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Budget 2015 has stuck to its ideology, articulated in the Economic Survey, of ‘persistent incrementalism’ combined with bold steps that ‘signal a decisive departure from the past’ with the obvious intent of reviving growth, but on an entirely new trajectory. Photo: PTI (PTI)
Budget 2015 has stuck to its ideology, articulated in the Economic Survey, of ‘persistent incrementalism’ combined with bold steps that ‘signal a decisive departure from the past’ with the obvious intent of reviving growth, but on an entirely new trajectory. Photo: PTI
(PTI)

Budget 2015: Taking wing

Arun Jaitley’s second budget is an attempt at remaking India to match the aspirational streak of the nation’s young

Arun Jaitley presented his first budget last year in the context of an economy that many analysts agreed was a step away from a crisis. By the time the second budget rolled around nine months later, the macroeconomic landscape was much improved—largely due to fortuitous factors, including initial forecasts that the monsoon will be a normal one this year.

So what did Jaitley make of the opportunity? He seems to have seized the moment, betting on growth and setting out a long-term economic blueprint. As he told Lok Sabha Television in a post-budget interview (playing off a recent cover headline in The Economist that said India is ready to fly): “I think from here, the time for takeoff comes."

If his first budget was about rebooting India, the second is an attempt at remaking India, to match the aspirational streak of the country’s overwhelmingly young demography that is stifled by the burden of their past-the-sell-date inheritance. It has stuck to its ideology, articulated in the Economic Survey, of “persistent incrementalism" combined with bold steps that “signal a decisive departure from the past" with the obvious intent of reviving growth, but on an entirely new trajectory.

The success of Jaitley and his support team of minister of state Jayant Sinha and chief economic adviser Arvind Subramanian depends on the execution of the plan and on global downside risks remaining at bay. It is also a function of analysts, industry, and the man on the street seeing more in the budget beyond the inflationary impact of the recalibration of indirect taxes.

For starters, the budget smacks of realism (like Suresh Prabhu’s Railway Budget did two days ago). It resists the temptation to grandstand (by meeting paper targets) and works within a fiscal space that shrank after the government decided to implement the game-changing recommendations on the sharing of resources between the centre and states prescribed by the 14th Finance Commission. Consequently, it spells out a credible fiscal consolidation plan—a precondition for reviving investor interest in India.

With an eye on accelerating the nascent revival in growth, it has delayed its original fiscal consolidation plan and used the space ( 70,000 crore) thus created to ramp up public investment in infrastructure. The underlying expectation is that public investment will prime the pump and generate private investment, which at the moment is risk-averse.

Implicit in the fiscal math, posited on a modest growth in tax revenues and curbing of expenditure, of the finance minister’s budget is the expectation that the impending revival will boost tax receipts. The back-up plan is strategic disinvestment—including the portfolio of private sector stocks held by the erstwhile Unit Trust of India—of 28,880 crore.

Second, the budget etches a new fiscal compact between the centre and states. The greater devolution of resources to states is now in the form of tax revenues and not grants—which is nothing but tied aid. Not only does this give freedom to states to cut the cloth to the desired size, it also lends buoyancy to resource transfers—increase in tax collections due to a pick-up in economic growth will now accrue even to states. The move also effectively makes the states a stakeholder in the growth process, instead of being a residual beneficiary. It also formally acknowledges that states (despite the temptations of populism) are fiscally as capable as the Union government.

This budget has formally kicked off India’s new federal polity. This is significant because the new resource devolution formula accompanies a major overhaul in public finance—with the budget fixing 1 April 2016 as the roll-out date for the single goods and services tax (GST).

The third takeaway, probably the most significant, is about the measures undertaken to improve the ease of doing business in India. The simple message from Jaitley to both domestic and foreign investors was that it is no longer going to be “business as usual" in India.

A fortnight after he launched an e-Biz portal that integrates 14 regulatory permissions at one source, Jaitley announced several new measures, including the introduction of a new bankruptcy law to fast-track resolution of stressed assets and show errant promoters the door.

Fourth, Jaitley has reiterated his government’s maxim of distinguishing between good and bad. The minister has promised an entirely new legislation with punitive measures against tax evaders—they will be spared with a penalty if they come clean. Of course, it also helps in addressing critics who have been harping on Prime Minister Narendra Modi’s failure to deliver on his electoral promise of returning the black money stashed abroad to India.

Fifth, the budget reaffirms the ideological inclinations of the Bharatiya Janata Party-led National Democratic Alliance (NDA). That it is politically right wing is well-established. Now, over two budgets, the NDA has emphasized its rightward tilt in economic thinking, which allows greater freedom to the market and individual achievement, too.

A day before the presentation of the budget, Prime Minister Modi, in an extremely provocative speech in the Lok Sabha, gave an unceremonious burial to the entitlement regime promoted by the Congress party.

On budget day, the government made clear that subsidies would be restricted to the deserving—summed up by Jaitley as the stance of a government that can be “pro-poor and pro-business"—and linked some social security benefits to beneficiaries making a token contribution as premium.

Consistent with this, the finance minister preferred to incentivize retirement savings as opposed to raising exemption limits on income tax. The plan, as he elaborated in the post-budget interview, is to create a safety net for the young in the later years of their life.

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