Jaitley's budget falls short of expectations he ignited

By S. Sethuraman. Dated: 3/4/2015 9:55:07 PM

Mr Arun Jaitley, Finance Minister, smartly projected a visionary image for the first full-fled Union Budget of the Modi Government for 2015-16, which in overall terms is less assuring of the "Achhe Din", promised by the Prime Minister, coming within sight in the foreseeable future. It holds out more attractions for business in the hope all that would help to revive investments and create jobs.
The budget exercise may have left Mr Jaitley wiser than before when faced with fiscal and other challenges which he would have brushed off earlier in the opposition. But the Modi Government could not have had a better environment than now for a transformative budget, which could have both major game-changing reforms and feasible social development goals.
Even the Fourteenth Finance Commission (FFC) report it has implemented to transfer the highest ever 42 per cent of central tax revenues to States, has certainly helped to enhance Government's image, apart from other favourable factors such as slowdown bottoming out, sharp fall in international oil prices, declining inflation, and comfortable reserves with a well-managed current account deficit.
Mr Jaitley, while politically ignoring the groundwork laid in 2013-14 toward macro-economic improvement, credited his government for the turnaround including "conquest of inflation". Yes, he daringly utilised the oil bonanza to deregulate diesel prices to reduce subsidies, improve government finances and the current account in BOP. He also readily embraced the previous regime's scheme of direct benefits transfer, which is being widened on the back of Prime Minister's Jan Dhan Yojana of taking banking to millions.
While fuel subsidies may soon be a thing of past, a reversal of downtrend in oil prices in 2015 could exert new pressures on price front, given India's 80 per cent dependence on oil imports. Mr Jaitley's Rs. 17,77,477 crore budget assumes lower inflation, a stable external sector and a normal monsoon banks to target 8 to 8.5 per cent real growth (11.5 per cent at current prices).
The economy should grow as projected, without any external shocks which could affect capital flows, and inflation held down for revenue growth to be in line with the budgeted 15.8 per cent. Otherwise growth with stability would be elusive and the quality of fiscal consolidation to keep to the target would suffer.
Even as the implementation of the 14th FFC may have left the Centre fiscally stressed, the budget marks a new dawn of "co-operative federalism" and "empowerment of states". The latter would now be virtually autonomous, with such untied resources transferred by the Centre, to make plans having regard to local needs and aspirations and flexibly design and implement programmes. States' share of central tax revenues in 2015-16 would be 5.24 lakh crores as against 3.38 lakh crores in 2014-15 (RE).
The Centre believes that this landmark reform would trigger higher growth and faster development of different regions contributing to overall national growth. NITI, which has supplanted the Planning Commission, is intended to provide the mechanism for institutionalising such cooperative federalism. The Centre takes on a supportive role as an enabler with States doing a greater share of spending in the sectors taken up.
Centralised planning as hitherto has been given a go-bye as a "top-down approach". The Central Plan has had to be streamlined to provide for areas in the exclusive domain of the Union and it takes care to protect major welfare programmes in the social sector including the ongoing MGNRE Scheme and outlays on minorities, other special interests, health and education programmes etc.
But the envisaged plan expenditure in 2015-16 is roughly equivalent to revised estimates of current year, being part of efforts to contain fiscal deficit at 3.9 per cent of GDP in the new fiscal year while Mr Jaitley has retained 2014-15 deficit at targeted 4.1 per cent of GDP. There is distinct recognition of the need for public investments in infrastructure to catalyse private investments.
Mr Jaitley said out of increased capital expenditure provided for in 2015-16, an additional rs.70,000 crores of investments would be made in key infrastructure sectors including railways, roads and power. Government expects this would draw in domestic and foreign investors to maximise spending on infrastructure, the major bottleneck for industrial advance, especially in the context of the current thrusts to boost manufacture under the Make in India Programme.
With the Centre's fiscal space getting reduced in the aftermath of implementation of FFC recommendations and likely burden from the 7th Pay Commission report in 2016-17, Mr Jaitley has made a deviation from his fiscal consolidation roadmap. The goal of 3 per cent of GDP as fiscal deficit would become possible only in 2017-18. For 2015-16, the target is set at 3.9 per cent which would come down to 3.6 per cent in 2016-17one year later than earlier projected. The deficit budgeted at 3.9 per cent in 2015-16 would be brought down to 3.6 per cent in 2016-17.
Continuing limited fiscal space is anticipated over these years and bringing deficits down as targeted may become difficult, bringing the quality of fiscal consolidation at issue. So far, deficit targets are achieved by cutting down allocated expenditures but fiscal rectitude would have to depend much more on mobilisation of additional resources.
The 2015-16 budget has a modest effort at raising additional revenue, mainly from excise and service tax rate hikes. But the impact of new excise levies on commodities andd the raising the service tax to 14 per cent would push up living costs for everyone. Where the budget has been viewed with some disappointment is in regard to changes in didrect taxation structure.
With focus on further easing of doing business and incentivizing investments for "Make in India", Swachh Bharat and the like, Mr Jaitley has proposed reduction of corporate tax from 30 per cent to 25 per cent over the next four years. He has left personal income tax levels unchanged, belying hopes of at least a rise in the exemption limit.. He has also abolished wealth tax - though there would be a higher surcharge for incomes above Rs. one crore - and deferred by another two years the applicability of GARR (General Anti Avoidance Rule),a contentious issue for foreign investors.
Predictably, criticisms of the budget have come from many quarters including former Finance Minister Mr Chidambaram who sees its thrust away from the poor, "cruelly ignored", and favouring corporates. However, Mr Jaitley can have some satisfaction that states are happy over the substantial resource transfers thanks to FFC.
In a politically significant aside, Mr Jaitley pointed out that both Bihar and West Bengal would be among the biggest beneficiaries of the FFC recommendations". Mr Nitish Kumar, Chief Minister of Bihar., has welcomed the special package given to AP and Telengana being extended to Bihar and West Bengal both due for elections in 2015 and 2016 respectively.
But Chief Minister Chandrababu Naidu was bitter and said A P has been let down both by the FFC and by Mr Jaitley's limited concessions. Mr Jaitley has listed two "incentives" for AP and Telengana - an additional investment allowance of 15 per cent of cost of new assets installed in the backward districts on or after April 1, 2015 and additional depreciation of 35 per cent, both for a period of five years.
--(IPA Service)

 

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