Budget 2017: Status Quo Maintained; Yet Another Opportunity Missed

The Modi government presented what had been widely pegged as the most important budget of its five year term on 1st February’17. Budget 2017 was considered to be extremely crucial for a number of reasons. One, because after nearly three years in office, the government has not been able to truly fulfil its poll promise of massive job creation and this budget was, perhaps, the last opportunity for the government before the next general election to make significant policy changes towards that direction; two, since the overall sentiment of the economy has been low because of the government’s surprise decision to ban high denomination currency notes, with both investment and consumption falling since the decision was taken and India’s economic forecast being downgraded by IMF, this budget was expected to be the government’s chance to lift up spirits and re-energise the economy with some path-breaking initiatives; and three, with the next round of state elections round the corner, the budget was expected to be politically appealing for the ruling party to pitch to the masses before going to polls.

After a perusal of the budget documents, one can safely say that the finance minister focused on achieving the third objective mentioned above and largely maintained the status quo on the other two while preparing the same.

The budget contains enough provisions for BJP’s political workers to boast about during the campaign trail in various state elections, especially in Uttar Pradesh. The party has been keen on propping up the anti-corruption image of the Prime Minister and the budget goes one step forward in doing just that. The policy of limiting cash donation to a political party to Rs. 2000, ostensibly aimed at cleaning up political funding, is one such illustration of the government trying to win over voters with a provision that can easily be evaded by political parties by simply limiting individual contribution to less than the mentioned amount. On the same lines, the policy of banning cash transactions above Rs. 3 Lakh would do little to halt the underground economy since businesses can easily evade scrutiny by simply issuing multiple bills of under Rs. 3 Lakh when undertaking a high value transaction. Even the proposed law on confiscating assets of loan absconders like Vijay Mallya and Lalit Modi is nothing but a sanctimonious attempt to remain on the good side of the public with respect to its promise of clean governance. Other provisions in the budget like cutting the rate of tax to half on income up to Rs. 5 Lakh and expanding the presumptive taxation scheme would provide much needed relief to the middle classes and maintain their political appeal for the next round of assembly elections later this year.

With respect to the post-demonetisation effects on the economy, I disagree with the notion that the government should have used the windfall gain to dole out freebies for Jan-Dhan account holders on the line of the Maternity Benefit Scheme wherein Rs. 6000 would be transferred directly to the bank accounts of eligible pregnant women. In my opinion, this would not achieve any discernible objective and would go against every principle held by this government under the leadership of PM Modi. One might say that the windfall received by post demonetisation allowed the government to double its lending target under the Mudra Yojna or perhaps, significantly increase allocation under various other existing schemes. That, was clearly a far more prudent and far-sighted step to have been taken by the government.

Notwithstanding the above, I would have liked to have seen a roadmap being presented directed at moving towards the Universal Basic Income (UBI) scheme as suggested by Dr. Arvind Subramanium, Chief Economic Advisor, in the Annual Economic Survey presented right before the budget. An action plan to rationalise redundant subsidies while moving towards a UBI scheme targeted at the most vulnerable sections of society is an idea worthy of merit that needs to be debated frequently going forward and possibly even explored in the coming future.

The real disappointment came from the macroeconomic provisions in the budget with the government choosing to stick to its variably successful mantra of incremental reforms and yet again, shying away from introducing any bold initiatives that would provide a fillip to the economy.

With regards to infusion of capital in public sector banks to solve the NPA problem, the government earmarked merely Rs. 10,000 crore for the current fiscal year. Although, the government has pledged more capital if need be, it might have been prudent to consider the idea recommended in the annual Economic Survey of a Public Sector Asset Rehabilitation Agency (PARA) or a ‘bad bank’ which would buy bad loans from state-run banks so that banks can be relieved of that problem and shift their focus on lending. PARA would then be responsible for maximising recoveries, now made simpler with the introduction of the bankruptcy code. Only such path breaking ideas can solve the twin balance sheet problem that India Inc. in currently facing and kick-start the investment cycle in the country, but, the status quoist instincts of the government haven’t allowed such proposals to pass through the planning stage.

The story is the same when it comes to other important economic issues like privatisation of public sector units (PSUs) and further liberalisation of the Foreign Direct Investment (FDI) regime.

In his budget speech, the Finance Minister declared that the government will move ahead with the listing of some railway PSUs like IRCTC, IRCON and IRFC. Although, this is a giant leap forward and might encourage greater investment in railways in the future, the comprehensive road-map with regards to privatisation of PSUs prepared by the Niti Aayog has quietly been put under the shelve so to not attract the ire of public sector workers. Even with regards to FDI liberalisation, the Finance Minister simply reiterated his commitment to the cause without making any concrete policy pledges. The decision to abolish the Foreign Investment Promotion Board (FIPB), hitherto the approving authority of the FDI proposals made by multinationals, can largely said to be redundant since 95% of the FDI coming into India is made through the automatic route.

Although there were some good proposals that were introduced in the budget, but they were few and far between. According infrastructure status to the low cost housing sector is one such proposal. This would lower borrowing costs for developers and would allow them undertake more projects, thereby achieving the ‘housing for all’ target set by the government. The reduction of the income rate from 30% to 25% for firms with turnover up to Rs. 50 crore would provide a major boost to start-ups and SMEs around the country, although an across the board tax cut would have been far more appreciated.

In conclusion, Budget 2017 was simply an extension of the government’s policies undertaken in the last two and a half years but fell desperately short of introducing any original gambit to reverse the fortunes of the country and bring about the much awaited ‘ache din’ to India. It remains to be seen whether the government would make course correction in the near future or face the wrath of the electorate in the next round of elections.

 

Budget 2016: A Step Forward

The Narendra Modi government presented it’s third budget on 29th February 2016 with hopes riding high that it would finally deliver the ‘big-bang’reforms that have been keenly awaited ever since the BJP swept away the national elections in May 2014. Although the budget did not present any major reforms, it focused on fiscal discipline, resolving the banking crisis and rebooting the rural economy. In this post, I shall attempt to analyse how Budget 2016 impacts the economy at large, the private sector and ultimately, the ordinary taxpayer, along with a special emphasis on the international tax proposals therein.

Stabilizing the Economy

Before the budget, there were speculations whether the Finance Minister would stick to the fiscal deficit target of 3.9% or miss the same in order to increase spending. Experts agree that by maintaining the fiscal deficit target of 3.9%, the Finance Minister made the right move, giving way for a rate cut by the Reserve Bank of India. Also, one needs to appreciate the government’s efforts to deal with the Non-Performing Assets (NPA’s) crisis which has gripped the Public Sector Banks (PSB’s), in a systematic and practical manner.

The 22 PSB’s in the country have been riddled with bad debts cumulatively amounting to 3.5 Lakh Crore and have thus proved to be the most significant impediment to India’s economic growth. The government had promised recapitalization worth 70,000 crore across four years while raising the balance from the markets. Although the current budget only allocates 25000 crore for recapitalization, it provides a clear roadmap to solve the crisis in an incremental manner. It proposes a Bank Boards Bureau which would advise the government on how to tackle the NPA problem as well as suggesting deserving people to occupy board positions of the banks, thus addressing the endemic problem of such positions being captured by cronies of the politicians in power. It further provides that the government may even contemplate privatising some of these banks, thereby reducing the government’s stake below 50%. More importantly, a new bankruptcy code is in the pipeline which aims at simplifying the insolvency process and would play a significant role in liquidating of assets of the defaulting borrowers in an efficient and timely manner, thereby providing a major relief not just to PSB’s but other corporate lenders as well.

The Budget places a big thrust on reviving the rural economy which has been in distress at the back of two consecutive bad monsoons. It allocates 87,765 crore across infrastructure, irrigation and other welfare schemes to augment the suffering agricultural sector. It unveiled the path breaking initiative of a common online market for agricultural produce of the farmers which would help them fetch the highest price available therein, a complete break-from-the-past move aimed at increasing agricultural income. Also, the government plans to institutionalize direct benefit transfer (DBT) schemes for various subsidies, including fertilizers and LPG, which would not only lead to better governance by eliminating middlemen and reducing corruption, but would also result in significant cost savings for the exchequer.

Growth Incentives

The Budget promotes the government’s pet scheme ‘Make in India’ by providing a reduced corporate tax rate of 25% for manufacturing companies incorporated after April 1st, 2016 and reduces the corporate tax rate to 29% from 30% for companies with a turnover less than 5 crore. It also promotes another government scheme ‘Start-Up India’ by exempting 100% of profits for start-ups set up during April 2016 – March 2019.

However, it provides for further 10% tax on dividends in excess of 10 lakh, aside from the dividend distribution tax (DDT) already paid by the companies, a major flop in the budget, which would result in double-taxation. The Budget further provides for an increase in taxes on people earning more than 1 crore by 3%, both amplifying the government’s intention of taxing the rich going forward. The above proposals have evoked mixed reactions from India Inc, with some expressing their discontent over the benefit of the reduced tax rate not being passed to the companies already in operation, while start-ups complaining that they expected a lot more from the government.

Middle Class Concerns

This budget provides a lot to smile about to BJP’s core vote base i.e. the ‘neo-middle class’ by providing a significant increase in rebates for low income individuals, first-time home buyers and rent-payers. But it balances that out by imposing additional tax on the purchase of cars and attempts to pluck the cash economy by imposing an additional tax of 1% on cash purchases of goods and services valuing more than 2 lakh. The Budget further increases the overall service tax rate by 0.5%, thus preparing the country for a higher tax rate under the Goods and Services Tax Bill which aims at unifying all the indirect taxes currently imposed in the country.

International Taxation

The Finance Minister reiterated the government’s commitment to adopt the Base Erosion Profit Shifting (BEPS) provisions which were presented at the G20 summit in late 2015. He adopted BEPS Action Plan 13 of Country-by-Country (CbC) reporting as well as imposing a tax on digital transactions in line with BEPS Action Plan 1 at the same time. But the corporate sector has something to cheer for with the announcement of the Patent Box Regime in line with BEPS Action Plan 5 which aims at providing the underlying tax benefit to those companies which are able to prove the ‘nexus’ between qualifying expenditure for developing intangible property (IP) and income received from those IP assets, signalling the government’s vision to turn India into an R&D hub. But at the same time, he announced that the government would adopt the ‘Place of Effective Management (POEM)’ residence test as well as General Anti Avoidance Rules (GAAR) from fiscal year 2017-18, preparing the MNE’s for a strict administrative road ahead.

Conclusively, I think Mr. Arun Jaitley, the Finance Minister has presented a pragmatic, forward-looking budget which might appear short on reforms, but provides a sensible road-map to transform the world’s fastest growing democracy. The key, however, lies in implementation, especially with regards to the resurrection of the rural economy and a hassle-free, responsive & efficient administrative system across all sectors. It is with desire that the country rallied behind the BJP in the May 2014 elections and one can hope that the government delivers on its promises.

Budget Session: BJP on the Front Foot

With the backdrop of the Rohith Vermula Suicide in Hyderabad and the JNU crisis, political cynics expected that the Budget Session 2016 of the Parliament was heading for another washout. But, if the first three days of its functioning is considered reflective, then it can be said that it is this session where the sheer magnitude of differences between our political parties and in a sense, the people they represent, was truly on display. In this post, I give a quick summary of the first three days of the ongoing parliament session.

The stage was set was another round of meaningless demonstrations and benign accusations by the opposition on the ruling Bhartiya Janata Party(BJP), given their mishandling of the JNU crisis and the suicide of a Dalit scholar in Hyderabad, purportedly at the behest of two union ministers. But thanks to explosive revelations by our feisty HRD minister, Smriti Irani; fiery speeches by the likes of Arun Jaitley & Anurag Thakur and some reports in the press, the BJP has managed to divert the attention from the agrarian crisis or the troubled Public Sector Banks and put the ball in Congress’s court to defend their support for the unruly students at JNU or their distortion of a report in the case of Ishrat Jahan, a woman who was killed in an alleged fake encounter in Gujarat back in 2004 but has now been confirmed as a terrorist who was sent to assassinate Narendra Modi, then the Chief Minister of Gujarat.

The Congress party sought to attack the BJP on the arrest and subsequent sedition charge of Kanhaiya Kumar, initiated by the speech of Jyotiraditya Scindia, a Congress MP, which frankly sounded like a collection of angry tweets by a loony liberal, echoing the same half-literate rants which dominate our media and intellectual space. He said that the BJP was trying to impose the Hindutva ideology on the country and how freedom of speech should be unrestricted, even if it celebrates a convicted terrorist. His speech was immediately rebutted by Anurag Thakur, a BJP MP, who attacked on Rahul Gandhi for supporting the students raising the anti-national slogans raised in the JNU campus and how the Congress resorted to political opportunism without understanding the seriousness of the issue. After a round of political blame games, it was the speech by Smriti Irani which exposed the bigotry and absurdity that grips the JNU Campus.

She inundated, with damning evidence, that in the garb of free speech, how students at JNU constantly celebrate the Maoists who vow for the destruction of India and the killings of Indian soldiers who lose their lives defending them, apart from their not-so-subtle demonstration demanding Kashmir’s succession from the Indian state on the much controversial night of February 9th, 2015. She also presented evidence on how the Congress party sanctioned school curriculums which had a clear prejudice against the Hindus, leaving our eminent parliamentarians completely speechless. On the next day, she continued her attack on the opposition, presenting evidence that Rohith Vermula was in fact not even a Dalit, confirmed here by the Telengana Police. She asserted that the political elite in the country had reduced him merely to a caste and exposed the irony that it was that very problem of being labelled as caste which drove him to commit suicide, as expressed by himself in his suicide note.

Due to her, it can be said that the BJP has managed to at least put forth a formidable defence against the controversies which have rattled the party in the last couple of months. Never has been the Left hegemony of Indian politics such fiercely challenged.

That being said, the troubles for BJP are far from over. They still do not have a majority in the upper house of parliament and the opposition is bent upon stalling important legislation, no matter what concessions BJP makes. The Prime Minister’s silence on key national controversies doesn’t help their cause either. If he is indeed serious about legislative business being conducted, he needs to shred his hatred for the Delhi media or their political patrons and lead from the front, tackling every issue heads on, just like the way his HRD minister has been doing for the past three days.

Also, the ruling party is clearly in the driving seat after a far-sighted Railway Budget was presented by Suresh Prabhu and a sobering yet optimistic Economic Survey was presented in the parliament by the Finance Minister, Arun Jaitley. If the government capitalizes on the work of the past two years by presenting a strong, innovative yet practical budget, it will silence all its critics and retain its glory, which some say has been fading at the back of declining exports, debt ridden Public Sector Banks and falling stock prices, thus bringing back the focus on investment and growth.

As of Friday(26th Feburary), the BJP has steered itself out of controversy but the real challenge would only be addressed on the 29th, when the Budget is presented in parliament. India is keenly waiting.