PLAYING TO THE GALLERY

Budget 2017 commendably stays with fiscal prudence, revives a much-needed conversation on reform of electoral finance. But it doesn’t offer roadmap to reviving investment, growth

WITH CRUCIAL STATE assembly elections just days away and an already investment-starved economy buffeted by headwinds both domestic (from demonetisation) and global (‘Buy American, Hire American’ policy of the new Donald Trump administration, hardening crude prices, rising interest rates), there was every temptation for the Narendra Modi government to present a budget that played to the gallery. That this did not happen and there weren’t too many surprises, positive or negative, is the best takeaway from the Union Budget for 2017-18.

Finance Minister Arun Jaitley’s fourth budget has, thankfully, not succumbed to pressure to pump-prime the economy with a view to boosting growth and reviving investment. Instead, he has, more or less, stuck to his government’s fiscal consolidation roadmap of reducing the fiscal deficit to 3 per cent by 2017-18. While the latter target has been deferred for the following year, the budgeted figure of 3.2 per cent in the coming fiscal is good enough considering the circumstances.

Fiscal prudence pays, and it does so even more in an environment of volatile global capital flows: Since November, foreign portfolio investors have pulled out over $10 billion from India, on the back of rising interest rates in the US and the prospect of their rising further because of the Federal Reserve’s likely response to an expansionist fiscal stance of the Trump government. The Modi government’s tenure so far has been notable for a commitment to macroeconomic stability — reining in inflation as well as the twin deficits — which was the bane of the previous regime. There is little sense in abandoning such a stance for short-term gains, both economic and political.

WHILE sticking to fiscal discipline — there was lot of chatter, including in the latest Economic Survey, about impractical ideas like a universal basic income scheme or using the Reserve Bank of India’s “excess capital” to recapitalise state-owned banks — the budget has, nevertheless, not gone overboard in the zeal to contain deficits. Thus, the service tax rate has been left unchanged at 15 per cent, with Jaitley choosing to wait till a consensus emerges with states on the final levy under the goods and services tax regime. The personal income tax rate has been halved for those with annual incomes between Rs 2.5 lakh and Rs 5 lakh, with taxpayers in the subsequent brackets also getting a uniform benefit of Rs 12,500. This is most welcome when private consumption has taken a hit on account of demonetisation. Some kind of a balm — more of a signal to ordinary salaried taxpayers that compliance and honesty do not go wholly unrewarded — was also necessary in the present circumstances. Significantly, an additional surcharge of 10 per cent has been imposed on people with an annual taxable income between Rs 50 lakh and Rs 1 crore, over and above the 15 per cent already levied on those having an income of more than Rs 1 crore. Likewise, corporate tax rates have been reduced from 30 per cent to 25 per cent — but only for companies with annual turnovers below Rs 50 crore. All this has symbolic value — intended to convey the message that this is not a government of the suit-boot wallahs.

Another interesting move is the enabling of the issuance of electoral bonds by political parties. Donors can purchase such bonds from authorised banks and these can be redeemed only in the designated accounts of registered political parties. While helping to retain the anonymity of the donors, it is a welcome initiative for cleansing of electoral funding — whether and how it will work on the ground remains to be seen.

BUT THE BIG question is: Will the latest budget bring back growth and revive the animal spirits of investors? The honest answer is: It is unlikely to do so. The budget does give a big push for rural development through increased outlays for the Pradhan Mantri Gram Sadak Yojana and the MGNREGA, while aiming at creation of productive assets under the latter. There are also sops for affordable housing, including through the grant of infrastructure status and allowing flexibility in unit area requirements to qualify for benefits. The merger of the Railway budget with the Union budget to a certain extent may mask some of the structural weaknesses of a department-led commercial organisation which is facing severe challenges, especially competition from the road and civil aviation sectors. There are other welcome measures such as the abolishing of the FIPB, time-bound listing of PSUS and the creation of an integrated public sector oil major. But it is not yet clear whether these will be enough for the economy to regain the growth momentum of the 2003-13 period and, more importantly, create adequate jobs.

This was, in any case, a tall order for a single budget. And of course, the crucial test still lies ahead: Whether or not the fiscal prudence that is such a commendable feature of this budget will be maintained in the next one, which will precede the general elections. THIS BUDGET HAS to be measured against a context: The Indian economy has been tied in knots. The macro-economic indicators indicate a placid surface. But underneath, the rumblings of discontent are palpable: Growth has slowed as a result of demonetisation, the principle indicator of a vibrant economy, private investment, is down, gross capital formation has dipped, the two building blocks of a competitive economy, health and education, are still in a shambles, and most importantly, India seems nowhere close to figuring out a jobs strategy. The government is also constrained by possible global headwinds.

The Narendra Modi government is past the halfway mark. Its economic performance has been competent. But the impact of its economic measures has not been near the point where it can go to the electorate with a triumphal economic narrative. Its mobilisation strategy, therefore, still depends on elements of ultra-nationalism and communalism. The big dividend from demonetisation did not come. So there was pressure on the government to find some way of giving relief, which it has done largely in the form of tax cuts.

In this context, the budget inspires confidence in one key respect: It has not succumbed to political temptations. It is an exercise in forward-looking but cautious prudence. The narrative was framed around the themes of transformation, energisation and cleansing. But the cleansing part was decidedly the most prominent. The narrative of cleansing the body politic continues. The proposals on political funding — allowing electoral bonds, presumably to protect the anonymity of donors, and lowering the limits on cash donations — will, at least, deepen the discussion on political financing. It could be argued that lowering the threshold of cash donations from Rs 20,000 to Rs 2,000 will only require more ingenuity on the part of accountants but not lead to much cleansing. But it signals that political financing is now a subject that political parties will not find it easy to evade. There is a commitment now to use better data to increase tax compliance. There is a promise of more punitive measures against absconders.

But whether this cleansing will turn out to be a mere ritual cleansing or a genuine cleansing in India’s tax regime is an open question. Since demonetisation has not