The Indian budget is akin to a State of Union address in that the finance minister reports the health of the nation and prescribes fiscal doses to fix ailing sectors. How he raises and spends funds spells out the government's priorities. This budget showed government priorities were squarely on fixing the rural economy and enhancing social security for the poor.
At the outset, the government projected that GDP will continue growing at a fast clip. Currently, India's GDP growth is robust. However, sustaining this growth requires steady investments and ensuring those investments translate to incremental output. The two pillars of a growing economy are capital formation - investments and incremental capital output ratio.
Capital formation has steadily declined over the years, especially in the private sector. This is because of sluggish demand and new investments are unlikely in an environment of excess capacity. A major driver of demand is rural consumption. In that context increasing minimum support prices across the board should stimulate demand. This was the first major overhaul of MSP by this government, and it also spoke about liberalising agricultural exports. Both policies should raise foodstuff prices that will help the farm sector, improve demand of consumer goods and industrial durables but are likely to be inflationary. One challenge of MSP is that it signals which crop to grow. For instance, drought prone areas grow sugarcane since the MSP price is high. This adds to the risk of crop failure. While increasing MSP the government should ensure that incentives to produce appropriate crops are maintained. Otherwise sporadic rural distress may continue to be a feature of Indian farming.
Employment generation was a key focus of the budget. Funding the provident fund liabilities of 12 per cent for new employees for three years and extending tax rebates for new employee cost will go some distance in formalising the labour pool of India and aid labour intensive manufacture. However, in the absence of comprehensive labour reforms that ensure that new employees, once recruited do not become a permanent burden on the employer, the full measure of the benefit may not be realised. If industry does hire more workers per unit of output, capital-output ratio, currently lagging global benchmarks, will improve and will significantly increase the GDP numbers for existing levels of capital formation.
The corporate tax was reduced to 25 per cent for companies with revenues below Rs 250 crore. Lower corporate taxes is a step in the right direction. India is currently an outlier in terms of corporate tax and manufacturing is discouraged while imports are incentivised. Electronics imports from China and South East Asia have ballooned over the last few years partly due to the differential tax rate. To reduce the imports of electronics, customs duties on mobile phones and televisions were imposed. Capping the tax benefit at a revenue level may not work effectively. Unlike individuals where progressive taxation is desirable and effective, for corporates it may result in spinning off entities and encouraging companies to remain small to benefit from more favourable tax rates. Hopefully, the tax benefit would be extended to all companies irrespective of size.
A much needed health insurance scheme for ten crore families were set up. This will give Rs 5 lakh coverage to the poorest Indians. This is welcome and over the long-term will yield benefits.
Chatterjee is managing director of Luxmi Tea and chairman of Obeetee