March 2016
Issue No. 4
Policy Watch

Hope, Hype and Reality

The post-Budget conversation has moved from 'very good' to 'good job under the circumstances'. Srikanth Srinivas takes a quick look at what's leading to the contradictory reactions

In the first 10 days after the FY17 Union Budget was presented in Parliament, perspectives and opinions have moved from ‘ a very good Budget’ through ‘it was disappointing’ to a more realistic ‘good job under the circumstances’. Public discourse before every annual Union Budget exercise generates considerable speculation and anticipation, only to be quickly muted soon after the event.

Many expectations were belied: there were no Big Bang reforms for example, though many experts and analysts hoped for them. In sum, this year’s budget was a sort of consolidation exercise: it built on some of the announcements of last year, made some minor tweaks rather than mid-course corrections, and amplified on some announcements made during the year.

Some analysts have sought to present their reviews by clustering the government’s announcements into buckets: fiscal consolidation, tax measures (additions and rationalisations), infrastructure spending commitments, etc. Perhaps what this type of perspective ignores is the larger strategic direction that this year’s Budget lays out. In the paragraphs that follow, we try to capture the strategic drivers in the FY17 Union Budget

First, let’s start with hope, especially that of the possibility of a cut in corporate income tax. Most captains of industry expected that cut, in line with the government’s earlier commitment to bring it down to 25 per cent. Cuts were conspicuously absent in both individual and corporate income taxes.

But the finance minister did announce that all businesses incorporated after April 1, 2016 would pay corporate tax at 25 per cent, without exemptions; in other words, corporate income tax is now at two speeds. Older companies will pay at 30 per cent and claim allowable exemptions; as the tax administration rationalises taxes through the GST and current tax exemptions reach sunset, the two rates will converge to the same 25 per cent. This, most people estimate, will be accomplished by 2020.

Second, there’s been a lot of hype around the ‘rural focus’ in this Budget. The truth is, after two successive droughts, the finance minister could not afford ignore the stress on the rural (mainly agrarian) economy. The majority of India’s population is part of the rural economy, and drove a significant part of the consumption-driven growth evident in the last three years.

In his Budget speech, finance minister Arun Jaitley underscored the Rs. 38,500 crore allocation to the flagship MGNREGA scheme as being the highest so far, an increase of 15 per cent over the allocation in the previous year. But the revised estimates for FY16 were Rs. 35,800; this year’s increase is just a shade less than 10 per cent. Even if the scheme was a legacy of the previous government, this one sees merit in continuing with it.

Which brings us to the third driver in the Budget: improving governance, not least in ways that make public expenditure more efficient, using direct benefit transfers and leveraging technology to improve working of the public distribution system (PDS) that will enable better targeting and cut leakage by almost 30 per cent.

The other side of the push on bettering governance is improving the ease of doing business; rationalising the tax regime and streamlining exemptions are measures that will go a long way towards improving regulatory predictability.

Fourth, on the banking front, the introduction of a bankruptcy code through legislation will be a big step towards cleaning up investments and bank balance sheets. Credit growth is after all a proxy for economic growth, and putting banks back on that curve is one of the quickest ways to economic revival.

Banks will feel some of that pain, but it will be that of surgery: essential to a stronger and healthier financial system. The Rs. 25,000 crore in recapitalisation monies is viewed as inadequate relief, but this is just a part of the Rs. 70,000 crore that banks will get over the next four years.

Finally, the government reiterated its commitment to fiscal prudence; despite the number of persuasive voices that suggested that a little fiscal slippage would not have adverse consequences, Mr. Jaitley chose to stick with his stated target of 3.5 per cent of GDP for the fiscal deficit. It may not earn him kudos, but it certainly shores up his credibility.

But the Budget is also about raising tax revenues; Mr. Jaitley has done a fair bit of that as well, raising some taxes like services tax, and removing some exemptions to increase tax revenue. As someone pointed out, after the government takes enough to balance its budget, the taxpayer has the job of budgeting the balance.