BackA corporate, social and responsible budget
In weaving the three together, finance minister Arun Jaitley's budget seeks for balance between national economic imperatives and political objectives
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The first budget of the Narendra Modi government is Corporate, Social and Responsible. The budget is corporate in its ideology, social in its ideation and responsible in intent.
In weaving the three together, the budget seeks to achieve a balance between national economic imperatives and political objectives. While the former remains by and large the same as in the past, the latter is distinctly more right wing than before.
In terms of the nuts and bolts, the budget focuses on rationalization of transaction costs and reductions in systemic inefficiencies to improve growth. At the same time, there seems to be a conscious attempt to not reinvent the wheel/not fix something which isn’t broken.
That the budget is deeply corporate in its mooring is evident from the liberalization of the foreign direct investment (FDI) regime; the long-pending increase in the cap on FDI in insurance as well as the defence sector are just two examples.
There are also a lot of tax initiatives at the sectoral level, like in the case of power with a 10-year tax holiday, which will help the corporate sector. Or bringing on par customs duty for all kinds of coal at 2.5% makes the import of high-grade thermal coal cheaper for the power sector.
A large part of the corporate focus comes in the form of infrastructure development and financing. The emphasis on infrastructure development is evident from the ₹ 37,850 crore for roadways and highways, ₹ 11,635 crore for ports, ₹ 7,060 crore for infrastructure to develop smart cities, ₹ 5,000 crore for improvement in warehouse capacity and ₹ 50,000 crore for municipal debt management for infrastructure.
Gas pipelines infrastructure will get benefits through PPP (public private partnership) mode of investments. Similarly, tax pass-through status for Real Estate Investment Trust (REITs) will avoid double taxation and will give a major boost to housing infrastructure. This will remove the structural constraints facing the corporate sector.
Indeed, it is not only about domestic capital. This budget must rank among the top three Union budgets ever which has emphasized the need for, and incentivization of, foreign inflows into India; be it debt or equity or a combination of the two.
The extension of relief on withholding tax beyond May 2015 to attract foreign funds (withholding tax on Foreign Portfolio Investors and Qualified Foreign Investors was reduced from 20% to 5% until 31 May 2015) or the advisory to financial sector regulators to take early steps for a vibrant, deep and liquid corporate bond market and deepen the currency derivatives market by eliminating unnecessary restrictions show the intent very clearly.
So does the liberalization of the ADR/GDR (American Depositary Receipts and Global Depository Receipts) regime to allow issuance of depository receipts on all permissible securities, allowing international settlement of Indian debt securities. The complete revamp of the Indian Depository Receipt (IDR) and the introduction of a much more liberal and ambitious Bharat Depository Receipt (BhDR) are all measures meant to either attract foreign capital or are designed to address funding constraints of corporates.
The social aspect of the budget comes from the allocation of public expenditure. The size and structure of the budget is social without being socialistic.
In this context, agriculture has been brought back into focus with heavy allocation of funds, and the setting up of a price stabilization fund with an initial allocation of ₹ 500 crore and restructuring of the Food Corp. of India (FCI) to check food inflation.
The rural developmental focus can be seen in the introduction of Prime Minister’s irrigation scheme with a corpus of ₹ 1,000 crore. The Centre will continue the Interest Subvention Scheme and raise corpus of Rural Infrastructure Development Fund to ₹ 25,000 crore. The Warehouse Infrastructure Fund will get ₹ 5,000 crore this year. The government also proposes to set up Long Term Rural Credit Fund in Nabard (National Bank for Agriculture and Rural Development) for the purpose of providing refinance support to cooperative banks and regional rural banks with an initial corpus of ₹ 5,000 crore.
Notwithstanding a lot of focus on agriculture, this budget will face pressure because of a weak monsoon which will complicate fiscal management, by pressuring agricultural production and food inflation, thereby triggering automatic stabilizers off the budget and making it much harder to rationalize subsidies.
The responsible intent is evident from the fiscal programme of three years. There is the usual well intentioned talk about introducing fiscal prudence that will lead to fiscal consolidation and discipline. Pleading on grounds of inter-generational equity, he has drawn a road map for fiscal consolidation with a fiscal deficit of 3.6% for 2015-16 and 3% for 2016-17. While these may be difficult to achieve, the fact that the government is expected to be in power for five years lends some credibility to the intention behind the numbers.
The major differentiator from what can otherwise pass off as a Congress budget is the move away from a distribution-driven public expenditure policy to an allocative-based public expenditure policy.
As such, the growth impulse will not come through an increase in demand emanating from an improvement in the income distribution. Instead, the structure of public expenditure has been done with a view to improve its allocative efficiency.
To the extent that income distribution and under-consumption has not been a constraint to growth in recent years, the macro-economic logic of this shift is robust. It may even help in dampening inflationary expectations.
To the extent that government has increased public expenditure on infrastructure projects in order to boost growth, while lowering unnecessary consumption-related spending, it is an investment-led rather than a consumption-driven budget. This is also a break from the last few budgets of the UPA 2 (United Progressive Alliance 2).
This also marks a decisive end to the autonomous public investment-led growth model that was the core of Union budgets right through the 1970 and 1980s. It is now only driven by public expenditure which facilitates private investment.
This may well be a beginning in the reorientation of fiscal management towards a public expenditure policy that is oriented towards creation of productive assets rather than entitlement-based fiscal transfers.
This, along with a major boost for self-employment, marks a change from income distribution to income generation. This is clearly a focus area of the budget and if implemented in the right manner will in the long-term address the issue of unemployment as well as pressure on the primary revenue expenditure of the budget.
For this sector, a big thrust could come because of the move towards confidence-based banking. Differentiated banks serving niche interests, local area banks, payment banks, etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.
There is also some sensitivity towards the MSME (micro, small and medium enterprises) sector which contributes more to the GDP than the corporate sector. A committee will examine the financial architecture for the MSME sector, remove bottlenecks and create new rules and structures to be set up and give concrete suggestions in three months. A Fund of Funds with a corpus of ₹ 10,000 crore for providing equity through venture capital funds, quasi equity, soft loans and other risk capital specially to encourage new start-ups by youth is to be set up.
The finance minister has addressed those micro issues where he could have made a difference now and at least stated his government’s intentions in those areas where he is not in a position to make a difference immediately.
There are many important issues such as goods and services tax, direct taxes code and mining Bill which have been pending for years and perhaps rightly the government has chosen not to use the budget as a forum for detailing the mechanism of how it intends to resolve/move forward on them.
While stating its broad intentions, it can focus on the appropriate forums and channels to address those issues later; it doesn’t need to be done through the budget.
The underlying message of this budget is of continuity rather than a break in the overall economic and fiscal regime. This is important insofar as the feature of, and the reason for, the success of the post-1990 economic policy was the broad political consensus underlying it.
Not much has been made of it, but the fact remains that despite opposition of a few political parties, successive governments followed the same nature and direction of economic reforms.
Of late, not only had this consensus been decisively disrupted, the manner in which the debates were being conducted—be it on the allocation of resources or the foreign direct investment in retail—suggested a disruptive break.
This budget restores the political consensus on the direction and substance of economic reforms. This is the biggest directional takeaway of this budget which is otherwise drowned in detail.
The writer is an economist.
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