The Budget was presented in the backdrop of an economy that was slowing partly due to global factors and partly due to demonetisation, a resurgent and strong dollar globally, and higher interest rates in the US.
This, in turn, is increasing the risk of capital outflows from developing economies such as India. There is also a rising global turn towards protectionism causing a doubt about export and jobs growth. Rising prices of oil and other commodities, along with anticipated tax rate hikes in the goods and services tax, cause inflationary pressures to build up within the economy. There is some apprehension about food inflation.
Thus, Finance Minister Arun Jaitley had the classic challenge of providing a strong growth impulse and at the same time remaining within prudent fiscal limits.
The FM delivered admirably well on all these fronts. One could say that in its third year, the FM and his government could have been bolder. But, no reform can be bolder and more disruptive than demonetisation. So it’s not as if the government has not demonstrated its capability for a big-bang reform, but the macro context presents multiple constraints.
On the growth stimulus, it has come via lower income tax to the middle class and hence a boost to consumer spending. It has also come via a record spending of `3.9 lakh crore on infrastructure. That includes roads, rail, ports, airports and irrigation schemes. All that will surely lead to an increase in demand for materials such as steel and cement, and also increase in employment.
On the fiscal prudence front, the Budget has targeted a fiscal deficit of only 3.2 per cent of the GDP, much below market expectations.
This brought cheer to the bond markets since this means borrowing pressure from the government would be lesser than anticipated. This also means that bond yields would go down, bringing profits to bank treasuries. These profits can, in turn, help banks tackle their bad loans, and also help them make new loans.
As such, the surge in deposits post-demonetisation has also helped banks. The deficit is low and the national debt is manageable. It is never going away, but so long as it is sustainable and funding productive assets and public goods it is a good thing. To the extent that this extra debt goes to finance the creation of new infrastructure, which will help future unborn generations, it is good quality spending.
Overall, the size of the Budget is higher by six per cent although national income will go up by 12 per cent (in nominal rupee terms). In that sense, there is sensible spending restraint. The direct tax revenues are expected to rise by 15 per cent even though tax rates have actually been reduced. How is that possible? This is because of greater tax compliance.
In his speech the FM said that “India is largely a tax non-compliant economy”. What he meant is we have one of the lowest tax-to-GDP ratios, and which is further made worse because the share of direct taxes compared to indirect taxes is even lower. The direct tax net can be widened thanks to new information coming from bank deposits, which surged after demonetisation.
Preliminary investigation has revealed 18 lakh individuals whose huge bank deposits do not tally with their known sources of income. So, at some stage they will all enter the tax net. Of course, there may be lot of complicated litigation before that happens, but that’s a different story. At least a start has been made.
This is the first Budget to mention transparency in political funding. In its fight against black money, the government cannot ignore the issue of unaccounted money in politics. Hopefully, this sunshine will eventually mean that political parties will also come under the ambit of RTI.
— Ajit Ranade, senior economist based in Mumbai