READY, GO, STEADY... The Safe Bet Performing After the a Moving Big Gamble Balancing Act
Till now, the daily wage labourer who was forced to forego his earnings, or the hassled homemaker who stood in the ATM queue, drew comfort from the belief that the rich were suffering. Now, the junior staff in workplaces can rejoice at the thought that their bosses in cold cubicles will have to cough up more tax.
If demonetisation had brought to the fore the contrast between the haves and have-nots, the Budget has only reaffirmed the differences between the haves and the better-offs. The crusade to tax the rich began a year ago when those earning more than .₹ 1 crore were asked to pay more.
The government has now hit upon a more conservative definition of ‘the rich’. While the prime minister wages a war against ill-gotten wealth by scrapping notes, the finance minister has narrowed the battle to extract extra tax from all those who earn more than .₹ 50 lakh a year.
Arun Jaitley claims he would make more people pay tax because so many of them escape the taxman today. What, however, he proposed was to make the people who pay the most in taxes fork out more.
There is no overtly populist scheme in the Budget. Yet, it is political. After the cash chaos of demonetisation, lowering corporate tax would have sent out a wrong signal before crucial state elections. Understandably, Jaitley avoided it, though he had promised a rationalisation of corporate tax in 2016. However, his decision to relax the rules on minimum alternate tax would benefit power and road construction companies.
It’s a Budget that tries to heal the scars of demonetisation, battle the stigma of jobless growth and widen Narendra Modi’s political support base — though not exactly the tax base of the economy. The FM has warned that those who deposited unexplained cash would not have the last laugh. But his expectation from the second income declaration scheme is modest while one has to wait to figure out whether the ban on cash deals above .₹ 3 lakh would cast the tax net wider.
In the first round of demonetisation, the country’s scheming money launders have had an upper hand when they funnelled their hidden cash into bank accounts. It’s for Jaitley and his team to win the last round by ensuring that a large slice of this money flows into the government ex- chequer and not back into tijoris of cash hoarders.
The Budget once again tries to drive home the point that the men in Delhi do not represent a ‘suit-boot ki sarkar’, but whose hearts go out to the aam admi. It attempts to please the constituencies that matter without toppling the applecart: lowering tax by 5% on small and medium businesses, which bore the brunt of note ban; raising the disposable income of millions of low- and middle-income household by .₹ Rs 1,000 a month.
By keeping the tax on stock market gains untouched, the minister has dispelled the worst fears of traders and investors. By reining in the fiscal deficit number, he hopes to send a reassuring signal to rating agencies and foreign portfolio investors in equities as well as bonds. And finally, many families in smaller towns may dream of owning a home while small builders can enjoy tax relief and hire unskilled labourers thrown out of jobs.
When Corporate India is hesitant to build new factories, affordable housing is among the few untapped markets that can draw investors.
An equally overwhelming signal, on the other hand, is to impose new tax on the ultrarich. For instance, promoters of business houses who hold their shares through private, non-charitable trusts will now pay 10% tax on the dividend they receive from companies. So far, they were spared.
In last year’s Budget, the FM had slapped the same tax on dividend of over .₹ 10 lakh earned by individuals, Hindu undivided families and firms. In 2017, the minister took a step forward to cover the trusts.
The voters of Uttar Pradesh and Punjab may have already made up their minds. But an unadventurous finance minister has done what he could to win over many by promising those who count and upsetting those who don’t. Indeed, if demonetisation was Modi’s big political gamble, the Budget comes across as a safer bet. The larger theme for Budget 2017 has been that of calculated restraint and measured balance. In line with its focus on transforming, energising and cleaning India, it saw measures being announced to benefit farmers and the weaker sections of society while also allowing measures to revive investments and infrastructure.
Finance minister Arun Jaitley articulated that the pace of remonetisation has picked up and that the effects of demonetisation will not spill over to the next year, thereby allaying any anxieties over a significant impact on the GDP. While the extent of this impact will unravel in the months to come, it would be safe to assume that GDP growth is likely to be subdued in FY18. However, this has led to surplus liquidity in banks that will lead to lowering of interest rates.
Pursuing its commitment to cleaning up black money and nudging the economy towards ‘less cash’ and digital platforms, the banning of cash transactions above .₹ 3 lakh will lead to greater transparency and help curb tax evasion. A transition towards a digital economy will aid transparency across programmes and policies, and help uphold the government’s hard won credibility.
Jaitleyhaslargely stuck to his stated fiscal consolidation road map by pegging fiscal deficit at 3.2% of GDP, a marginal deviation from the 3% target set earlier. This emphasis on fiscal prudence along with the fact that he refrained from taking recourse to ‘escape clauses’ indicates a continued commitment to gradual fiscal consolidation. This slight deviation in the target fiscal deficit is necessary to fund development expenditure.
A key impediment in economic growth has been job creation. The Skill Acquisition and Knowledge Awareness for Livelihood Promotion Programme (Sankalp), a .₹ 4,000-crore programme aims to provide marketrelevant training which, if implemented efficiently, should aid the upskilling of youth and suppprt pro- grammes like ‘Make in India’.
India’s journey towards becoming a global commercial hub was previously hampered by a largely ineffective arbitration regime that was afflicted with various problems including those of high costs and delays. Establishing the proposed resolution framework under the Arbitration and Conciliation Act to resolve disputes in public contracts in the infrastructure sector will help change the way foreign investors view India.
Upgrading the infrastructure segment has been a strategic objective in achieving sustainable economic growth. Breaking from the colonial legacy of having a separate Railway Budget, the FM, for the first time in nearly a century, presented the Railway Budget along with the Union Budget. Recognising the scale of challenges facing the Indian Railways, the government’s move towards offering end-to-end transportation solutions for commodities to arrest falling freight revenues will help it become more competitive as compared to other alternate modes of transport.
On the banking side, the government has signalled its intention to get tough on economic offenders who have burdened India’s banking system with bad loans. However, there has been no concrete guidance with regards to managing the quantum of non-performing assets (NPA) that has stressed the sector. The proposed new law that will allow agencies to confiscate domestic assets of economic offenders who flee the country will provide more teeth to banks and agencies in cases of default. How this aspect develops in the near future will be keenly monitored. The FM providing clarity regarding taxation of masala bonds is welcome.
A major announcement has been aimed at promoting transparency and accountability in political funding. The proposal towards enabling issuance of electoral bonds is singularly unique in this aspect and will work towards creating a formalised structure towards political funding.
This Budget has been a balancing act in maintaining fiscal consolidation, spurring economic growth and creating a transparent ecosystem in every sphere. Facilitating increased ease of business has been an ongoing sentiment across various measures and policies. This Budget has been a definitive step in the right direction.
The writer is CEO, HSBC India