FM accepts the challenge, fundamental shift follows

K Yatish Rajawat

arunjaitley_parliamentIf the framework of any budget is boiled down to a decision matrix than it would be does it lead to growth or not. Not only every decision taken from a growth perspective is popular or has immediate impact. Growth requires expenditure from government and investment from the industry. This creates that economic engine which than drives jobs and incomes.

If we look at the budget from this perspective than the government has increased its plan expenditure by 26.9 per cent to Rs 5,75,000 crores over actuals of 2013-14. This is much higher than 14 per cent increase shown by Chidambaram’s last full year budget for 2013-14. This is important because it shows that the government has confidence in growth and willing to commit to expenditure without forgoing the deficit target. Arun Jaitley has promised to keep the fiscal deficit at 4.1 percent and promised to reduce it to 3 per cent in the next three years’ time.

This is obviously based on the fact that a greater growth will give a higher buoyancy to tax revenues. The non-plan expenditure is Rs 12,19,892 crores, shows an increase of 9.4 per cent over last year revised estimates, with additional provision for fertilizer subsidy and capital expenditure for armed forces. The provision for fertilizer subsidy will most likely depend upon the new Urea policy that the government will announce soon. This takes the total expenditure to Rs 17,94,892 crores.

The net tax revenues are expected to grow by 15.6 per cent to Rs 11,89,763 crores from Rs 10,29,252 crores last year. This means if for some reason the growth does not happen the government will not be able to maintain its fiscal deficit targets. The budget documents say that the objective is that tax should increase as a per cent of GDP.

While the expenditure and revenue part of the budget is a number exercise that shows the confidence and spirit of the new government. What is more important is that the budget has indicated a shift from services to manufacturing, construction, financial services and agriculture. Customs duty has been pushed up and down based on the sectors that the government was to promote manufacturing. To give a push to solar panels, inputs used in making them has been exempted from basic custom duty. One of the bottlenecks for manufacturing or growth is power, and the FM wants to push this by giving a ten year tax holiday to all power plants that start generation and distribution before March 31, 2017.

Small and medium sector manufacturers are the biggest job generators. To give them an incentive to add capacity, he has given an investment allowance at the rate of 15 per cent to a manufacturing company that invests Rs 25 crores in new plants and machinery. This benefit will be available for investment upto March 31, 2017. Another thing which shows the dramatic shift from the earlier regime is that this government has started a Rs 10,000 crore venture capital fund for the MSME sector. In terms of announcement this was the single largest amount for any scheme in the first half of Jaitley’s budget.

On the construction front , Jaitley has given a slew of incentives to promote low cost housing. Allowed REIT and Infrastructure investment trusts pass through benefits so that they can be set up in India. Large real estate companies are looking to monetize their existing lease bearing assets by converting them to Real Estate Investment Trusts and listing them in foreign exchanges.

Banks have been given an incentive to raise funds for infrastructure sector by allowing such funds to be exempted from the requirement of CRR/SLR and even priority sector lending targets. This will give enormous liquidity to banks to raise sector specific bonds and deploy them for the market.

On the agriculture side the most interesting announcements is that the Finance Minister is talking about setting up of farmers market. A proposal suggested in an earlier article of mine about how inflation cannot be brought down unless farmers are allowed to sell directly. Besides, this there long term rural capital fund of Rs 5,000 crores and rural infrastructure development fund of Rs 5,000 crores.

What is disappointing is that budget has not been able to move beyond populist steps. The FM announced more than 20 schemes with Rs 100 crores or less as the budget for them. This is a waste effort and mere symbolism, he spend a large part of his speech explaining these schemes. But the budgetary allocations for these schemes is so less that they will be absorbed by just the bureaucracy appointed for implementing them. Hardly anything will flow down to the people from these schemes. And so many schemes, what was the point, the FM could have waited for another year or more and then announced something substantial.

There is not much for the common man either, if they were looking for relief from taxation. The increase in the exemption limit by Rs 50,000 and the 80C benefit do not help a population that is struggling with high prices and shrinking wage growth. Maybe if the economic engine kicks in and over the next two years’s time, we might see some measures to reduce the tax impact on the common man.