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Business News/ Opinion / Online Views/  The budget, shorn of the hoopla
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The budget, shorn of the hoopla

Is this the best budget the ‘fastest growing large economy in the world’ can come up with?

Given the constraints finance minister Arun Jaitley has been struggling against, there probably wasn’t much more he could do. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
Given the constraints finance minister Arun Jaitley has been struggling against, there probably wasn’t much more he could do. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Mr. Jaitley’s second budget is underwhelming on many counts. The first of them is the much tom-tommed switching of central government spending from revenue to capital expenditure. The government’s chief economic advisor has been making a pitch for more public spending because the private sector’s balance sheet is apparently too stretched.

But here’s the rub. Capital expenditure is budgeted to be 1.7% of gross domestic product (GDP), which is about the same as it was in 2012-13 and 2013-14 and nobody made a song and a dance about it then. In 2011-12, the centre’s capital expenditure was 1.8% of GDP. Sure, capex is budgeted to go up by 25% in 2015-16, but that high growth comes on top of a pathetic 2.5% growth in the current fiscal. Incidentally, what was the budgeted capex growth in 2014-15? Twenty-five per cent.

Second, the tax-to-GDP ratio, which almost everybody agrees is very low for India, is budgeted at a meagre 10.3%. This is gross tax revenue, before the transfers to the states. True, the revenue estimates put this yardstick at a wretched 9.9% in the current fiscal, but it was 10.4% in 2012-13. This budget has been unable to better the tax effort of three years ago when, according to the Central Statistics Office, the economy was growing at a real rate of 5.1%, while it’s expected to do better than 8% next year. That doesn’t seem very bold.

Three, the entire increase in taxes has come about through regressive indirect taxes, while handing out sops to direct tax payers. Indirect taxes are budgeted to be 44.7% of gross tax receipts, compared to 43.3% in the current fiscal and 43.6% in 2013-14.

Four, it’s not only the consolidation in the fiscal deficit that is being deferred—the revenue deficit has been hardly touched at all, coming down from 2.9% of GDP in the current year to 2.8% next year. In terms of last year’s “medium-term fiscal policy statement", it was supposed to be pruned to 2% in 2015-16. And if we take the “effective revenue deficit", which takes into account the grants given to the states for capital expenditure, then that’s slated to go up from 1.8% of GDP this year to 2%. Keeping the fiscal deficit higher to finance capex is one thing, but keeping the revenue deficit higher is something else altogether. In short, the quality of the deficit isn’t improving.

Five, while the transfer of more tax revenues to the states is good, let’s not forget it’s a recommendation by the 14th Finance Commission and it’s been the tradition to accept finance commission recommendations. In its road map for fiscal consolidation, the finance commission had taken the fiscal deficit for 2015-16 at 3.6% and the revenue deficit at 2.56% instead of the 3.9% and 2.8% budgeted by the finance minister. It is entirely possible that the states may spend more on infrastructure with the extra money they will receive. On the other hand, they may equally plausibly spend on social welfare instead. To take one example, the spending support under the state plans for women and child development is budgeted for 2015-16 at 45% of the current year’s budgeted amount. Who will blame the states if they seek to make it up through the tax revenues received?

Six, it’s true that subsidies have been slashed. But the entire cut has been due to the windfall of lower petroleum subsidies, a consequence of lower global crude prices. The budgeted allocations for food and fertilizer subsidies have increased. In particular, the lack of action on the fertilizer subsidy, despite abundant evidence that it is leading to soil degradation, is glaring.

Seven, while all the talk of tax simplification and the removal of exemptions and the proposal to subsume education cesses in the central excise duty is exemplary, note that we still have the clean energy cess which has been increased, the Swachh Bharat cess and the road cess. The best thing about cesses, from the point of view of the centre, is that they don’t have to be shared with the states. And while the decision to get the corporate tax rate to 25% in the next few years is very welcome, the effective tax rate of the largest companies is already well below that rate. With the pruning of exemptions, does that mean the effective tax rate will be higher for these companies in the future?

And eight, consider the lack of adequate capital set aside for the public sector banks. This is likely to hobble their ability to help fuel the recovery or fund new projects.

Of course, there are some good things in the budget as well. The recognition of an explicit inflation target by the Reserve Bank of India is very significant. The various proposals for providing a push to infrastructure, the talk about a bankruptcy code and the reference to “strategic disinvestment" which one hopes is a euphemism for privatization—that dreaded word we dare not utter--are all good things. But the proofs of those puddings will be in the eating.

Given the constraints the finance minister has been struggling against, there probably wasn’t much more he could do. Consider the trouble the government is in over its amendments to the Land Acquisition Act or the drubbing the Bharatiya Janata Party received from an unabashedly populist party recently and it’s easy to understand the finance minister’s timorousness.

In his budget speech, Mr Jaitley said India is “the fastest growing large economy in the world" and that “we have turned around the economy dramatically". Is this the best budget such an economy can come up with?

Manas Chakravarty looks at trends and issues in the financial markets. Your comments and feedback are welcome at capitalaccount@livemint.com.

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Published: 01 Mar 2015, 06:09 PM IST
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