The NDA government, under the leadership of Prime Minister Narendra Modi, has demonstrated its appetite for taking unpopular decisions, its political will, and a capability of executing them on ground through blitzkrieg moves — such as demonetisation.
Which is why the entire nation was looking forward to the Union Budget with tremendous expectation. They expected it to be progressive, pushing India back on the path of high growth, before the bells of 2019 Lok Sabha elections ring and the government falls behind the curtains of populism.
Overall, Finance Minister Arun Jaitley has managed to strike an acceptable balance between populism and progressive reforms in this budget. Let us look at them.
Disposable income
The demonetisation announcement on November 8 had the side-effects of stalling the economy momentarily and putting the general public through short-term pains, thereby depressing consumption and output. It was therefore imperative to increase the disposable income and bolster consumption and growth.
The change in the personal tax regime to lower the rates for the tax slab of income between ₹2.5 and ₹5 lakh from 10 per cent to 5 per cent will do just that — put additional disposable income in the largest segment of the salaried population. Government’s direct tax revenue loss on this account may well be compensated by the additional 10 per cent surcharge affluent tax payers (those with income between ₹50 and ₹100 lakh) will have to pay.
The reforms in the personal tax regime is well complemented by the reduction of corporate tax rates to 25 per cent for companies that have a turnover of less than ₹50 crore. This shifts the focus back on MSMEs and start-ups. The tax burden on early stage start-ups has been further reduced through proposed relaxation of the profit linked deductions available to them to three out of seven years instead of the three out of five years.
FPIs and FIIs
The FPIs too have found a reason to be happy, as the budget exempts them from the indirect transfer provisions. With the falling VIX index and the perennial threat of US raising interest rates, this was a necessary intervention to prevent massive outflows of capital from the FII category. However, the finance bill has failed to provide clarity for the category III FPIs on this front, which is a cause of concern for the already stalled private equity segment.
Business and infrastructure development
The finance bill reaffirms the government’s long term commitment to improving the ease of doing business and infrastructure development. The abolition of FIPB approval process gives investors a positive signal. The 25 per cent rise in overall capital expenditure with a specific focus on highways (outlay raised from ₹57,676 crore to ₹ 64,000 crore), renewable energy (solar capacity target 20,000 MW) and rural electrification (universal coverage by 2018) reiterates the Government’s commitment to position India as the preferred FDI destination.
Oil reserves
The budget also allocates ₹20,000 crore to augment the existing capacity of strategic oil reserves from five million metric tonnes to 15 million by building two more crude oil reserves in Chandikhole in Odisha and in Bikaner, Rajasthan. This is a welcome move, as it will protect the country against global oil price volatility and provide the government with fiscal headroom on the account of oil subsidy bill, to some extent.
Rural focus
The focus on the industry is well complemented by the importance given to rural sector, with the introduction of affordable housing scheme, announcement of measures to include tax sops based on carpet area instead of built-up area, and the commitment to build one crore rural homes.
This, they plan to do in the next two years by allocating ₹20,000 crore and ₹23,000 crore to the National Housing Bank and Pradhan Mantri Awas Yojana respectively. The rural housing consumers are incentivised by the ₹1000 crore set aside for the new credit-linked subsidy scheme.
Less-cash economy
The finance bill augments the demonetisation push from a predominantly cash based economy to a less-cash economy through a slew of measures in digital transactions domain.
The allocation of ₹10,000 crore to the Digi Gaon initiative under BharatNet umbrella project, provides a clear roadmap of giving high speed broadband connectivity to 150,000 gram panchayat s in the next 14 months. This move can be supplemented by a ‘Digi-bandhu’ initiative (similar to a Bank-Mitra), to strengthen the population’s digital literacy and remove the primary barrier in the transition to a digital economy.
The formation of Payments Regulatory Board under RBI’s ambit, to resolve disputes, ensure customer protection, and curb bad practices by dominant players, can go a long way in boosting the confidence on digital transactions and achieving the ambitious target of 2.5k crore online dealings in 2017-18. The one-time push to the digital economy via demonetisation has received a sustainable thrust through the finance bill.
Where it lacks
This is the first budget ever to speak about political campaign finance reforms, by capping cash donations to ₹2,000 per donor and the proposed issue of electoral bonds. Although the moves lack significant clarity on implementation, as pointed out by Association of Democratic Reforms, this does indicate the government’s will to clean up the political funding system in the future.
And while the finance bill has announced a slew of progressive measures, it is woefully silent on the reforms for the stressed banking sector. The massive growth of deposits due to demonetisation, leading to a reduction of interest rates, have not really contributed to a significant credit off-take as the banks do not have an appetite to lend, owing to the high levels of NPA in their books.
The absence of any declaration to form the National Asset Rehabilitation Company to clean up balance sheets and give the banks a clean state to facilitate the investment scenario, is highly disappointing.