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Budget 2016: 6 takeaways, 1 lesson

By A K Bhattacharya
March 16, 2016 09:51 IST
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Illustration by Uttam Ghosh


Budget was a master stroke because by sticking to these numbers Mr Jaitley addressed the concerns of the most vocal and influential sections, says AK Bhattacharya, Editor, Business Standard

About a fortnight ago, Finance Minister Arun Jaitley presented his government’s third Budget to the nation.

It is, therefore, a good occasion to look a little more closely at the implications of his proposals in the light of the various reactions to them and the government response.

Sifting through these various strands, one can easily list six broad takeaways from the Union Budget for 2016-17.

Fiscal prudence: The master stroke of this Budget is Mr Jaitley’s decision to adhere to the fiscal deficit targets that he had himself announced last year.

He was under considerable pressure to relax the fiscal deficit targets -- from his own advisors, the recommendations of the Seventh Central Pay Commission for higher wages and the need to find more resources to increase public investments.

In the end, he met the promised fiscal deficit target of 3.9 per cent of gross domestic product in a year when the nominal size of the economy had not grown as was expected.

He had an alibi to stray from the target on the ground that the economy’s nominal growth was only 8.6 per cent against the anticipated 11.5 per cent.

That he did not use that excuse has been creditable.

More praiseworthy has been his move to stick to the promised goal of reducing the fiscal deficit to 3.5 per cent of gross domestic product for 2016-17, even though he had to face a higher expenditure burden.

It was a master stroke because by sticking to these numbers Mr Jaitley addressed the concerns of the most vocal and influential sections of the economy -- the economists, the market analysts, the rating agencies, the World Bank and the International Monetary Fund, Indian business leaders and of course the Reserve Bank of India.

Whatever may be the other shortcomings of the Budget, the act of staying true to the cause of fiscal consolidation helped ward off most adverse reactions to its proposals.

Conservative tax revenue numbers: This is the second big takeaway from the Budget.

The current year has seen nominal growth of 8.6 per cent and yet tax revenue growth is at around 17 per cent.

Barring unforeseen developments, achieving 11.7 per cent tax revenue growth next year should not be a big task particularly if the projection of nominal growth of 11 per cent is realised.

Ambitious targets: Even if the government manages to sell assets of public sector enterprises as is the government’s plan, the target of raising Rs 56,500 crore (Rs 565 billion) from disinvestment and strategic sale of assets would be a tall task.

No government in the past managed to cross Rs 26,000 crore (Rs 260 billion) from this revenue stream.

The stock market’s current situation is not very encouraging. Reaching anywhere near that number alone, therefore, would be a major achievement.

Similar doubts are being expressed on the assumptions of telecom revenues of around Rs 1 lakh crore (Rs 1 trillion).

The challenge here would come not from the licence fees or the auction proceeds, but from realising around Rs 20,000 crore (Rs 200 billion) of arrears.

The Budget document lists only a total arrears amount of Rs 16,000 crore (Rs 160 billion) and it would require some effort to meet this number.

Some difficult goals: There are a couple of proposals in Mr Jaitley's third Budget whose goals are not easily achievable.

The promise of creating a settlement mechanism for companies with long-pending tax disputes is laudable, but the terms outlined by the finance minister are not attractive.

Why, for instance, would a company agree to pay up the tax demand without interest and penalty?

If the company is of the view that the tax demand itself was unjustified, the incentive of not paying interest and penalty will hardly be helpful.

Similarly, the income disclosure scheme allowing tax evaders to come clean after paying around 50 per cent tax on the amount could be a non-starter, simply because such disclosures would expose the tax-payer to further scrutiny by the tax department.

The short point is that without reforming tax administration, such schemes are likely to make little headway.

A few risks: Purists are likely to point out a few indiscreet moves in the Budget.

The increasing dependence on cesses to collect revenues is justified on the ground that the Centre too needs to garner resources without sharing 42 per of the collections with the states.

But this can hardly be a justification as this tramples upon the basic principles of tax devolution enunciated by successive Finance Commissions.

Nor is it any solace that the cesses will go away once the promised goods and services tax is introduced.

Equally problematic are several duty increases that are seemingly aimed at either addressing specific concerns arising out of import competition or at promoting domestic manufacturing in the name of the Make In India programme.

Political pragmatism: Finally, in spite of many provocations to go in for big-bang reforms, the Budget avoids proposals that could face political headwinds.

Thus, it stays away from deferring the implementation of the recommendations of the Seventh Central Pay Commission and indeed provides adequately for the pay, allowances and pensions of government employees.

This is political pragmatism even though it means huge additional pressure on government finances.

Taxing the rich -- a higher surcharge on taxable income of those earning over Rs 1 crore (Rs 10 million) and a 10 per cent additional tax on dividends of over Rs 10 lakh (Rs 1 million) received in a year -- are similar such attempts to tax those who are in the higher brackets of income.

Yet, the regret is that political pragmatism has not been adequately matched by political management of the Budget.

The manner in which the government succumbed to political pressure from the better-off salaried class on the question of taxing the outstanding balances of employees’ provident funds on their withdrawal is testimony to the current political dispensation’s inability to make adequate political preparations to ensure the acceptance of such a proposal, which had economic merit but would have faced some obvious political resistance.

That it did not engage in such planning is a reminder to the government that the Budget is not just about presenting some revenue and expenditure numbers, but also about preparing the people to accept the economic logic of policies howsoever unpalatable they might seem to be.

Illustration by Uttam Ghosh/

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A K Bhattacharya
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