To the hinterland

| Updated on January 20, 2018 Published on February 29, 2016

The emphasis on agriculture and the rural poor reveals a marked shift in the Modi government’s political and economic strategy

A standout feature of the Budget for 2016-17 is that it is overtly ‘political’ even as it escapes being populist. Its unmistakable rural and social sector emphasis suggests that it has been clearly influenced by the prevailing political climate. This is not surprising. Two straight years of deficient monsoon and a damaged rabi crop in 2015 has engendered a palpable rural discontent. The BJP is aware that it lost two Assembly elections last year, and there are five coming up — in Puducherry, Assam, West Bengal, Tamil Nadu and Kerala. It must have also taken note of the demand slack in the rural economy and the rash of protests from traditionally landowning castes such as the Patidars, Kapus and Jats. Together, these factors explain the sharp shift in emphasis from smart cities to the hinterland.

Not to be overlooked is the dismal global context. Whereas the last Budget speech, in an excess of optimism and political confidence, said “the world is predicting that it is India’s chance to fly”, this one is measured in describing India as a “bright spot’’ in a slowing economy. With the domestic corporate sector still deeply mired in debt and export demand unlikely to look up soon, the Centre has no option but to pick up the tab to keep growth going at the current seven-plus levels, in keeping with the Economic Survey’s advice. Finance Minister Arun Jaitley has turned on the investment spigots (picking agriculture, housing and roads for their multiplier potential) without relaxing the fiscal deficit target, as suggested by his Chief Economic Advisor. The finance minister can justifiably claim credit for having “increased Plan expenditure at the RE stage in 2015-16 in contrast to the usual practice of reducing it”.

On the face of it, a fiscal deficit target of 3.5 per cent of the GDP for 2016-17 seems hard to achieve, unless the Centre slashes some major heads of expenditure. It is based on a nominal growth assumption of 11 per cent and a similar growth in tax receipts. While a tax buoyancy of one (the rate of increase in tax revenues as a proportion of nominal GDP growth) is in line with the average rate for the period 2012-14, the question is whether a nominal growth of 11 per cent is achievable given that we clocked only 8 per cent in 2015-16. The Centre has also estimated its receipts by pegging the disinvestment target at ₹56,500 crore. While this may be ₹13,000 crore less than last year’s Budget target, it is way ahead of the ₹25,312 crore raised this year. A financial market that continues to be depressed may thwart such ambitions. It remains to be seen whether the Centre will stagger the payout of the Seventh Pay Commission award, estimated at over ₹1 lakh crore, to bridge a possible revenue gap.

Apart from public investment, another remarkable feature of the Budget is its emphasis on reforming the direct tax system along the lines suggested by the Easwar panel. This entails both rationalising direct tax proposals by removing exemptions and anomalies, and making the tax collection machinery more reasonable and business-friendly. Efforts to extend the scope of ‘presumptive taxation’ will reduce hassles for small businesses. The Budget’s intent to improve the dispute resolution mechanism in tax matters, while providing a window for out-of-court settlements, is laudable. It has, however, not departed from the unfortunate trend of mopping up revenues essentially through indirect rather than direct taxes. Its acceptance of the recommendations of the Easwar panel may provide the roadmap for correcting this imbalance by drawing in more assessees and revenue. Direct tax revenues must increase sharply for the state to be able to discharge its obligations.

The Budget is not without its problem areas. There has been considerable heartburn about its setting aside ₹25,000 crore for the recapitalisation of banks — a mere trickle considering what they need to satisfy Basel III norms. At the same time, it is hard to realistically expect much more from a Budget that needs to balance competing priorities and expectations. The small hike in the service tax is a part of the planned move towards the GST, but the increase in exemptions run counter to the spirit of such a unified tax regime. No effort has been made to standardise filing excise and service tax returns; the first is filed monthly and the second half-yearly. To offset the States’ 42 per cent share in tax revenues and keep more revenues for itself, the Budget has resorted to introducing new cesses and surcharges, such as the Krushi Kalyan Cess of 0.5 per cent on all services, an ‘infrastructure cess’ on motor vehicles, even as it has scrapped many old cesses. It has gamely tried to address demand-side concerns on the one hand while easing up supply and procedural constraints on the other. Never mind the loose ends.

Published on February 29, 2016
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