A good Budget, Mr Jaitley!

Against a challenging background, Finance Minister Arun Jaitley has, very sensibly, stuck to the basics, notes Shankar Acharya

At the best of times, making the Union Budget is a hugely complex and demanding financial, economic, administrative and political exercise.

These are far from the best of times: the world economy is teetering on the edge of recession; world trade growth is barely positive; global financial and commodity markets have been volatile and edgy; Indian agriculture and rural incomes have been hit by two years (four seasons) of poor rainfall; and industrial recovery from the slump of 2012-14 remains sluggish, notwithstanding the new series national income data.

As if these were not enough, Finance Minister Arun Jaitley and his team had to contend with the once-a-decade largesse recommended by the latest Pay Commission (the seventh) and the consequences of the government’s positive decision on “One rank, one pension” for the armed forces.

Against this challenging background Mr Jaitley has done a pretty good job.

The Budget may not set the Jamuna on fire with a slew of “big ticket reforms” but that’s nigh impossible to do without the imperatives of a full-blown economic crisis. Instead, he has, very sensibly, stuck to the basics.

Above all, and despite contrary advice from many (including within his own ministry), he has targeted a fiscal deficit reduction in 2016-17 down to 3.5 per cent of gross domestic product after having achieved the 3.9 per cent target for 2015-16.

This demonstration of commitment to macroeconomic prudence and stability has already softened long-term interest rates, bought valuable insurance in an uncertain world and made room for policy interest rate reductions by the Reserve Bank.

Second, the big numbers underlying the fiscal consolidation look mostly credible.

The tax revenue projections seem reasonable, based on a (reasonable) nominal GDP growth expectation of 11 per cent.

Like every past Budget, the disinvestment and telecom spectrum sale projections are on the high side but the shortfall may not be massive; it all depends on political will and competency of execution.

Above all, the Budget seems to have made ample provision for the final Pay Commission outcomes (being appraised by a committee) and the implications of OROP. It incorporates a Rs 22,000 crore (Rs 220 billion) increase (over 2015-16 RE) for defence pensions, Rs 5,500 crore (Rs 55 billion) for civilian pensions, and nearly Rs 79,000 crore for pay and allowance for all personnel, adding up to a total increase of Rs 1.06 lakh crore (Rs 1.06 trillion).

Such generous and transparent interim provision for these big items stands in sharp and welcome contrast to the United Progressive Alliance’s infamous Chidambaram Budget of 2008 which under-provided massively for the Sixth Pay Commission effects and many other items, leading to the overshooting of the fiscal deficit target for the year by an astonishing six per cent of GDP (including off-budget items like petroleum subsidy bonds)!

As for sectoral thrusts, the emphasis on agriculture and rural development in expenditure allocations (somewhat exaggerated by creative reclassifications) and programme priorities is welcome in the context of two bad monsoons.

If the Bihar election results helped, so be it.

Mr Jaitley could well refer partisan snipers to Keynes’ riposte: “When the facts change, I change my mind. What do you do sir?” It’s a pity there is no major commitment for reforming the legacy of huge, food and fertiliser subsidies, even if there is some consolation in the promise to experiment with direct cash benefit transfer of the latter in a few pilot districts.

"More positively, the large allocations for roads (including rural) and railways (in the rail budget), coming on the back of similar thrusts in the preceding Budget, should help build decent public investment momentum in these key infrastructure sectors.

On the tax front, most of the Budget proposals are sensible, including:

Keeping the income tax exemption limit unchanged, while giving “relief” to lowest tax bracket filers through higher rebate provisions and house rent allowance deductions;
A modestly higher surcharge for rich individuals ( earning more than one crore);
Extending the scope of the presumptive taxation scheme for small businesses;
A somewhat limited effort at redeeming the previous year’s pledge to execute a phased reduction of the basic company tax rate down to 25 per cent: all that has been done is to offer (with qualifications) the 25 per cent rate to new manufacturing companies and cut the rate for small turnover (less than 5 crore) companies to 29 per cent;
A half percent increase in the service tax rate in the guise of a cess;
The usual increase in the “sin” taxes on tobacco products;
A doubling of the “clean environment cess” on coal and lignite; and
A new “infrastructure cess” on cars, calibrated by size and fuel. Nothing wrong with such special excises on luxury consumer products.

The big bad exception is the ten pages (53-62 of Budget speech) of tinkering with customs (mostly) and excise duties to give targeted additional protection to various industries and products under the flag of “making more value addition in India”.

History has amply demonstrated that a plethora of tailor-made protective duties is not the way to promoting a competitive manufacturing sector. It does more harm than good.

Aside from main tax and expenditure provisions, other major welcome features of the Budget include:

A raft of measures (based on the recommendations of the Easwar and Shome Committees) to reduce the backlog of litigation cases relating to income tax, improve dispute resolution, rationalise penalties and otherwise make the tax administration more taxpayer-friendly;
The commitment to table a bill to give statutory backing to Aadhar as the key platform for targeted distribution of government subsidies and benefits. This has already been done and that too as a money bill, requiring passage only in the Lok Sabha;
Large devolutions to panchayats and municipalities;
Strengthening of public sector bank governance and debt recovery provisions, but without biting the bullet of closing (or selling) really weak banks; and
A new Public Utility Resolution bill and fresh guidelines for renegotiation of public-private-partnership concession agreements.

All this will not trigger high growth of investment, industry, exports, national output and employment overnight. But the Budget is a good step in the right direction.

Shankar Acharya is honorary professor at ICRIER and former Chief Economic Advisor to the Government of India These views are his own