governance, political economy, institutional development and economic regulation

(photo credit: dnaindia.com)

Clothes truly make a man. FM Jaitley’s budget, presented to Parliament today, turned out to be constructed the manner in which he was dressed- a Modi jacket over a shirt, trousers and chappals (flip flops) for shoes. Nothing objectionable of course and yet unexceptional.

Tarun Das, the veteran Industry budget watcher, known for drawing up lists of good and bad points, complained that he could not find one thing to quibble about.

The Congress foot soldiers predictably fingered the paucity of direct measures to boost agriculture and made vague and unsubstantiated noises of the poor being let down.

“Thinkers” were left wondering what the log frame was for going from the budget allocations to the near term objective of generating jobs. Particularly relevant if Indian grew at over 7% per the new GDP calculations even as pink slips were the order of the day in FY 2015 and investment nose-dived. Clearly just doing more of the same is unlikely to generate jobs and the problem is not the lack of skills it is the lack of demand for skills.

The middle class stood around puzzled about how and why they had not been given tax relief. The poor…well they are just too busy working to bother too much about the national political economy.

Expectedly, this was a timid budget and not calculated to set the Yamuna on fire. The FM has a very “young team” who are still learning how to get a gas connection in Delhi, so they could hardly add little, expect technical tweaks.

One such is changing the way in which the GDP is calculated so that, almost overnight, economic growth estimates for 2014-15 went from a shameful 5% earlier to 7%.

Clever statistics also enabled the FM to “achieve” the challenge he had taken on in July 2014 of running with his predecessor’s very stiff Fiscal Deficit target of 4.1% of GDP.

FM Jaitley is at heart a lawyer and lawyers are by nature aggressive, garrulous and argumentative. Predictably his rhetoric was expansive. He berated incremental change as the hall mark of the previous Congress regime and defined his vision as “a quantum jump” which would “make India fly”.

Wisely however, he did not seriously seek to implement the rhetoric. He maintained broad continuity in inter se allocations across functions. Even the tax proposals had very limited surprises barring a possible promise of a tax bonanza for the corporate sector.

State Owned Enterprises are not being privatized and are slated to grow and provide a significant amount of the Rs 1.25 lakh crores ($20.5 billion) the FM expects to invest in FY 16.

Pushing the right buttons

The FM pushed a number of “buttons” to rally the relevant stakeholders.

Greening city transport

For the “Green” brigade, he proposed a misguided but mercifully paltry, subsidy Rs 75 crores ($ 12 million) for the development of electric vehicles. One hopes this money will be used to develop electric public carriers like buses or trams and not cars. Urban congestion is so extreme that even if commuters don’t choke to death on exhaust fumes, courtesy electric cars, they could starve to death as commuting time increases and urban traffic, grid locks become a regular event.

Relief for NGOs

Yoga teachers and schools can expect to benefit from their new status as charities. The NGO community will certainly appreciate the enhanced tax free limit of 20% of their income from commercial operations.

Broadening digitized cash support

The enhanced compulsory use of digitized transactions through banks, including the Post Office which becomes a payments Bank for state subsidies and the disallowance of large cash payments is very welcome. Digitised audit trails are sorely needed to start the clean-up of the black economy.

Soak the rich

Soaking the rich always gets favourable reviews and the FM did this with finesse. Tellingly however he got no cheers from colleagues in Parliament, who seemed to look more worried than gleeful, particularly when he requested them to voluntarily not accept gas subsidy which will now go directly into the bank accounts of consumers.

He garners an additional, estimated Rs 8000 crores ($1.3 billion) by abolishing the clunky, expensive to administer and iniquitous Wealth Tax and substituting it with a 2% surcharge on individual income above Rs 1 crore ($164,000). There are only around 100,000 such “super-rich” tax payers who are unlikely to complain. Of course the rather small number of the income tax paying “super-rich” illustrates how pervasive is unaccounted income and wealth and how far we have to go to unearth “Black Money”

Social protection for the poor

The spate of pension and insurance support measures are directionally correct but the poor will await implementation before they cheer.

Giving hope to corporate India

Corporate India also gets a break with a promise to reduce the basic Corporate Tax rate from the prevailing 30% to 25% over the next four years. The catch is that exemptions which today reduce the effective collection to just 20% of Corporate India’s income is also scheduled to be reduced. So the net gain is unclear. In the meantime they had better read the FM’s lips- to quote Ronald Reagon.

Election politics

West Bengal and Bihar, both states which go to the polls soon, will receive special central assistance in addition to the increased allocation they have already got per the recommendations of the Finance Commission. This explains the renewed bonhomie between the BJP and Nitish Kumar and Didi (Mamta Banerjee) respectively, Chief Ministers of Bihar and West Bengal.

Fiscal devolution kick starts Cooperative Federalism

The biggest plus from the budget is implementation of the spirit of “cooperative federalism” by transferring 42% of Union tax proceeds to states from around 32% earlier, per the recommendations of the Finance Commission. Transfer of an additional 20% as central grants will further boost total transfers to states to 62% of Union tax revenues. This “big bang reform” in fiscal devolution sets the stage for State governments to take direct responsibility of the functions allocated to them under the constitution. They can no longer plead a lack of resources.

FM Jaitley is right that reform is a year around activity and does not begin and end with budget promises. Let us hope he walks the talk. The biggest public service he could render is to make the budget presentation process devoid of “news value” by following a year around dialogue with stakeholders and continuous results on basic reform steps.

This was a budget without many surprises. Maybe we have evolved to being an economy, in which the budget is a mundane, technical exercise, of interest to economists and accountants, but of little immediate consequence for those who live in the real world.

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