The Budget has been a Balancing act between the Politics and Economics of India
The Politics of Budget
All government budgets, especially budgets in India, have two aspects: an economic one and a political one. The economic one is crafted by the finance minister while the political one caters to the prime minister’s and the ruling party’s immediate political needs. The Budget for 2016-17 presented by the finance minister Arun Jaitley, his government’s third, is no exception to this general rule.
Following the poor show of the ruling Bharatiya Janata Party-led National Democratic Alliance received in Bihar Assembly elections held last year, and the fact that a series of assembly elections are coming up in the next two years, this year’s Budget spotlight was on rural and farm sectors.
In order to remove the allegation of “suit-boot ki Sarkar” it is imperative that the prime minister projects a pro-poor image and this is what the Budget for 2016-17 seeks to do.
The prime minister was quick to hail it as a “pro-poor budget”. He now has a talking point and an opportunity to shed the pro-rich image his government had acquired after the government’s failed bid in 2015 to get the land acquisition bill passed.
Mr Jaitley thus proposed a need to transform India based on the following nine pillars:
- Agriculture and Farmers’ Welfare: with a focus on doubling farmers’ income in five years;
- Rural Sector: with emphasis on rural employment and infrastructure;
- Social Sector including Healthcare: to cover all under welfare and health services;
- Education, Skills and Job Creation: to make India a knowledge based and productive society
- Infrastructure and Investment: to enhance efficiency and quality of life;
- Financial Sector Reforms: to bring transparency and stability;
- Governance and Ease of Doing Business: to enable the people to realise their full potential;
- Fiscal Discipline: prudent management of Government finances and delivery of benefits to the needy; and
- Tax Reforms: to reduce compliance burden with faith in the citizenry.
With distress in rural areas increasing, the Budget enhanced the outlays of nearly Rs 2.75 lakh crore for programmes in the social sector, farmer welfare and rural sector with emphasis laid on roads, medical services and a new welfare scheme for LPG provision to women from the households.
Farmers were given much more importance with Mr Jaitley referring to the farmers as ‘the backbone of the country’s food security’ and emphasized the need to think beyond ‘food security’ and give back to our farmers a sense of ‘income security’. The aim was thus to double the farmers’ income by 2022.
The Budget actually tilts against the corporate sector, the rich and the middle classes by removing some of their tax exemptions and even taxing them – as in the case of the new dividend tax that individuals who receive dividends in excess of Rs 10 lakh will have to pay. For the middle class, it proposes to tax 60 per cent of their retirement savings when they retire and receive their pensions and provident funds. It has also proposed that purchases above Rs 1 lakh will require a PAN card and that purchases above Rs 2 lakh will have tax deducted at source of 1 per cent. There was an increase in excise on services like jewelry and retail consumer products depicting the fall of increased taxes on the middle class and the consumer markets in the semi urban and urban areas.
Its economic objectives had been known for several months. These were to raise depressed aggregate demand in the economy while not disturbing the fiscal deficit targets; to increase the level of government investment in infrastructure; and lastly to rationalise the tax system by simplifying procedures and definitions. For example the implementation of Justice Easwar Committee recommendations by rationalising deductible expenditure on dividend earning instruments, the extending of the presumptive scheme for professionals and other taxpayers, the automatic stay of demand at first appellate level with 15 per cent part payment and enhanced interest for delayed refunds beyond 90 days all reinforce the Government’s commitment towards a simplified and less litigious tax regime.
The Economics of the Budget
Thus, leaving the political grandstanding aside for the moment, the Budget is rich in economic content. It provides a number of ways for small and medium businesses to access finance, grow and pay taxes in a stable fixed rate regime of 25 per cent. It has made a determined attempt to simply procedures.
It has stuck to the fiscal deficit target of 3.5 per cent which will come as a relief to the financial markets and force the RBI to reduce interest rates. However, since he has not provided for the impact of about one lakh fourteen thousand crore because of the pay commission’s recommendations and one-rank-one-pay, there may be some doubt on the target being met when the final accounts come in. After all, the net increase in revenue this year is only Rs 19,000 crore.
The massive increases in outlays for roads and railways will spur the demand for steel and cement and create employment in construction projects. It has made a strong attempt to recapitalise the banks. Some may argue that the amount provided for this, Rs 25,000 crore, is less than needed but nevertheless, it is a strong beginning.
The fact that there is no change in capital gains tax regime for listed stocks has made equity investors happy. The apprehension that such a tax would be introduced had made the stock market dip in the morning but it quickly recovered after the budget speech was over. However, the finance minister stuck to the time frame on General Anti-Avoidance Rules (GAAR) which will be implemented from April 1, 2017. This is likely to align Indian tax laws with legislation of BEPS action plans.
The Budget has made a strong attempt to get people who have not declared their incomes fully to make them do so by offering a one-time amnesty from prosecution provided they pay the 30 per cent rate and a penalty of 15 per cent.
For Corporate India, there’s not much in it. Budget proposed lowering corporate income tax rate for next financial year of relatively small enterprises with a turnover not exceeding Rs 5 crore in fiscal 2016 from 30 to 29 per cent plus surcharge and cess. New units incorporated on or after March 1, 2016 will be taxed at 25 per cent plus surcharge. Another important aspect of the Budget for the corporate was the need for ease of doing business for Indian investors and Indian businessmen as well as promoting institutional governance practices.
There are a few negative features as well, such as the decision to impose the service tax on spectrum fees which will increase the cost of telecom services, and will adversely affect telecom companies. The proposal to introduce a sunset clause for SEZ tax holiday could impact the IT sector. But since this will become applicable only from 2020 there is enough time for firms to adjust.
The new transfer pricing documentation norms, which will include country-by-country reporting for multinationals with world incomes exceeding euros 750 million, is new and while it will bring in transparency, it will result in initial challenges for the tax payers.
The provision for what amounts to a tax holiday for start-ups will help them. The assurance that there will be no retrospective taxation and that the interest and penalty on litigants will be waived if they withdraw their appeals against the tax ruling is major step. The proposal to permit public sector units to sell their assets like land instead of equity divestment is a good one because it will boost government revenues.
Overall, in the backdrop of the prevailing depressed global economic scenario and the challenges the economy is facing, the Budget is a pragmatic balancing act combined with good economics and politics.