Union Budget aimed at rural India
The third Budget of the Narendra Modi Government at its mid-point takes care to shift emphasis to farmers and agriculture, ahead of a round of state elections, given its weakening hold over the country. It is designed ostensibly to “transform” the lives of the poor, especially farmers whose incomes are to get doubled by 2022, as the Prime Minister announced on Budget day.
No wonder Modi, who crafted the budget strategy, joined his party in thumping the desk for every allocation boost rolled out in the budget speech by Finance Minister Arun Jaitley in the Lok Sabha on Feb 29. Rural Development gets Rs. 87.765 crores. It is another matter whether, at the end of the day, all the higher allocations get utilised and benefits delivered, looking to spending shortfalls in the current year.
Be it said to the credit of Jaitley that he has not made most of it welfare spending inasmuch he has also given his budget for 2016-17 a coat of reforms to buy credibility for the overall fiscal exercise. He has stuck to declared targets of 3.9 percent of GDP as the fiscal deficit in fiscal 2016 and 3.5 percent of GDP in 2016-17 thereby underlining Government’s continued commitment to fiscal consolidation.
This fiscal prudence is indicative of a signal for RBI to ease monetary policy, which is subject to CPI remaining target-bound. The Budget has proposals on monetary policy management for the future and provides for Rs. 25,000 crores as recapitalisation of public sector banks, all stressed with bad debts.
Besides enhancing expenditure in priority areas such as farm and rural and social sectors, infrastructure investments, Jaitley maintained his Government’s reform agenda was on course to ensure the passage of GST and insolvency and bankruptcy laws. His announcements on doing business easier included liberalisation of FDI to make possible 100 percent participation in processed food retailing, a back door entry perhaps for other multi-brand items for inclusion later on.
Jaitley did not declare an end to “tax terrorism” once and for all but listed ways of reducing tax disputes and special procedures to get rid of arrears disputes with multi-national companies. There were no changes for domestic taxpayers and all that Jaitley said was that his proposals would reduce compliance burdens “with faith in the citizenry”. Even those with black money have a chance to come clean.
The budget makes a few halting steps on corporate tax reform and withdrawal of some exemptions but in no way hurting the rich or bigger corporates. The thrust of additional resource mobilisation is in excise and service tax designed to yield, net of direct tax concessions, Rs. 19,610 crores.
But apart from the government employees to benefit from the implementation of 7th pay commission’s revised pay scales and OROP, the ordinary people of the country have nothing to cheer in the budget. The excise levies, already effected in advance to save Jaitley’s fiscal target in 2015-16, coupled with new ones, and the further rise in service tax and its wider extension, would all throw cost and price burdens for the economy and the common man.
Whether the higher pay for lakhs of government employees creates a demand impact or not, the Finance Minister has based growth revival in fiscal 2017 on domestic demand, especially with ongoing global headwinds and slowdown, on the strength of Government’s market-friendly policy reforms. The budget estimates are based on the nominal growth of 11 percent (8.6 percent in BE 2015-16) at current market prices.
The official assumption is that continued lower inflation, buoyant tax, increasing foreign direct investment flows and government’s push to reforms in crucial areas including banking, infrastructure, power, taxation, etc., have brightened the near-term prospects for the economy. From around 11 percent in 2016-17, growth is likely to accelerate to 12 and 13 percent in the following two years.
The investment focus in the budget is primarily in the agricultural and rural sectors with “substantial potential” for higher growth and Jaitley cites infrastructural investments proposed in the road sector, railways, power, etc. which should help to build up the growth momentum. It is Jaitley’s claim that his budget agenda for 2016-17 would be transforming India.
Getting down to the arithmetic of the budget, Mr Jaitley does not expect the revenue buoyancy as in 2015-16 with the excise levies on lower oil product prices. With the additional burden on account of the 7th pay commission, there is an attempt to prioritise expenditure with a focus on farm and rural areas, the social sector, infrastructure sector and bank capital recapitalisation.
For additional resource mobilisation, Jaitley has roped in higher income groups with his proposals to tax dividend in the hands of recipients where it exceeds Rs 10 lakh per annum as well as by raising the surcharge from 12 to 15 percent for incomes above Rupees one crore.
Revenue mobilisation has been rising not only by frequent revision of service tax rates but also levy of a variety of cesses. The Budget brings in a Krishi Kalyan Cess, @ 0.5 percent on all taxable services, proceeds of which are intended to be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers.
The medium-term fiscal policy statement of the Finance Ministry projects fiscal deficit to decline from 3.5 percent of GDP in fiscal 2017 to 3.0 percent in the following two years (2017-19). Gross tax revenue to GDP improved to 10.8 percent in 2015-16 (RE), thanks to excise levies, and it is assumed to continue at the same level in BE 2016-17 as only moderate revenue growth is projected on an already higher excise duty base.
But the fiscal correction assumed by lowering the current year deficit by 0.4 percentage points to 3.5 percent of GDP would be challenging unless Government mobilises larger non-tax revenues than in the current year. Disinvestment receipts are budgeted at Rs. 56,500 crores, which would come partly (Rs. 20,500 crores) from the sale of strategic and minority stock holdings Government held in some enterprises. To alleviate downside risks, Government would have to deliver on the targeted disinvestment and also ensure going through with spectrum auctions, even in a phased manner.
Whatever the claims of the Finance Minister on his “transformative budget” for 2016-17, its timing is unmistakable and it facilitates Modi’s campaigning for his party in the forthcoming round of state elections in the countryside of the South and in West Bengal (April-May) and later in Uttar Pradesh and Punjab in the North (2017). IPA
(The author is a senior commentator on economic affairs. Views expressed are strictly personal)