Prime Minister Narendra Modi has put in place his strategy to win the Lok Sabha poll in 2019. That is written all over the Budget Arun Jaitley presented yesterday. A clear shift towards the preponderant rural poor was visible in the investment and taxation proposals. It was as if the ruling party was at pains to disprove the popular belief that it was a middle class urban party.
While being careful not to hurt its traditional vote-bank, the Budget sought to shift the focus to rural poor who had hitherto been ambivalent about the BJP. It was a clever move. Because not only a vast majority still lived in the villages but also because the middle class voter anyway tended to be critical of the BJP’s main rival, that is, the Congress.
Let us take note of another clear message of the Budget. It cries out loud that the ruling party is not soft on the rich and the corporate biggies. It never was, regardless of that cheap jibe by Rahul Gandhi about the ‘suit-boot ki sarkar.’ There is nothing much for the moneybags but a lot that will hurt them. Big Business has always prospered under the Congress, observing the ‘live and let live’ pact. The Modi Government has done the unthinkable by imposing a ten percent dividend tax on recipients of dividend income of Rs. 10 lakhs or more. Promoters of major companies earn in multiples of tens of crores in dividends alone.
Indeed, the list of those who will feel the pinch would read like the who’s who of the world of industry and commerce. This tax alone should yield a tidy sum in fresh revenue. Superrich will also be hurt since the surcharge on income above Rs. 1 crore has been raised from 12 to 15 percent. But businessmen as a class have reason to feel relieved that despite huge pressures Jaitley has stuck to the fiscal consolidation path, retaining deficit at 3.9 percent for the current year and at 3.5 percent for the next. Foreign investors have reason to feel reassured. If they still exit the markets, it is due to global factors. Yes, the Finance Minster could have allocated a little more than the Rs. 25,000 crores he has for recapitalisation of public sector banks.
Given the extent of bad loans, and the coming enforcement of the Basel-III norms, this amount is unlikely to serve the purpose, though Jaitley has promised to raise the allocation should the need arise. Restructuring the loan profiles of PSU banks and disinvesting below 51 percent in case of smaller banks is welcome. The promise to amend the RBI Act to provide a framework for Monetary Police Code is a step in the right direction. This should remove any scope for friction between North Block and Mint Street, a constant irritant during the time P. Chidambaram was the Finance Minster.
Also welcome is the commitment to amend the Companies Act to facilitate ease of doing business. Also, a new law to deal with bankruptcy in banks is in the offing. Rural sector received optimum attention, be it the somewhat tall promise to double farm incomes by 2022 or to take irrigation to more than 28,000 hectares at a cost of Rs.17,000 crores by 2017.
Low-cost crop insurance scheme gets Rs. 5,500 crores; Rs 15,000 crores for interest subvention on farm loans; Rs. 38,500 crores for MGNREGA; electrification of all villages by May 2018, etc. are some of the measures aimed at alleviating rural distress. Indeed, a huge step-up in aid to Gram Panchayats as per the Finance Commission’s recommendation would mean a total of Rs. 2.87 lakh crores. Programmes for rural roads too get a huge increase.
Another positive is to do away with the distinction between Plan and non-Plan expenditure from next fiscal. More than fifteen percent hike in Plan expenditure for the last year of the 12th Plan would take the total money earmarked under the head to over 5.5 lakh crores in 2015-16. Senior citizens receive a marginal tax relief while middle income groups can expect further rebate on interest paid on loans for house purchases, and salaried get higher deduction on house rent.
However, traditional economists will baulk at the higher reliance on indirect rather than on direct taxes. As against a little over Rs 1000 crores in direct taxes, the indirect taxes aim at raising over Rs. 19,000 crores. This could prove inflationary. Costlier cars, cigarettes, etc. would not pinch a vast majority of the people, especially when the one percent levy is meant to alleviate growing environmental concerns. An across-the-board hike of 0.5 percent in service tax on account of what is being called Krishi Kalyan cess, making it a full 15 percent, would mean a slightly higher outgo on anything that attracts this ubiquitous levy.
Meanwhile, contrary to the general expectation, a budget is only a broad indication of the overall health of the economy, but how the economy would actually perform depends crucially on several factors which may have nothing to do with the budget. Global crude and commodities markets, for one. Equally crucial is the way the Central and State Governments enforce good governance principles.
Therefore, if the Modi Government keeps its eye on the ball all 365 days and does not fritter away energies on peripheral controversies such as Ghar Wapsi, beef, culture wars, etc., and stays focused on the economy, there is every hope that we might achieve nearly eight percent growth in the coming year. In sum, good governance is a sine qua non for a strong economy.