A friend of mine recently said all politics is local, if I may add to his comment and say all budget statements are political and must remain so. To that extent Budget 2017 has achieved to deliver the statement of intent for the Narendra Modi government and Arun Jaitley has not disappointed. In India traditionally the budget document has never been what it technically should be, an account statement of the government to show what it earns and what it spends. However, most finance ministers will never be able to go down in history books if they stick to just that. So what has Budget 2017 meant to most, what does it intend to achieve for the Narendra Modi government & what will it do for the Indian economy?
I will use the television style sheet by starting with my rating, of the budget. I give it 8 out of 10 and if you read through this column you will see where it scores so high and also why it fails to get a perfect score. It is election season especially in rural heavy UP and Punjab and despite several changes in the voter population share between rural and urban, the voter as defined by a politician lives in rural India and remains the primary target for them. Far away from TV studios and media glare, Indian farmers have clearly been left out of whatever benefits India has reaped in other sectors. No point blaming previous governments but it looks like the NDA government does not want to deviate from the rural theme. No big deal either but a massive increase in 24 percent spending outlay goes to display Narendra Modi’s political thinking. From aiming to remove poverty in 50,000 gram panchayats to allocating more money towards MNREGA for productive assets, farm sector has been given a massive priority. While Arun Jaitley now believes in allocating more money for MNREGA it is clear that this is one inherited policy of previous UPA government which is now the central theme of building assets and providing job security in rural India. So whether it is higher allocation or more targeted programs towards building roads or agriculture credit, the Gaon and Krishi focus is surely the biggest headline.
What is more obvious is the budget conveys that Demonetisation was not a shot in the dark. Going by Arun Jaitley’s prefacing the tax proposals with hard data on tax non-compliance it is clear the tax authorities are planning to target the next round of evaders using the data on bank deposits post Demonetisation. The use of the word big data should ring alarm bells who think the government doesn’t have the much needed inputs to improve tax compliance. More important I felt was the recognition that demonetisation has hurt small businesses and the informal sector. There is a clear aim to give them some relief through a major tax rate cut of 5% in corporate tax rate for small businesses with turnover of less than 50 crore rupees. While there will continue to be loopholes where crafty business minds will create multiple companies to seek the benefit of low tax rate, what is more important is the lack of incentives to small businesses to grow bigger. It is also a trifle disappointing to see so few companies with turnover of more than 500 crore rupees and yet they were receiving major concessions through rebates of various kinds. Overall Narendra Modi has once again conveyed that demonetisation is just one tool in his crusade against black money and in support of a more formal economy. More important, will this trigger a spree of fresh investments by the small and medium business segment to hire more, provide more work to those seeking employment? If the answer is yes then he will surely reap the benefits of creating more jobs and higher tax revenues.
One more positive is the infrastructure status to the affordable housing sector which has so far failed to attract capital, investors or any major activity. This move has the potential to trigger a demand for steel and cement and lead to more action if banks are willing to give loans to buyers. And finally one symbolic and another substantive move in the budget. Abolishing the Foreign Investment Promotion Board conveys that India takes the ease of business ranking seriously and wants to attract more investment with less red tape. The more concrete positive takeaway is a major cut in tax rates for the income category of 2.5 lakh rupees to 5 lakh rupees to 5 % which covers a significant number of people and salaried class ranging from government employees and those belonging to the service sector. This is a significant move which tax payers will remember and are likely to return the favour through their support when election time comes.
A few significant places where the budget fails to get a perfect score is its inability to do much for the weak state of bank finances or any significant moves to trigger big ticket investments. A feeble attempt to introduce yet another law to confiscate assets of those fleeing the Indian legal system doesn’t really solve the problem since there are enough laws already to catch the culprits. The issue is of execution. Just like the way the good intent in the many positives can come a cropper if execution fails.
And this is why political thinking of Narendra Modi should be recognised in this year’s budget statement. It projects the intent quite clearly that budgets can never be made in isolation without thinking of its political benefits. Major policy changes and disruptive reforms can always be announced during the year, a good example is demonetisation. Get ready to see more disruptive reforms in the coming months depending on the election outcomes in states. For now Budget 2017 should be read as much for its politics as it should be for its reasonable attempt at increasing economic activity.