The Union Budget: Investor Friendly but lacking Social Vision?

Finance Minister Arun Jaitley before the Budget Session
Finance Minister Arun Jaitley before the Budget Session

Deepanshu Mohan reviews India’s latest budget, presented on 28 February 2015. He argues that while the announcements signal the government is clearly working towards an investor friendly and globally competitive India, they lack vision in addressing more structural socio-economic concerns for the Indian grassroots.

 

In a country that has nominally been socialist since independence, the budget is always read as a coded message about how supportive the government of the day intends to be in relation to markets. As an annual exercise the Indian budget therefore carries much more meaning and purpose than being a mere presentation of the financial accounts (outlays for the next financial year) by the Finance Minister (FM). There were high expectations for the Budget announcement last Saturday. In his first nine months in office, Prime Minister Narendra Modi announced a raft of initiatives to boost manufacturing, improve sanitation, slash red tape, increase foreign investment and more. However, has been lacking is a coherent strategy to tie these worthy goals together. A lot in the India Inc. had even started questioning the pro-growth and Acche Din (Good Days) rhetoric.

FM Arun Jaitley had a lot to prove in India’s most important annual statement of accounts since 1991. While there haven’t been any significant structural reforms announced, the budget seems to be focusing more on mending the existing imbalances and fundamental concerns in India’s existing business and economic system.  The article here tries to elucidate on the significant takeaways from the budget and raise a few concerns associated with them.

Positives

To his credit, Jaitley presented an expertly crafted budget while also attempting to reconcile the interests of business and the markets on one hand and that of the masses on the other hand. By pledging to abolish wealth tax, postpone GAAR (General Anti Avoidance Rule) and cut corporate tax rate from 30% to 25 % in the next four years the government is clearly working towards an investor friendly and globally competitive India.

There were several tweaks to indirect taxes presumably to aid the ‘Make in India’ effort, and a promise to roll out the Goods and Services Tax by April 1, 2016. The idea of an electronic bill discounting platform for Micro Small and Medium Enterprises is an excellent one that will address the cash flow problems of the smallest of businesses.

The Personal Income Tax exemptions have been raised, with the maximum claimable exemptions now Rs 4.4 lakh rather than Rs 3.8 lakh and an additional 2 per cent surcharge has been added to the tax paid on income over Rs. 1 crore i.e. for the super-rich. The higher spending middle income salaried class faced a higher tax burden with the basic rate of service tax raised to 14 per cent (on the indirect side) which seems to be done to ensure that overall the FM can raise approximately Rs. 15,000 crore more from taxes.

For the middle class, there is a slippery slope here, so the FM has tried to incentivise the push for retirement coverage with the promise of a generous tax-break (for those who save towards government directed pension funds). Before the budget, there was a strong expectation from the FM to take steps to increase the gross domestic savings and encourage more investment in the long run. Jaitley seems to have done this by raising the total tax exemption limit up to Rs. 444,200. The question however remains, with a high indirect tax base, an assumption of high growth (8% real GDP growth rate), consistent low inflation rate (4%-5% level or below) the disposable income may drastically change if the assumptions do not hold (especially given fuel prices are only going to rise in the future after the recent slump).

One of the facets of the budget that seems to stand out is the conscious push towards spreading the social security net especially with respect to retirement pension coverage, using the Jan Dhan platform. The Pradhan Mantri Suraksha Bima Yojana (PMSBY) will offer accident cover of Rs.2 lakh at a premium of just Rs.12 per year and the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) will offer life cover of Rs.2 lakh at a premium of just Rs.330 per annum. Both these are creditable plans that should take social security to those who need it the most.

Concerns

There are some caveats. All the budget projections made assume that the economy will roar along at between 8.1 per cent and 8.5 per cent next year, up from 7.4 per cent this year. However the actual trends in corporate profits, tax collections, job growth, exports and other indicators suggest an economy struggling to break free rather than one about to soar (see Swaninathan Aiyar). Similarly new orders for capital goods and construction are currently at dismal levels, and it is far from certain that the binding constraint lies in infrastructure finance.

The middle-class will be unhappy with no change proposed in either the income-tax slabs or the rates; the decision to increase the import duty on petrol and diesel is unlikely to go down well with retail prices that have increased due to the trade-parity pricing formula followed by the oil companies. In simpler terms, their cost of living will also increase as cigarettes, mobile bills, internet and going out to multiplexes, restaurants etc. are going to cost more due to heavy indirect direct tax rise.

The tax proposals, along with the recommendations for devolution of the Fourteenth Finance Commission and a push to reinvigorate infrastructure, has also meant that the FM has delayed the fiscal consolidation path by a year. The fiscal deficit for 2015-16 will stand at 3.9 percent of GDP instead of the expected 3.6 per cent, but with a commitment to the3 percent target in the medium term.

The scheme of MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) which has been marred with structural bottlenecks across states in India, and criticised for fund leakages previously by the current government when it was in opposition, seems to now be the sole job creating force (with an added allocation of Rs.34,699 crores announced) and nothing seems to be announced to address its weaknesses.

One of my major concerns with the budget is on a lack of a concrete financial vision in addressing some more structural socio-economic concerns for the Indian grassroots. For example, there is no roadmap provided for outlays and on ensuring improvements in healthcare, primary education, women’s security and mortality rates. It also seems naïve to assume that faster growth facilitated by a pro-investment and business environment is going to ensure a trickle-down effect in addressing challenges of basic services.

 

 

Deepanshu Mohan is a regular columnist for India At LSE and Senior Research Associate at the Jindal School of International Affairs, O.P. Jindal Global University, India. He graduated from LSE with an MSc. in Economic History in 2012. Read more of his posts here.

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