The Budget widows can relax: it’s over. The newly minted Finance Minister has let the budgetary cat out of his portfolio bag. Well, some are saying that he has set the cat among the pigeons, but it’s a free country. In a nation obsessed with freebies, free speech counts as first among equals. Just a note of caution though; this view is not from the eyes of a trained economist. There will be a host of those in the coming of days. This may just serve as an entrée before the main dish.
Jaitley had an unenviable task at hand. First, in a historic win (which is referred to in the Budget as well), he would have felt like the only loser, having lost his campaign for a Lok Sabha seat. Then there was uproar after the Prime Minster entrusted him with the prestigious Finance Ministry. His qualifications, capability et al, to handle this responsibility were all questioned and his appointment criticised. And before he could settle-in, this annual, arduous and often over-hyped exercise awaited him. There was further pressure of delivering on the ‘Great days ahead’ slogan that the Modi campaign had hammered into Indian minds. So let’s try to see how our debutant has fared.
Fiscal consolidation
Fiscal consolidation was high on everyone’s agenda. And the FM had made all the right noises since assuming office; hence people were all ears on what he had to say on the issue. Well, he said that achieving 4.1% in the current financial year was “a daunting task” in the backdrop of two years of low GDP growth and static industrial growth, among others, but the government “is committed to achieve this target”. He also stated that the decline in fiscal deficit in previous financial years was achieved mainly by reduction in expenditure rather than by way of realization of higher revenue. Thus, an increase in revenue along with some cost control should crush this nemesis.
Sounds like a plan. But an important question looms: How to increase revenues? Unlike people, who need to earn first so they spend later (in most cases anyway), governments can afford and are actually expected to plan for spending first and think about earning later. However, they cannot do so indefinitely. And the strategy of containing fiscal deficit by just reducing cost without an increase in revenue also comes with an expiry date. This is where the budget disappoints; there is no clear roadmap for reduction of subsidies or how the projected tax revenue will be achieved. And due to this, staying put on the fiscal deficit target of 4.1% seems far-fetched.
Agreed, that the government has announced that in order to broaden the tax base in Service Tax, sale of space or time for advertisements in broadcast media has been extended to cover such sales on other segments like online and mobile advertising. Services provided by radio-taxis have also been brought under service tax. The tax proposals on the indirect taxes side are estimated to yield Rs 7,525 crores during FY15. But this is small fry if they intent to achieve their target of 4.1% which currently seems like a pipe dream; maybe they have an ace up their sleeve. Going forward, the NDA regime intends to bring down fiscal deficit of to 3.6% in FY16 and 3% in FY17 and provide teeth to the Fiscal Responsibility and Budget Management Act.
Development agenda
If there is one clear signal that the new government has sent via the budget, it is regarding its seriousness on development of the country. Agriculture, infrastructure, education, among others feature prominently in the document with a host of schemes announced for these sectors. Among major announcements, the government increased the FDI limit in the defence sector to 49% from 26%, with full Indian management and control through the FIPB route. It also raised the FDI to the same limit in the insurance sector.
Capital market reforms were also announced. Uniform KYC norms and inter-usability of the KYC records across the entire financial sector, introduction of one single operating demat account, uniform tax treatment for pension fund and mutual fund linked retirement plans, reintroduction of Kissan Vikas Patra (KVP), enhancement of annual ceiling under the PPF scheme to Rs 1.5 lakh from Rs 1 lakh currently and modernisation of the monetary policy system were a few important announcements. Long pending REITs were given the green signal and were also given tax pass-through status. The government will also immediately bring pending insurance laws (amendment) Bill for consideration of the Parliament.
Another interesting announcement was setting up a Fund of Funds with a corpus of Rs 10,000 crore for providing equity through venture capital funds, quasi equity, soft loans and other risk capital specially to encourage new startups by youth to be set up. In a country starved of entrepreneurs and considered poor in doing business in (we rank 134 among 189 countries ranked by the World Bank in its ‘Doing Business Report 2014’) it is a positive step. Good that somebody got up and took notice. And hopefully the dark ages of development are behind us.
Tax proposals
There was some good news at the tax front. Personal Income-tax exemption limit was raised by Rs 50,000, i.e. from Rs 2 lakh to Rs 2.5 lakh in the case of individual taxpayers, below the age of 60 years. For senior citizens below 80, exemption limit was raised from Rs 2.5 lakh to Rs 3 lakh. Status quo was maintained on the rate of education cess and the rate of surcharge for corporates, individuals and HUF. Investment limit under section 80C of the Income-tax Act was raised from Rs 1 lakh to Rs 1.5 lakh and deduction limit on interest on loan in respect of self occupied house property was raised from Rs 1.5 lakh to Rs 2 lakh.
Stings like a bee
Every rose has its thorns. Somebody has to bite the bullet and swallow the bitter pill. And the mutual fund industry was one of those which had to take this one on its chin. For debt mutual funds, the long term capital gains tax rate was doubled from 10% to 20% the period of holding for qualifying them as short-term capital asset was trebled from 12 to 36 months. The arbitrage available while calculating the dividend distribution tax was been removed. Ouch! But if we look at it, this is just closing arbitrage windows; debt mutual funds had more than fair share of leveraging this opportunity, but as with all good things, this had to come to an end someday.
It seems that the government is nudging the investor to actually ‘invest’ rather than look for loopholes to hide their money in. Long-term ahoy seems the directive. Though this hasn’t gone down well with the industry, it may work out well in the long-term, if you think about it. Time (and investors) will tell.
Another stinger was the announcement of erection of the ‘Statue of Unity’, a statue of India's first home minister Sardar Vallabhbhai Patel, for a princely sum of Rs 200 crore. A sum of Rs 150 crore on a scheme to increase the safety of women in large cities and Rs 200 crore on a statue? I wonder if the Iron Man of India would have nodded in approval or hung his head in embarrassment. I think this additional money would have served well for women safety, given that it is being spent on the statue of a man who defended this nation’s security with all its might.
In toto
Costlier: Cigarettes, pan masala, gutka and chewing tobacco (all smart moves), aerated drinks with sugar (there goes my cola), radio taxi and imported electronic products.
Cheaper: LED/LCD TVs below 19 inches, footwear priced between Rs 500 to Rs 1,000 per pair, soaps, e-book readers, desktop, laptops and tablets, RO based water purifiers, branded petrol and Life micro insurance policies among others.
A look at the indicative list above makes me think that a large chunk of the aam aadmi (common man) will at least be pleased if not outright happy.
I think the Budget is a step in the right direction. And it is important for all of us to understand that assessment of these policies against what they intend to achieve is more important that against what we intended them to be. Mr Jaitely has presented a cautiously optimistic budget. One doesn’t try to get to third base on the first date (or at least shouldn’t try to) or throw a haymaker in the first round of a 15-round bout. Especially when your opponent has the strength of Lennox Lewis, quickness of Muhammed Ali and quirkiness of Mike Tyson.
It seems that the present establishment realises that this is a war and not a battle against the problems facing the nation. I hope this is just a warm-up to other big bang announcements. At the same time, all of us in different capacities have to be ready to take one for the team for the greater good. And for the Budget widows, get ready, as this exercise is coming up again in a little over 7 months.