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PRACTICAL, BUT NO BIG BANG

The Narendra Modi government has proposed a budget almost two months after it took office. It is a budget of great detail. But it does not give a coherent policy framework. It was supposed to to deal with a weak and declining economy: the sharp fall in gross domestic product growth, persistent high inflation, static employment growth, high fiscal deficits, high deficit on the current account in the balance of payments, and declining savings and investment. The stock market anticipated that the budget would transform the environment for industrial growth and climbed to extraordinary levels. Foreign institutional investors poured in funds. The rupee exchange value improved sharply.

Within six weeks of taking office, the government announced steep increases in railway tariffs, garnering around Rs 8,000 crore. This signal that the budget would inflict more pain did not deter the stock market. It expected administrative and labour law reforms to speed up approvals for projects, end inspector raj, make labour hiring and firing easier in relation to market needs, use information technology to improve transparency in government purchases, projects and clearances. There would be fiscal consolidation by pruning waste in social expenditures and privatizing and disinvesting State owned enterprises. The response to the impending drought through the release of grain stocks, and making hoarding of vital vegetables and other food products more serious crimes, might lead to a more stable supply and price situation. The budget needed to invest in water storage and conservation, storage including cold storage, and free agricultural markets from the heavy hand of the bureaucracy.

Industry would like a free market over India that the goods and services tax would bring about, also direct tax reforms so that there is consistency in tax demands, the scrapping of unreasonable retrospective taxes, clear rules on transfer pricing, rebalancing of customs and excise taxes to encourage local production, changes to the new Companies Act so that there is a smaller burden of compliance and more freedom for decision making. Industry would also like to see a lower interest rate regime. Stimulants for small scale and cottage industries, like easier funds, materials procurement, technological and marketing support, were other expectations. The lowest income tax slabs needed upward adjustments.

The railway budget made clear that costs will be reflected in future tariffs; it announced openings for private and foreign investment and talks of the private-public partnership model for private investments (with no detail) . The private-public partnership was an innovative idea, poorly implemented and there are over Rs 2,50,000 crore of private infrastructure loans lying un-serviced with banks. The finance minister in his budget speech recognized the weaknesses in contracts, but left the actions to a later announcement. The announcement of Bullet trains seemed inappropriate, considering the huge investments necessary and when existing trains need improvement.

Jaitley’s budget accepted Chidambaram’s February deficit calculations and the target for the year of 5.1 per cent. The statements show non-tax revenues as going up in relation to 2013-14 from Rs 79,788 to Rs 99,099 crore, an increase of almost Rs 20,000 crore. It is not known whether this is because of selling bank shares (mentioned when he talks of recapitalizing banks), or general disinvestment. The budget speech was long, uninspiring and full of so many pilot schemes that the major achievements were lost.

The budget has much to benefit individuals and for investment. It reduces the tax liability of the middle class, the BJP’s backbone, by raising tax exemption limits, limits on tax free investments in public provident funds, tax benefits on housing investment and borrowings and by raising the limit for exemption of investments under 80C. The budget will stimulate future FDI by committing to avoid changes as with retrospective taxation, commiting to more transparency and method in transfer pricing rules, and raising FDI limits for defence, insurance, real estate and smart cities. The United Progressive Alliance had passed a law to overcome a Supreme Court order invalidating retrospective tax claims against Vodaphone. Jaitley and the National Democratic Alliance could have abandoned that legislation. The budget also commits to bank capitalization on Basel norms, and implies selling significant bank shareholdings.

It encourages domestic investment in manufacturing, both in the organized and in the micro small and medium enterprises sectors. It promises a stable tax regime, that all government departments and ministries will be integrated through e-platforms (enabling speedy and coordinated clearances), extends the benefit of advance tax rulings to local people and not just non-resident Indians. It talks of a mechanism to settle pending tax claims expeditiously. It also provides significant allocations for road construction, national highways, rural roads, sanitation, investments in roads and rail in the Northeast. These substantial allocations will have a multiplier effect on the economy. The indication of a predictable tax regime is welcome as is the extension of advance tax ruling to domestic investors and the opening of more benches for the purpose.

There are indications of administrative and legislative changes, for example, changes in the Apprenticeship Act to enable much larger use of apprentices by all, including MSMEs. If such changes come, they will be a great addition to the country’s need for skills development. One hopes that this is a precursor to changes in Central ands state labour laws.

For many investments it talks of a public private partnership model, and in some, viability gap funding. But it has no mention of how these will be contracted to avoid old pitfalls. For example, PPP projects allowed debt ratios of as much as 80 per cent. A considerable part of the sticky advances with nationalized banks today are to such projects. Private parties have also bid aggressively, leading to abandonment of projects.

On many items the budget speech postponed decisions by setting up, for example, an expenditure reforms commission to review government expenditures, a high level committee to interact with trade and industry for clarity on tax laws, examining the UPA’s revised direct tax code, and it commits to introducing the goods and services tax this year. It will add to government revenues, and also stimulate industry by making a true common market of India.

The budget speech was largely taken up with details of many different imaginative projects, many with token allocations for each of Rs 100 crore for states for many new AIIMS, IIMs and IITs, tribal welfare, improving the rural power infrastructure, 24x7 power to all households, madrasas’ modernization. There are other such with token provisions of Rs 500 or 1000 crores when the requirement would be many times higher.

The budget focuses on agriculture and wants private investment in the infrastructure. It does not tamper with the UPA expenditures on social schemes, but will make *NBREGA focus on building agricultural assets. This budget is commendable for being prepared in 45 days in government. It is a realistic budget. It is disappointing in relation to the promises of “better days”, and the specifics mentioned by the prime minister — lower deficit, better implementation of social programmes, big push for growth and employment. Because it is realistic, one can expect that Modi will achieve the promise of 7-8 per cent GDP growth with only moderate inflation in two to three years.