|In the long run these changes may be more revolutionary than the tax proposals pertaining to one year.
By R Jagannathan, Firstpost
Arun Jaitley made up for his budget washout of last year today. The Union budget for 2015-16 is a very good effort to reform, rejuvenate and revive the economy – to the extent any budget can do that. It brings some fresh thinking and ideas to tax issues, proposes strong measures to curb black money, extends the social security net to the poor and vulnerable, provides fresh funds for infrastructure, and – above all – emphasises the importance of entrepreneurship for growth and jobs.
Last year the finance minister uttered all of 16,299 words in his budget speech and achieved very little. This year, brevity has ensured more content and quality in the budget speech. He spoke 30 percent less (11,247 words), and achieved more, even if a lot of what he said constituted only a vision and a path for the future rather than something he can deliver in the coming financial year.
Last year his speech was peppered with too many references to small allocations for schemes named after Sangh parivar icons like Deendayal Upadhyaya and Syama Prasad Mookerjee. There was little of this kind of pandering this time, with most schemes now bearing the generic ‘Pradhan Mantri’ prefix.
Jaitley presenting the budget. PTI image
Another hallmark of today’s budget is that it follows the Economic Survey’s path of “creative incrementalism”. It does not set great store by big bang reforms. Many key changes have been announced to improve the ease of doing business, encourage entrepreneurship, expand tax compliance, and improve the delivery of social security benefits to the poor by reducing leakages, but the real impact of these changes will be felt only after a year or two. In the long run these changes may be more revolutionary than the tax proposals pertaining to one year.
So what are the prime themes of budget 2015-16? I can see at least a dozen of them.
First, the budget has cleverly balanced the need to push up public investment without straying from the road to fiscal consolidation. The 2012 roadmap drawn up by Jaitley’s predecessor called for a reduction of the fiscal deficit to 3 percent by 2016-17. Jaitley has promised to achieve this one year later. He has used a part of this fiscal leeway to increase investments in infrastructure. In 2015-16, the net increase in public investment is said to be Rs 1,25,000 crore, including Rs 70,000 crore in capital outlays. This will boost growth when the money is spent over the year.
Second, the budget completely rebalances centre-state fiscal power in favour of the states, in line with the report of the 14th Finance Commission. The commission had recommended the transfer of 42 percent of gross central tax receipts to states, but the real devolution is much larger – Rs 1,82,000 crore more in 2015-16 compared to the year before. The finance minister said: “The devolution to the states would be of the order of Rs 5.24 lakh crore in 2015-16 as against the devolution of Rs 3.38 lakh crore as per the revised estimates of 2014-15." Another Rs 3.04 lakh crore would be transferred by way of grants and plan transfers. Thus, states will spend about 62 percent of the total tax receipts of the country. This rebalancing of fiscal resources means that states, which have the larger burden of implementation responsibilities, will now have the money to do so. The centre’s fiscal role will shrink relatively.
Third, this budget shifts more of the tax revenue burden to indirect taxes and away from direct taxes. Left economists may rant about this, saying the budget will favour the rich and businesses, but the key to higher direct tax compliance is more reasonable rates. Moreover, companies have the option of not investing in India if they find tax rates lower elsewhere. Thus, Jaitley has offered Rs 8,315 crore of direct tax concessions, and raised Rs 23,383 crore from indirect taxes, especially excise and service taxes. The service tax rate is up to 14 percent from 12.36 percent now and the exemptions reduced. Basic excise duty is up from 12 percent to 12.5 percent. The clean energy cess on coal is up from Rs 100 to Rs 200 a tonne. The middle class gets very small direct tax benefits, including some relief in medical reimbursements and higher exemptions on travel allowance (Rs 1,600 per month). Clearly, the FM did not have much money to spread around.
Fourth, the budget also balances promise and delivery – its promise now, deliver later. The promise to cut corporate tax rates to 25 percent (as well as the withdrawal of business exemptions) will happen in 2016-17, while the surcharge on corporate and individual taxes is up this year itself by 2 percent. So gross corporate taxes will actually go up in 2015-16. The cess on income tax – education and higher education – will go, but only in 2016-17. Wealth tax goes in 2015-16, but this is being compensated by the surcharge of people with incomes above Rs 1 crore.
Fifth, the emphasis on additional infrastructure investment is clear. Between the centre and public sector companies, investment in infrastructure is expected to go up by Rs 70,000 crore. Coming on top of the 52 percent increase in the railway plan, this is a significant boost. Moreover, a new National Investment and Infrastructure Fund will get Rs 20,000 crore annually to support infrastructure projects. And road, rail and irrigation projects will be allowed to raise money from tax-free bonds.
Sixth, given the slow pace of job creation, the government is betting on entrepreneurship to make up the deficit. Apart from easing rules for business, new funds are being set up to promote entrepreneurship and fund micro and small enterprises. As the FM said, “there are some 5.77 crore small business units, mostly individual proprietorship, which run small manufacturing, trading or service businesses. Some 62 percent of these are owned by SC/ST/OBC. These bottom-of-the-pyramid, hard-working entrepreneurs find it difficult, if not impossible, to access formal systems of credit. I, therefore, propose to create a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 20,000 crore, and a credit guarantee corpus of Rs 3,000 crore.” Another fund will promote start-ups in the technology space with Rs 1,000 crore.
Seventh, the finance minister is shifting the balance of regulatory power away from the RBI and towards Sebi, in which the Forward markets Commission will be merged. The centre will set up its own debt management agency, which means the RBI’s only job will be the making of monetary policy and bank supervision. Even in the making of monetary policy, a new legislation will shift the power to set interest rates from the RBI Governor to a Monetary Policy Committee, which the Governor will chair, but where he will have only one vote.
Eighth, the FM has also proposed to create a new bankruptcy law that will ensure quick solutions to companies that go belly up. The bankruptcy code, possibly on the lines of America’s Chapter 11, will replace the Sick Industrial Companies Act (SICA) and the Board for Industrial and Financial Reconstruction. The SICA law and the institution created under it have not delivered either the revival of sick units or ensure quick euthanasia for the terminally ill.
Ninth, another theme in the budget is giving workers choice – both in choosing their retirement savings vehicles, and in health/recuperation benefits. Currently, all employees have no choice but to join the Employees State Insurance Scheme (ESIS) or the Employees Provident Fund Organisation (EPFO), both of which perform poorly. In future, employees will have the choice of choosing a separate health insurance plan instead of the ESIS, and also opt out of the EPFO in favour of the National Pension Scheme (NPS). As the FM noted, “both EPFO and ESIS have hostages, rather than clients.” To enable employees to invest in their own retirement corpus, the FM has also created a separate Rs 50,000 deduction for contributions to pension funds like the NPS.
Tenth, the biggest blow the budget delivers is to black money. The penalties for black money are not only being enhanced, but an attempt is being made to strike at the very root of domestic black money by targeting big ticket cash transactions for monitoring and providing incentives for the use of debit and credit cards. Apart from big jail terms for concealment of income and assets abroad, which includes similar penalties for abettors to such concealment, benami properties will also be targeted. The Finance Bill will prohibit the payment of more than Rs 20,000 as advance for buying property, and PAN numbers will have to be given for all purchases above Rs 1 lakh.
Eleventh, the reform focus is being shifted from the rich to the poor. In the past, reform had come to mean doing things for business or the middle class; the NDA is taking small initiatives begun by the UPA to the next level. The Jan Dhan Yojana, the Aadhaar ID and mobile banking will now be increasingly used for the transfer of subsidies to the poor, with LPG being the launchpad and almost more than half the consumer base. The FM said that if GST will put in place a state-of-the-art indirect tax system by 1 April 2016, the JAM trinity (Jan Dhan-Aadhaar-Mobile) “will allow us to transfer benefits in a leakage-proof, well-targeted and cashless manner.” He added: “We need to cut subsidy leakages, not subsidies themselves. We are committed to the process of rationalizing subsidies based on this approach.”
Twelfth, the biggest promise the FM has committed himself to is on containing inflation. He said: “We have concluded a Monetary Policy Framework Agreement with the RBI, as I had promised in my Budget Speech for 2014-15. This framework clearly states the objective of keeping inflation below 6 percent.” What this means is that if inflation surges above 6 percent, or threatens to, the Monetary Policy Committee (MPC) will act to bring inflation down even if Jaitley wants interest rates lower. Once the MPC gets this mandate, the finance minister is effectively curtailing his own freedom of fiscal action, for the MPC will act to bring inflation down if fiscal policy is heading in the other direction.
All in all, Jaitley’s budget breaks new ground. It is a commendable effort in the context of his constraints. The market has not reason to mope in gloom. This budget does nothing to ruin the party. It sets the tone for future parties, especially if growth recovers.