The Union Budget speech delivered by Finance Minister Arun Jaitley on 28 February had a number of expectations pinned to it. It was heralded as the final chance for the Indian economy – a veritable litmus test for whether it would change direction and become more resilient and sustainable in the years ahead. The alternative would be a rapidly disintegrating social contract, with 800 million people living at less than two dollars a day and 120 million entering the workforce over the coming decade with only a fraction of the required jobs to go around.
Many suggest that a turnaround would necessarily entail second generation reforms – and in this context the Budget is not of as much significance as it is often thought. The Finance Minister has limited room to manoeuvre – the Union Budget is much smaller than the budget available with the states, and the legislative route cannot be bypassed for instituting substantive reforms such as on land acquisition. Yet, even with this limited room, it cannot be doubted that Mr. Jaitley has attempted to provide a directional shift for the Indian economy. He has proposed at least five big ticket ideas, which if carried through to their logical conclusions, can yield significant dividends.
First, is a rethink on the Public-Private Partnership (PPP). PPP has largely been considered a panacea by successive governments who have looked to bridge the burgeoning investment deficit by making the private sector a partner in development. However, large infrastructure projects following the PPP model have come to a standstill owing to a range of concerns including the inability of the private sector to take on a multitude of implementation risks as well as an inability to correctly assess political and economic risk. The alternative suggested by Mr. Jaitley is for the sovereign to take on a greater share of the implementation risks. This can change the dynamics of the PPP model significantly, as long as the sovereign is also interested in the financial viability of projects that it takes on.
In addition, given the good fortune of low global oil prices, Mr. Jaitley has proposed an additional cess on petrol and diesel, towards road projects. He has also looked to leverage the market for long term capital creation by proposing steps such as the liberalisation of investment frameworks including Real Estate Investment Trusts, Alternative Investment Funds, and modification of Permanent Establishment norms to facilitate fund management.
Second is the focus on widening the tax net rather than taking a myopic view. The most significant step towards this objective is the proposed reduction of Corporate Tax from the current level of 30 per cent to 25 per cent over the next four years. Anyone running a business in India would know that staying competitive while paying 30 per cent Corporate Tax is near impossible without a competent chartered accountant. Given that Corporate Tax makes up the largest source of direct tax receipts, over 3.5 per cent of GDP (as compared to around 2.25 per cent of GDP in the case of Income Tax), only around 23 per cent of corporates liable for this tax currently pay it, and that the global average is close to 20 per cent, a rationalisation of corporate taxes was long overdue.
T devil will certainly be in the details. The removal of Wealth Tax, and the surcharge of 2 per cent on the super-rich (earning over one crore rupees a year) is a case in point. The fine print in The Finance Bill, 2015, indicates that a number of surcharges are aimed at neutralising tax cuts from the outset. In the long term however, the expected effect is positive – a widening of the tax base.
Third is the merging of regulatory entities rather than creating new ones. The proposal to merge the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (SEBI) has been welcomed by financial market participants. The proliferation of regulatory agencies without requisite regulatory capacities has become a worrying reality across many sectors. By bringing the FMC within the fold of SEBI, the government can begin to reimagine the role of regulatory agencies in a broader context, beyond just the simplification of their administration.
Fourth is the reemphasis on credit extension through market based instruments. Only around five per cent of India’s Micro Small and Medium Enterprises (MSMEs) have access to institutional credit, while they collectively account for about 45 per cent of manufacturing output, and a major share in job creation. Mr. Jaitley has proposed setting up of a Microfinance Unit Development Refinance (MUDRA) bank to refinance microcredit operations in the country. This would make the cost of credit cheaper, and concomitantly grow the micro finance industry. The MUDRA bank would have a corpus of INR 20,000 crore and a credit guarantee corpus of INR 3000 crore. An additional policy innovation here is the government’s suggestion that the bank prioritise lending towards marginalised social categories including Scheduled Caste and Scheduled Tribes. In the future, more such business expansion linked social spending would go a long way in creating a robust economy.
Fifth, Mr. Jaitley has stressed the importance of ‘efficiency’ in social spending by harnessing technologies and financial inclusion. By prioritising what the Economic Survey has called the ‘JAM’ trinity of Jan Dhan Yojana, Aadhar, and Mobile, he is setting the ground for linking a number of social schemes with the concept of Direct Benefits Transfer (DBT). Although only around 30 per cent of the 115 million or so new accounts opened under the Prime Minister’s ambitious Jan Dhan Yojana are active, there is a great opportunity at hand to transition the inactive accounts to active ones on account of cashless DBT linked schemes as well as the innovative pension and insurance schemes announced in the Budget. Moreover, given that there will soon be nearly a billion mobile phone subscribers in the country, and hundreds of millions of Indians are ‘keypad literate’, technology offers a leapfrogging opportunity that is unparalleled in terms of the scale at which it can transform social welfare.
Despite a wealth of new ideas as illustrated above, there is scope for improvement. Specifically, the record of the government in fund management is poor. While the National Investment and Infrastructure Fund of INR 20,000 crore as proposed in the Budget is very relevant -- how it translates into actual funding remains uncertain. Similarly, the emphasis on setting up five new Ultra Mega Power Projects seems misplaced given the already existing stranded capacities, and the poor state of coal evacuation infrastructure.