Eyes on the horizon

The Modi government’s first full Budget has its eyes firmly fixed on achieving medium-term growth. It suggests that the government wants to do all it takes to move to a higher growth trajectory — despite a sanguine forecast of 8.1-8.5 per cent for the next fiscal. This includes relaxing the fiscal deficit target to 3.9 per cent of the GDP for 2015-16, against the earlier roadmap of 3.6 per cent. The target of 3 per cent for 2016-17 has been pushed back by a year. What is remarkable is not that the target has been set aside for a couple of years. The UPA overshot it on several occasions, either to pull the economy out of a crisis, as in 2008-09, or to boost welfare schemes — only to brutally slash capital spending in other years, as in 2013-14. But there is nothing knee-jerk about this Budget. For the first time, the need for an enhanced deficit has been put on the table with a sense of confidence — it is meant to fund infrastructure creation and, by implication, will be inevitably corrected by the growth that such assets create. With a comfortable current account deficit, benign inflation, low oil prices, stable rupee, and no foreseeable political or global shock to make foreign investors rush for the exit door and push up interest rates, the Centre has chosen the right moment to hit the ‘invest’ button. Its confidence has rubbed off on investors as well, with the markets, rather uncharacteristically, taking the higher than projected deficit for 2015-16 in their stride. Running a higher fiscal deficit also makes sense in view of the increase in devolution of funds to the states; the Centre needs a breather to adjust. So, this Budget, unlike many earlier budgets, is biased towards investment rather than consumption as the engine of growth.

To fund this investment, the Budget plans to lift both savings and efficiency in financial intermediation. The middle class has been allowed generous deductions towards healthcare and pensions, meeting both macroeconomic and social objectives. Moves to promote gold bonds and their variants are also welcome. But apart from pursuing growth, the investment push has been prompted by another circumstance. As the Finance Minister said, with the PPP model in disarray, there is a need to revisit the sharing of risk in infrastructure projects. Such a pro-active role should also be seen in the context of uncertainty over the land acquisition ordinance, which could lead to private players holding back funds over the consent clause.

The Budget’s revenue projections look more credible than what was put out in July. Then, the government estimated a tax revenue increase of 18 per cent for the current fiscal, with the economy growing at a nominal rate of about 12 per cent. Collections have fallen short by over ₹10,000 crore and Jaitley is hoping for a 15.8 per cent rise in tax collections in 2015-16 (at ₹1.4 lakh crore) over the revised estimates, assuming a nominal growth rate of 13 per cent, while also banking on the slight increases in service tax and excise duty rates. A disinvestment target of ₹69,500 crore, however, looks like a tall order, despite the buoyancy in the market. Whether the Centre will squeeze social spending to stick to the 3.9 per cent deficit target or allow the deficit to go further will depend on the monsoon and the stability of macroeconomic indices. The move to abolish wealth tax and introduce a 2 per cent surcharge on the super-rich instead is sensible. Wealth tax is a vestige of the inspector raj, its collections not being worth the cost and harassment.

Apart from infra spend generating demand for industry, there is a lot for corporates to cheer about. A cut in corporate taxes from 30 per cent to 25 per cent, accompanied by the likelihood of lower interest rates, should spur industry to invest, particularly if red tape is cut to obtain clearances. An improved mechanism to resolve contractual disputes would address one of the biggest hurdles to doing business in India. From a political economy perspective, it appears that the tax-cum-regulatory package for industry is also meant to offset the uncertainty surrounding big bang land and labour reforms, with crucial elections around the corner.

However, in this seemingly comprehensive package of supply and demand driven measures, there is a bewildering omission: agriculture. Apart from the routine hike in credit targets, the Budget has little to offer. That the fertiliser subsidy has been hiked to nearly ₹73,000 crore at a time of subdued oil prices shows a surprising disinterest in addressing the problem of nutrient imbalance. The imbalance, owing to a disproportionately high usage of urea, has impacted soil quality. This once again points to the political constraints to reform. In sum, this Budget takes a five-year view, but it is also like a long-distance runner subtly asking for time.

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