By Charitha Ratwatte –

India’s 2014/15 Budget

Regionally, India’s economy is so big, that what happens in India affects all of us in South Asia. On 10 July, Arun Jaitely, the Minister of Finance in Prime Minister Narendra Modi’s new Government, presented a new Budget. Expectations were high. The Mumbai stock market on Dalal Street was up by a fifth. A hitherto shaky rupee had steadied and consumers, who had the money, seemed to be on a spending splurge.

Jaitely in his pre-Budget comments insisted that fiscal prudence will prevail over ‘mindless spending and populism’. Although analysts felt that the target of shrinking the Budget deficit to 4.1%, which Jaitely inherited from the former Minister of Finance Chidambaram, looked very difficult to sustain, in the event Jaitely retained this target, albeit admitting that it will be a tough call.

Before the Budget, two months into the fiscal year, spending outstripped revenue by an estimated $ 40 billion. If the current weak and underperforming South West monsoon does not strengthen in the course of this month, farmers will be in difficulty and will require relief. The problems in Iraq and Syria, Palestine, Gaza and Israel are pushing up energy costs, which India imports and distributes at a subsidy.

PM Modi during the election made humongous promises – analysts have described them as ‘Modi’s infrastructure ambitions’. Roads, factories, power lines, high speed rains and 100 new cities to be built to create jobs for India’s aspiring young work force. Jaitely is expected to bring about some controls on wasteful subsidies, which have very weak system targeting 640 million Indians who have been enrolled in a biometric identity scheme called Aadhaar, which has proved, in limited experiments to be very effective in controlling leakages in welfare payments.

There were some fears that since this was started by the former Congress Government, spearheaded by Nandan Nilekani, formerly of the software giant Infosys, who worked with the Congress Government and later contested the election on the Congress ticket, but lost, would, in the South Asia tradition, be scrapped. But better sense seems to have prevailed.
But cutting subsidies is unpopular, as the Modi Government discovered when they went ahead with an increase of railway fairs, before the presentation of the Railway Budget which precedes the national budget, and had to roll back some of the increases due to overwhelming opposition. It is ironic that the increase of rail fares had been a decision taken by the previous Congress government, which the succeeding BJP Government implemented.

Confusing revenue taxes

Another vexing issue has been the confusing revenue taxes prevailing. Each state has its own taxes, causing confusion to both local and foreign investors. Both Modi and Jaitely have called for what they term ‘Cooperative Federalism,’ which is essence seems to be giving a role to State Government to decide on spending and economic policy, with a trade-off that a unified Goods and Services Tax will be implemented on an All India basis. Some disinvestment of holdings by the Government in State-owned banks and businesses are also expected.

Analysts have expressed the opinion that Modi will not be able to give into the temptation in this Budget, to pay back the voters who elected him. He had to play a deft hand balancing out the demands of an electorate that had high expectations and the reality of constraints placed on practical steps by the actual state of the economy. There was not much room for fiscal experimentation and at the same time fiscal consolidation cannot be delivered all at once.

Investors catapulted the India’s equity markets to new highs expecting the Budget to outline a road map for rolling back spending on subsidies and channelling resources towards productive capital investment such as infrastructure. Some analysts believed that the overwhelming majority the BJP had in the Lok Sabha would enable it to take potentially unpopular decisions on subsidies, though they point out that such moves will have to be calibrated to avoid the inevitable political back lash and roll back, as in the case of the railway fare increase.

Most analysts dismissed the possibility of big bang reforms in the Budget; they predicted that the Government will overcautiously take a long-term view of its mission to fix the defects in the Indian macro economy and restore growth.

Vallabhbhai Patel statue

When the Budget was finally presented in the context of these expectations and predictions, the only big bang was the setting aside of $ 33 million for a statue, going to be the world’s largest, of independence leader Vallabhbhai Patel, in Gujarat, Prime Minister Modi’s home state. This allocation in a budget which totalled $ 301 billion was pounced upon by critics, who questioned whether such a statue was a real priority for India at this time. They pointed out that the statue got more money than women’s safety nationwide which was allocated $ 25 million (India is in the midst of a ‘rape epidemic’) and girl education which got $ 16.5 million only.

Vallabhbhai Patel was Pandit Nehru’s virtual enforcer in convincing the Indian Princely states to opt to join the Indian Union. The Viceroy Lord Mountbatten plan, for Indian independence, provided the Maharajas with such an option. For those who opposed the total credit in the independence struggle going to Mahatma Ghandi and Jawaharlal Nehru, and the subsequent focus on the descendants of Nehru, Indira Ghandi and her family, Patel was the focal point. In fact one BJP minister, in response to criticism on the allocation for the statue, pointedly asked whether statutes could be only elected for the Nehru-Ghandi dynasty.

Beginning of a journey

Other than the criticism on this issue overall commentators expressed the view that Jaitely had done well to emphasise that the measures announced in the Budget are only ‘the beginning of a journey towards a sustained growth of 7 to 8% or above within the next three to four years along with macroeconomic stabilisation that includes lower levels of inflation, lesser fiscal deficit and a manageable current account deficit’.

These words together with some robust but realistic budget targets and a wide range of allocations to diverse sectors helped stabilise the markets and earned the Finance Minister appreciation for his maiden effort. Among the noteworthy measures is the move towards a friendlier and more stable tax regime, encouragement of FDI in critical sectors, and the focus on infrastructure including power and roads, and the emphasis to removing obstacles to mining.

The challenge before Jaitely was to continue with the fiscal consolidation and at the same time create new space for desperately required increased public investment. Congress’s fiscal deficit target of 4.1% was retained, while confessing that it would be a challenge in the backdrop of two consecutive years of low GDP growth and humongous subsidy burden the Indian economy carries forward.

Although much was expected from the budget in rationalising and improving the targeting of subsidies, in essence only an overhaul of entire subsidy regime including food and fertiliser subsidies was promised at a future date – an expenditure management commission is to be appointed. The personal income tax rate was raised marginally in a sop to India’s emerging vociferous middle class. The deduction limit on loans in respect of self-occupied housing property has been raised, to benefit the same vested interest. A more conducive tax regime has been promised for infrastructure investment trusts and real estate investment trusts.

The Budget did not announce any significant changes in direct taxes either. Sin taxes were predictably increased. Indians will have to pay more for cigarettes, cigars and other tobacco products. What is noteworthy is the emphasis in the Budget on a friendlier tax regime; Foreign Direct Investment is encouraged in wide range of sectors including defence, insurance, and real estate and in the development of smart cities.

A flagship make work program of the Congress, MGNREGA, by which rural people were guaranteed a number of days of paid work per month, was retained, with the caveat that it will be reoriented to work that is more productive, asset creating and substantially linked to agriculture.

Public Private Partnerships (PPP) in infrastructure have been promised a leg up. A new State entity with a capital of Indian Rs. 500 crore will be set up to promote PPPs. The overall message of India’s 2014/15 Budget is one of continuity; the directional change analysts were predicting was not delivered, obviously on the basis of an acceptance by Modi’s Government that it was not warranted in the current circumstances of India’s economy. One analyst quipped: ‘Rather than walking the talk, Mr. Jaitely simple talked more talk!’

Shriram’s take on the Budget

While the Budget was a disappointment on this aspect, the Confederation of Indian Industry’s President Ajay S. Shriram stated that the Finance Minister had boosted investors’ confidence by committing to a path of fiscal consolidation. Shriram said that this will restore macroeconomic balance and, bring about a decline in interest rates and revive the economy.
Jaitley’s proposal to set up an expenditure management committee was also forward-looking, Shriram pointed out. He also hailed the announcement of the implementation of the Goods and Services Tax and the cautious approach towards retrospective taxes, taxes which the imposition on Vodafone by the previous Government caused investors much heartburn.

The CII’s President also applauded the setting up of a venture capital fund of Rs. 10,000 crore to support entrepreneurship; this will promote Micro, Small and Medium Enterprises (MSMEs) and their access to finance. But he also pointed out that the entire ecosystem for MSME needs to be improved by reducing regulatory requirements. He emphasised that developing a better bankruptcy framework would be a step in the right direction.

Shriram pointed out that the Budget has taken measures to ease long-term finance for the new projects that the Government has initiated. Further the Budget deals with the issue of public sector banks which have been plagued with rising levels of nonperforming assets; the Budget while providing for efforts to revive stressed assets, had also made provision for the recapitalisation of banks. The Budget indicates that the Government is likely to lower its shareholding in public sector banks by selling shares to the public.

The right signals given in the Budget will help to revive sentiment in capital markets and will encourage, not only investors but also households to invest their savings in financial markets. Shriram concludes that the Budget recognises the synergy between agriculture and economic growth as well as tackling inflation and also provides a strong focus on agriculture and rural development. Shriram concludes by saying that the broad vision of the Budget reflects a market-friendly approach to revive growth and investment, t is a comprehensive package that addresses concerns in diverse areas.

Sops for the vote bank

Other analysts point out that the Budget clearly threw sops at the BJP vote bank, farmers, the aspiring rural poor, Dalits, the middle classes, the youth and Modi’s core Hindutva constituency. Landless farmers were promised cheaper credit. The rural poor got promises of broadband internet connections, cheaper TVs and better roads. Dalit-focused schemes were promised more money, the middle class got tax breaks, the youths got the Skill India and Digital India programs and Hinduism’s holiest river, the Ganga, was allocated funds for a cleanup.

Uttar Pradesh, the state which put the election result clearly beyond doubt, was given generous allocations for ghat development and metro railways, and will stand to gain the most from the Ganga development program. Varanasi, the Hindu holy city, which is Modi’s constituency, at which the Siddhartha Gautama the Buddha also spent time, through which the Ganga flows, has been given funds for its Moslem weavers and a waterway project.

State elections are due in the near future in a number of states. The proverbial pork barrel has been really rolled out for them – Haryana got a Horticulture Research institution, Jharkand a research institute for Agriculture, Maharashtra an All India Institute for Medical Sciences and an Indian Institute of management, plus agri biotech clusters and Jammu and Kashmir funds for pashmina wool and sports stadia. Delhi, where the BJP is considering forming the local government after the Aam Admi party resigned, was allocated money for water and power reforms.

One message is clear: pork barrel politics is back. But did it ever go away in South Asia? Jaitely offered some relief to tax payers in his maiden Budget, which was a marathon, setting a record in longevity, with a long litany of schemes and allocations but left those expecting big reforms waiting for next year.

Cutting the deficit – the gap between government expenditure and income – and getting a grip on inflation and stimulating growth were the major challenges before him. He bravely picked up the challenge thrown down by his predecessor Chidambaram and opted to hold down the fiscal deficit at 4.1% of GDP this year.

Jaitely said that he had 45 days to prepare the Budget and this was the best he could do. The Budget speech bristled with projects and programs granted token allocations, Rs. 1,000 crore seems to have been Jaitley’s favourite number, it is mentioned at least 28 times! What is new is the nomenclature – the Congress’s bank of project names or the Nehru-Ghandi lexicon has been replaced by a new BJP nomenclature – for example, Syama Prasad Mookerjee and Deendayal Upadhyaya! This branding, re-branding, renaming of infrastructure and programs, will always happen and in South Asia, even in the future until our political class reaches a level of maturity when they realise the futility of the exercise!

Jaitely has some classic acronyms for new programs. Consider the national mission on ‘Pilgrimage Rejuvenation and Spiritual Augmentation Drive’ – PRASAD! National Heritage City Development and Augmentation Yojana – HRIDAY! Thankfully nothing is named after Narendra Modi – yet!

Prime Minister Modi, as expected, endorsed Jaitley’s Budget, tweeting ‘the Finance Minister presented a Budget that is a ray of hope for the poor and downtrodden, it converts people’s hopes and aspirations into trust’. He further observed that ‘a moribund economy, the Budget has come as a sanjeevani (life-giving) and an arunoday (sunrise) for the last man in the line’.

An effort to manage expectations

The Budget is an effort to manage expectations, take steps to revive and repair the economy target stakeholders such as the common man, the domestic consumer and the foreign investor. Once the pork barrel, the politics and the camouflage weeds are sorted out, there are indeed some potentially transformative ideas in Jaitley’s maiden Budget.

While the stock markets which had peaked before the Budget plunged while listening to Jaitely, it surged again once investors were able to decode the abstruse political jargon. Goals of sharp cuts in Government debt, reducing inflation, splurging on infrastructure and creating jobs gave investors confidence. Whether any of these announcements are credible depends on more details being made available and the capacity to implement.

Many of the grand schemes promised came; as one analyst caustically pointed out, ‘unburdened by detail’! Some proposals such as those on rethinking the Reserve Banks’ monetary strategy, taken by analysts to mean setting a strict inflation target, were welcomed. Foreign investors, who had been put off by a previous capricious and extortionate tax regime, welcomed the end to the much-disliked retrospective taxation, albeit undermined by a committee to oversee things, while reiterating the right of the Government to tax retroactively.

A New Delhi-based respected economist and hedge fund manager, Surjit Bhalla, described the Budget as ‘a very pro-growth Budget for the new look India’. The rhetoric may rally the faithful, but the proof is in the proper, efficient and corruption-free implementation. In this aspect, South Asia has so far been wanting. But Modi’s record in Gujarat of powerful, driven, allegedly-corruption free implementation is pointed out by analysts as giving hope. We watch and wait in expectation.