The Union Budget, the most important annual financial event in the country, normally transpires on the last working day of February. But this year, then finance minister P Chidambaram presented an interim budget on February 17 in view of the general elections in May. It was only a standby account of expenses the government might incur till the new administration is in place.
Now, after the landslide win in the elections, the new government formed by the Bharatiya Janata Party (BJP) presented a full budget for the rest of the financial year. It is the first major policy document of the new government which lays down the strategies for growth revival.
India is now poised to be the third largest economy along with the US and China to play a leading role in global economy. In India, growth is an imperative, and a sustainable and inclusive growth model for the country should be based on clear policy directions. The maiden budget presented by the new finance minister, Arun Jaitley, is to be viewed against the backdrop of the tasks already announced by the new government soon after its formation such as fiscal consolidation, price stability and growth, financial sector reforms, infrastructure build-up through public-private partnership, revival of the manufacturing sector and skill development. The pre-budget expectation of all concerned was that the Narendra Modi government’s first budget will be big on reforms that will help revive investor confidence and put the economy on a higher growth trajectory.
The budget has to be decoded in the context of the economic survey that preceded the budget presentation. According to the survey released on the eve of Budget, “after recovering in 2009-10 and 2010-11, GDP growth slowed down to decade’s low of 4.5 per cent in 2012-13. It picked up marginally to 4.7 per cent in 2013-14.Indian economy is likely to grow in the range of 5.4 to 5.9 per cent in 2014-15 overcoming the sub-5 per cent GDP growth of past two years. The priority of the new government should be to revive business sentiments that could be at the heart of restarting the investment cycle. Regaining growth momentum requires restoration of domestic macroeconomic balance and enhancing efficiency and to this end, the emphasis of policy would have to remain on fiscal consolidation and removal of structural constraints.”
The budget presented focused on structural reforms that seek to revive growth without higher borrowings. While asking the people not to live beyond their means Jaitley reiterated that we cannot leave behind a legacy of debt.
An unbiased analysis of the budget must focus on how the budget proposes to address the crucial issues of fiscal deficit, current account deficit (CAD), inflation, low growth and declining investor confidence. The finance minister has cleared a road map and is interested in reducing the fiscal deficit to 3% of the GDP. A fiscal deficit target of 4.1% of GDP for 2014-15 is a challenge accepted by the minister and it is seen as 3.6% of the GDP for 2015-16. In a growing economy some degree of CAD is bound to be there. Increased foreign capital inflow through enhanced foreign direct investment (FDI) and remittances from Indians abroad can help mitigate the growth depressing influence of CAD. On the inflation front fiscal policy initiatives announced in the budget are expected to supplement the Reserve Bank of India’s monetary policy efforts. A revised framework for inflation targeting is expected soon.
On addressing the low growth problem there are clear indications of future policies and programmes. The focus on infrastructure, road network and real estate, etc. will have a multiplier impact on economic growth. The government aims for sustained growth of 7-8% in the next 3-4 years. In agriculture the annual growth expected is 4%. Allocation of `7,060 crore for infrastructure will create employment opportunities. The minister has proposed to increase FDI in real estate, the biggest beneficiary of the budget. The budget figures on growth rates are credible. The incentives announced for savings will boost savings which in turn will boost investment. The confidence index has already gone up to 60 -65 %. Raising limit on FDI in defence and insurance from 26% to 49% could be considered as the beginning of a renewed interest in opening up the economy further. The measures announced are reassurances to foreign investors that they would get fair treatment.
According to the provisions of the budget food and petroleum subsidies are going to be more targeted. The rural job guarantee scheme which provides 100 days of paid employment a year will be more focused on asset creation.
There are some missing priority areas in the budget. Ageing related issues also did not get any mention in the budget though there are 11 crore aged people in India. Lack of strategic focus is found in the area of public health except in sanitation. The government intends to cover every household with sanitation through the Swatchh Bharat Abhiyan Scheme by 2019. The question of how to revive thousands of stalled projects is not answered in the budget.
Stability and predictability in taxation is of paramount importance. Jaitley’s reassurance that in future there will be no retrospective taxes is a sensible and mature approach. Individual taxpayers will see a moderate rise in threshold taxable income and additional breaks on home loans. Taxation threshold limit is raised from `2 lakh to `2.5 lakh and the income tax Section 80C saving limit is raised from `1 lakh to `1.5 lakh. Manufacturing companies, too, get a tax break to invest in equipment.
Though for most parts the budget looks an extension of the previous budget it is definitely an honest growth-oriented budget. But there is not much in offer for the manufacturing sector. For growth to improve to 6-9%, domestic industry must develop. The budget does not have any policy direction to bring back the manufacturing sector to its past glory. Though much emphasis is given to revive growth rate in the farm sector, strategies for increasing the yield and reducing water use didn’t get the importance they deserve. In the final analysis Jaitley’s maiden budget should be considered a futuristic and responsible budget featuring fiscal prudence. It is an investor-friendly budget that is going to be a game changer. It is not populist and does not offer any freebies.
The writer is professor of economics at Christ University, Bangalore, and can be reached at firstname.lastname@example.org