Let’s give the FM his due

Mohan Guruswamy

Mar 01, 2015

The important signs one should seek in a Budget are for directional changes. The government has now provided an additional Rs 30,000 crore for the direct benefit of small farmers by providing funds for private and collective irrigation. 

There always comes a time when you have to heed Jesus who said: “Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s.” So this time I will render unto the finance minister what is due to him. Or better still “give the devil his due.” This Budget is eminently sensible and innovative. Arun Jaitley’s speech was also mercifully brief and to the point. The Budget is an annual exercise that generates great expectations, and this one generated more than the usual for it was the first Budget prepared by the BJP government. But the expectations of any major changes in how money will be raised and how it will be spent are quite unreal given that a Budget is pretty well set weighed down by past commitments to programmes — plan allocations, fixed expenses and interest. Interest takes up almost a quarter of any Budget, while defence, too, is an imperative, as are salaries and other expenses. But this year we have a new joker in the pack. The Finance Commission’s recommendation that the states should henceforth get 42 per cent of the taxes collected, imposes severe constraints on the Centre’s ability to keep, let alone improve on old spending levels. Many of the social schemes have, therefore, witnessed a drop in proposed expenditures. The message is clear. If you want decentralisation then the discretion to spend money also moves statewards.

The only other big item is subsidies that take up a good Rs 3.77 lakh crore. This is the big enchilada that those who seek a big bang budget eye. But the nature of India’s political economy precludes any major slashes. Here every government confronts powerful lobbies. The farm lobbies will not countenance any reduction in the fertiliser subsidy or reduction in procurement, which gives the producer a ready bulk purchaser buying at above the market prices. Similarly, subsidised supply of foodgrains to people subsisting below the poverty line is also a strict no no.

Given these inherent constraints, the government has done well to find a way to rein in subsidies by adopting direct transfer of subsidies wherever possible to prevent leakages. For instance, the huge LPG subsidy is already being paid into the consumer’s bank account. The government has done well by resisting the temptation of passing on reducing international oil prices to the consumer.

By stepping up financial inclusion by linking Aadhar to bank accounts, the government has laid a neat roadway for direct transfer of all major subsidies directly. The other advantage is that this will reduce the incidence and potential for corruption and will hopefully have an overall impact on national character. It will also result in savings, but it is too early to quantify it.

The important signs one should seek in a Budget are for directional changes. One notable focus has been the emphasis on the small farmers and small businessmen. The government has now provided an additional `30,000 crore for the direct benefit of small farmers by providing funds for private and collective irrigation. It has also planned to wean away farmers from the urea dependency that has afflicted them.

The MGNREGA scheme to provide guaranteed employment to landless labour and small farmers has been further enhanced by Rs 5,000 crore to Rs 40,699 crore. But the government proposes to link this with measurable targets such as buildings, roads and canals. It will no longer be just, as the PM put it, digging ditches and trenches without purpose. There can be no quarrel with this, as it will help in creating new and useful rural assets.

Similarly, Mr Jaitley has announced the creation of a Mudra bank, for small businessmen with a corpus of `20,000 crore. The Mudra bank will also provide backstop refinance for micro-credit institutions, but will be for artisans and small businessmen. If it succeeds it will create a whole new opportunity for new entrepreneurs and even if a few handfuls make it big the seeding would have paid off. Mr Jaitley has attractively packaged both with the slogan “Banking the unbanked; funding the unfunded.”

India’s IT sector is now worth the equivalent of $153 billion and since it represents an almost 100 per cent value addition, its wealth creation is huge. The government has rightly begun an initial foray into incubator funding with an initial outlay of `1,000 crore. Most of incubator funding is by private individuals and institutions, and the entry of the government with its deep pockets will only encourage young and innovative individuals and teams to think big.

In the vital area of major infrastructure the FM has provided for Rs 317,889 crore or almost Rs 70,000 crore more than the previous year. The directional changes here are interesting. The government plans to set up national investment infrastructure fund. It proposes tax-free infrastructure bonds for projects in roads, rail and irrigation projects. This has the potential to harness tens of thousands of crores, as tax exemption could incentivise people to divert money headed for mattresses into these bonds.

To take the challenge of power shortages headlong, the government proposes five new ultra megapower projects of 4,000 MW each, and also plans to fast track their commissioning by taking full charge and responsibility for them. In addition, it proposes to expeditiously commission the second unit of the Kudankulam nuclear power station.

Nitin Gadkari, Union minister for road transport, highways and shipping, will have his job cut out as the government has committed itself to build an additional 100,000 km of roads.

The big directional change in infrastructure sector is the proposed corporatisation of nine major port trusts. This will enable the ports to unlock the value of their land and property to build modern and enhanced capacities. India needs this as of yesterday as the inadequacy of port facilities has hobbled economic growth for several decades now. But it will also put the government on the road to a major collision with entrenched trade unions whose internecine ambitions have turned the dockyards and port labour force increasingly less productive and fractious. It will also put the government at loggerheads with the RSS’ BMS labour union affiliate. To me this is a good sign of the government’s determination to improve the long languishing productivity within the economy.

Now I cannot but help crow a bit about the government finally deciding to monetise the tens of thousands of tons of gold within the country, lying as dead investments and often buried deep in backyards. India is the world’s biggest importer of gold and last year we imported as much as 800 tons of gold. The proposed Gold Bond scheme is a great idea and if marketed well, and if not encumbered by too many intrusive questions and conditions, it can yield several hundred billion dollars equivalent for the government to invest in India. The government also offers to introduce a Sovereign Gold Bond scheme that will issue a bond instead of solid gold for the holder to convert at any time and place of choosing for the equivalent weight in gold. Both schemes promise a certain rate of interest also.

We finally see the government show its willingness to crack its whip on those who evade taxes, loot and park their money abroad and benami property by promising stringent punishment for those caught and brought to justice. Seven rigorous years in an Indian prison is a huge punishment and the new provisions will also have hefty financial penalties over and above the seizure of relevant properties. But it would help if the government signals its determination by nailing a few politicians first.

There are many items such as the abolition of wealth tax and replacing it with a surcharge of two per cent on wealth in excess of Rs 1 crore. This takes the discretionary element out of the hands of the ITO and simplifies matters. You earn, you pay. If you earn and don’t pay, then don’t get caught. Finally there is a little something for every state. Some get IITs, others AIIMSs and others something else. But the government has not forgotten schools either and has set aside Rs 68,000 crore for them including mid-day meals.

Our generals will never be happy enough, but defence gets a 10 per cent jump from Rs 220,000 crore to Rs 247,000 crore. We should now expect a slew of seminars on the security challenges India faces, but they will have to wait for another time for more money.

Am I happy with this Budget? Yes. Am I ecstatic about it? No. We can always do better, but we must also factor in what is possible under the circumstances.

The writer held senior positions in government and industry, and is a policy analyst studying economic and security issues. He also specialises in the Chinese economy.