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The masterclass and the Budget

February 28, 2015 18:08 IST

Finance Minister Arun Jaitley arrives at Parliament.The finance minister and the government have met the immediate challenge.

The wine this time is new and also in a new bottle, which, though not full, is less than half empty, says Shreekant Sambrani.

How do you craft the annual Budget of a $2 trillion economy, the world's 10th largest (or the third, if reckoned in purchase-parity terms) that satisfies many conflicting expectations?

Especially when your government has been increasingly criticised for not making much progress in the last nine months towards meeting the many promises made in the election campaign? And more so, when your first budget, immediately after the unexpectedly handsome victory at the hustings, did not create much of a stir (I had called it 'Old wine in old bottles')?

On Budget day, Arun Jaitley, the finance minister and the prime minister's go-to guy for most matters, found a solution: Follow the masterclass of the chief economic adviser, Dr Arvind Subramaniam, in his Economic Survey 2015 presented to Parliament the day before. And in large measure it worked.

The current edition of the Survey is a refreshing departure from the earlier ones. It is sharply focussed on diagnostics of the macro economy and what needs to be done, it is transparent and is clearly written, all hallmarks of Dr Subramaniam's crisp commentaries on the contemporary Indian economy (alas, now no longer available due to his official position).

It unhesitatingly admits to reservations about the shifts in the economic numbers after the change in the datum and the methodology last month. It cautions us that the improved growth rate following the change must not be interpreted as India's emergence as a tiger economy, but as indicative of a recovering economy. The stalled projects are listed as a major bottleneck.

It offers clear views on price subsidies and the harm they do. It plumps for the trinity of the Pradhan Mantri Jan Dhan Yojana, the direct transfer of benefits under Aadhar cards and mobile phones. The fall in crude prices and the general lethargy in international economic activity are seen as placing India in a 'sweet spot' to accelerate its growth.

A growth rate of 8+ per cent is feasible for the present year. That can be achieved through greater stress on manufacturing, and not just for the Indian markets but also exports. A confluence of Skill India and Make in India is suggested as a desirable strategy.

The Rs 17.8 trillion ($300 billion) Budget reflected all this thinking as the basis of Jaitley's prescriptions for a 'just and compassionate' India. The outlining of the vision for 2022 when India will observe the 75th anniversary of Independence was rousing: Banishment of absolute poverty, housing for all, all villages connected and electrified were exactly the goals that acted as a tonic.

Later in the Budget speech, Jaitley added a universal social security net to the vision: Bank accounts accompanied by accident, life and medical insurance for those not covered, a universal pension plan and greater reliance on cashless transactions.

He lauded the direct benefit transfer schemes and urged the well-off to voluntarily not avail of the subsidies on offer.

He declared that India cannot get where it wants to by following an incremental route. It needs big bang reforms, echoing the Survey. He was also candid in admitting that public investment needs to play a key role in giving the economy a kickstart which in turn will boost private investment.

While the deficit for 2014-2015 will meet the target of 4.1 per cent of GDP, he pleaded for a somewhat slower progress to the target of 3 per cent in three years, with 3.9 per cent as the objective for 2015-2016.

The stalled projects will be revived. Four new ultra mega power projects each of 5,000 mW capacity will be auctioned along with all clearances in place to signal the stress on speedy completion.

Besides additional funds for roads and railways from the Budget, a national infrastructure investment fund would help financing institutions to leverage their resources. Railway and irrigation projects could issue tax-free bonds for financing.

The public-private partnership mode would be made more attractive by greater risk devolving on the sovereign partner.

All these welcome noises were topped by further announcements relating to taxation. India, the finance minister said, had a relatively high rate of 30 per cent as corporate taxes as compared to its neighbours and competitors. But it also had a variety of exemptions reducing the effective rate to 23 per cent and adding to tax disputes.

While there will be no change in the rates for the next year, the rate will be reduced to 25 per cent over the next four years, along with a rationalisation of the structure which will remove most exemptions as well.

Just as importantly, the long-awaited goods and services tax was now scheduled to be rolled out come April 2016. In anticipation of it, service tax was proposed to be hiked to 14 per cent from the present 12 per cent.

Further welcome initiatives were to treat all foreign investments, portfolio or direct, in the same manner and eliminating loopholes. Digitalisation as a means of de-bottlenecking permissions and clearances which is already underway will be further strengthened.

The hope clearly was that all these announcements would improve the ease of doing business in India.

The Budget refreshingly did not contain a laundry-list of changes in customs duty or excise levied on specific goods as has been the case for far too long, just as the Railway Budget two days earlier did not propose new lines or trains. The Budgets now need not be seen as pandering to special interests.

The criticism as heard immediately after the speech was on expected lines: Pro-rich, pro-business, nothing for the poor, and mostly followed the political affiliation of those offering it. Not much of it was justified.

For example, the lowering of corporate tax which was singled out, was in effect not a giveaway to business, as it came along with removal of exemptions. Stock markets grasped this soon enough, for the Sensex which had jumped by 1 per cent after the announcement, soon gravitated back to no change/small drop levels.

The 'nothing for the poor' point is also not tenable, because this is the first Budget in a long time that offers a comprehensive vision of social security with income generation.

And yet... (why is there always an 'and yet' clause?) The Budget is not quite the break-out plan that many had hoped for. It contains a road map, and mile posts. It also lists the possible roadblocks and potholes. But it does not quite tell us how the driver and vehicle will negotiate them.

For example, many of the proposals in the Budget need enabling legislation. The government already faces a hostile Opposition, especially in the Rajya Sabha, even for its current enactment agenda. One cannot say at this stage how easy the passage of the new measures would be.

A more fundamental oversight is that of three critical and chronic issues: The steady immiserisation of farming and peasantry, dwindling availability of life-sustaining water and rapid decline in air quality all over the country.

In the not too distant a future, these major problems will hobble India more than any of the concerns the Budget addressed.

But no matter. For the nonce, the finance minister and the government have met the immediate challenge. The wine this time is new and also in a new bottle, which, though not full, is less than half empty.

Postscript: The true rock star of this annual exercise this year was the new chief economic adviser, as anyone who watched him on NDTV the night before the Budget would readily agree. His mastery of facts and analysis and smooth communication skills are assets the government must use to the fullest in its drive to attract investments.

And is it necessary that each and every new scheme must be called Pradhan Mantri something or the other?

Shreekant Sambrani
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