In
the run up to the budget, as Mr Jaitley, Finance Minister convened his
customary pre-budget meetings with various segments of the society, including
from within the government, he has been inundated by advice, but of conflicting
nature. One segment advised him to go
all out for investment boost, while the other segment demanded that he should
not err on fiscal consolidation. The former group is well represented by his own
chief economic adviser, Arvind Subramanian, when he articulated that the
finance minister should ignore fiscal consolidation for one more year—wished to
keep the fiscal deficit unchanged at 3.9 per cent of GDP this year—so as to
give a countercyclical boost to offset global headwinds and thereby ensure that
the economy is kept on growth path. He indeed advised that the government should
rise its investment in infrastructure to offset the shortfall in private
investment.
As
against the known stand of CEA, the RBI governor, Raghuram Rajan is forthright
when he said that if India gives a go by to its fiscal consolidation, global
investors may lose their confidence and pull out capital. He is indeed categorical
in his assertion that fiscal reputations are hard to build but easy to destroy.
In one of his recent lectures, drawing the nation’s attention to Brazil’s
experience, he cautioned the policy makers thus: “The enormous costs of
becoming an unstable country far outweigh any small growth benefits that can be
obtained through aggressive [fiscal] policies.” With a combined fiscal deficit
of 7.2 per cent of GDP that is quite high for a country whose debt-GDP ratio is
already at 66 percent, he said, India could hardly afford to do anything that
threatens its macroeconomic stability.
Amidst
these conflicting demands and particularly, in the face of threatening global
financial storms, Jaitley faced a real challenge in drafting his budget but
finally came out commendably by rightly pegging the fiscal deficit at 3.5 per cent
of GDP in 2016-17, while the nominal GDP growth is pegged at 10-11 per cent,
which, should I say, well reconciles the opposing needs of fiscal consolidation
and the growth. Despite the inherent weaknesses of the budget
figures—even a slight slippage in GDP growth from the projected level or
slippages in the realization of disinvestment plans, the financial trouble in China that lead to unprecedented exodus of capital, while its overcapacity likely to flood the markets with its cheap goods, the trouble in the banking industry
of Europe, which can all cumulatively generate chill winds that can ultimately blow our budget calculations off the track—and given that this year the
government has to bear the additional financial burden under 7th pay
commission recommendations and One Rank One Pension scheme implementation,
which is likely to immediately raise the spending by 0.6 per cent of GDP, what
Jaitley accomplished is truly brave and laudable. And this is sure to help India stand out among
the emerging markets.
Fiscal
prudence aside, Jaitley also taxed the ultra-rich by levying an additional tax
surcharge of 3 per cent and an additional tax of 10 per cent on dividend income
exceeding Rs 10 lakh. Luxury car buyers will have to pay an infrastructure cess
ranging up to 4 per cent. Higher taxes will be levied on jewellery. He has also
increased service tax by 2 per cent. Although there is no radicalism in the budget,
true to the assertion made in the Economic Survey—“persistent, creative,
encompassing incrementalism”—Jaitley, by allocating Rs 35,984 crore towards
agriculture and Rs 87,765 crore for rural development; and fixing the capital
expenditure on roads and railways together at Rs 218, 000 crore, ensured that
the much desired multiplier effect is created. Which means, creation of employment and
sustainable growth in the country side. This in turn is sure to stimulate demand
in the market for goods besides addressing the supply-side weaknesses—supply of
food grains and other related agro-products—of the market. He has also reduced
customs and excise duties on certain inputs
to reduce the cost of manufacturing in sectors like IT, hardware,
capital goods, defense production, etc. to give a boost to ‘Make in India’
programme.
He
has also expressed a strong desire to arrest the slippages in the
administration of subsidy schemes by linking cash transfers to bank accounts of
the needy by legalising Aadhaar card as the prime identity source of citizens
through the proposed Aadhaar Bill. He has also proposed to introduce another
Bill that can offer guidelines for PPP negotiations and also help resolve the
disputes in infrastructure PPPs. He has also expressed a view to avoid
‘retrospectivity’ in creating fresh tax liability. Above all, he has not
resorted to any adventurism in taxation.
Of
course, there are people who freely air an opinion that the government being in
the middle of its tenure could have taken bold decisions such as stemming energy
subsidies that stood at an whooping level of Rs. 2.5 lakh crore, that too, when
the oil prices are at record low levels, pruning food and fertilizer subsidies,
etc., to limit the unproductive revenue expenditure and divert the so released
capital for infra investment. Similarly, much is being said of the government’s
ill-preparedness to implement the much-desired Goods and Services Tax (GST). Of
course, these are all very desirable elements that needs to be addressed by the
present government which indeed came to power promising some such good and
meaningful acts. And, so they are within their right to conclude that there is
nothing exceptional in the budget to gloat about.
True,
there is no much radicalism in the budget that the country looked forward to
Modi government but how can we ignore the age old saying: “Politics is the art
of the possible.” Look at the behaviour
of the opposition parties in Parliament. An unbiased look at it engenders a
painful feeling that opposition in Indian democracy means always opposing what
the ruling party in power proposes, irrespective of the fact whether it is good
for the nation or otherwise. Unless this attitude changes and leaders of either
side show statesmanship, nothing radical is perhaps possible in our present
system.
That
being the reality, one must admit that Jaitley did a fairly good job. The rest,
of course, lies in how well it is executed.
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