the poor and for farmers, Narendra Modi would have lost the next election.
But it does make the Budget tricky to sell elsewhere. If even Communist leaders, when asked, mutter “nothing in the Budget for the corporate sector” – that actually happened – then you can imagine how Mr Modi’s traditional middle-class constituency will have reacted.
The controversy over making provident fund withdrawals partially taxable is particularly unfortunate for the government, therefore; it serves as a crystallisation of resentment among some in the middle class that “our” government has suddenly turned on us.
But the BJP’s political calculation is that the middle class has nowhere else to go; and, furthermore, that this class is “nationalist” enough to think twice – in the charged environment currently being created – about voting for anyone but the flag-wavers in the ruling party. There is considerable weight to this argument.
Where to from now? Much was laid out in this Budget as a future agenda: bank reform, the Indian Financial Code, welfare reform.
The government will have a full year even if it puts the goods and services tax (GST) on the back-burner (which, judging by the lack of progress on GST-readiness in this Budget, it appears to have done). It has started late, but at least it’s started.
The next Budget will, no doubt, be a fiscal disaster and an election-time bonanza.
But at least there’s one year of hard work possible before that, and I have every expectation that Mr Jaitley and the team that produced this Budget are up for it.
