Arun Jaitley’s fourth budget had many firsts. The presentation of the budget was advanced by almost a month so that the government could start spending from the beginning of the financial year. For the first time in the history of independent India, the railway budget was included in the general budget. This will help in better transport planning, which is likely to improve outcomes. It was also the budget that marked the end of the planning era in the country. As a result, the classification of expenditure has changed to revenue and capital expenditure from Plan and non-Plan expenditure. And it was the budget that was presented after the unprecedented exogenous shock of the currency swap—intended to attack black money—to the economy. Given the backdrop of the currency swap initiative, weakness in economic growth and continued sluggishness in private sector investment, there are at least three broad issues worth noting in the budget.
First is the impact of the currency swap on black money and the economy in general. As Jaitley highlighted in his speech, the government now has an enormous amount of data on bank deposits made after the currency reform was announced. The challenge now for the tax department will be to mine the data and be able to check tax evasion in a meaningful way. As has been noted in this space before, it will have to be done with care so that honest taxpayers don’t face any hardship. Reduction in evasion and improvement in compliance will, over time, reduce the burden on honest taxpayers.
The drive to push digital transactions will also lead to greater formalization of economic activity, which will help the economy in a number of ways in the medium to long term. The pain of the currency swap was always expected to be transient and will wane entirely in the coming weeks and months. The government will now have to focus on maximizing the gains. The finance minister also announced tax incentives for equipment used in cashless transactions. This could have been avoided as movement on this front is happening at a satisfactory pace. Personal income-tax relief for individual taxpayers needs to be welcomed, but the imposition of a surcharge on large taxpayers goes against the desire of simplifying the tax structure.
Second, the government has taken several reform measures in the budget that will help the economy. It has also not lost sight of the fact that private investment continues to remain weak and the state needs to fill the gap. Consequently, it has increased capital expenditure by over 25%, which will help push growth in the coming year. The special focus on agriculture and rural India will also benefit the economy. Renewed efforts will be made to list public sector undertakings. Movement on this front has been slow—one of the reasons why the government normally falls short of the disinvestment target. The government is also taking steps that will help increase foreign investment, which is already buoyant. The commitment to abolish the Foreign Investment Promotion Board in 2017-18 is a positive.
However, there is one big disappointment on the reforms front. While the finance minister lowered the rate of tax for smaller companies, the corporate tax rate has not been reduced, as was widely expected by the market. At the least, a clear road map for reduction in the corporate tax rate would have lifted sentiment among investors. The government has also done well by initiating reforms in political finance which will help reduce the role of cash and lead to greater transparency and accountability. Currently, about 70% of the donations that political parties receive comes in cash. It can be argued that parties can still show donations in cash even with the reduced limits. But the fact that steps have been taken in this direction is a positive. Outcomes can always be reviewed and rules can be adjusted.
Third, while the tone of the budget was positive and encouraging, the decision to target the fiscal deficit at 3.2% of the gross domestic product (GDP) is a disappointment even as market borrowing has been pegged at a lower level. In the given circumstances, there was a strong case for adhering to the 3% target. It would have enhanced government credibility a great deal and placed it in a much better position to implement the new fiscal rules.
Overall, the budget has moved in the right direction and should help augment growth. A clear road map on rationalization of corporate tax and adherence to the fiscal deficit target of 3% of GDP would have given the government some bonus points.
Will the budget help push economic growth?
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