Borrowing from cricket terminology, media is agog with description of Modi – government first full-fledged budget 2015-16 as a ‘super-budget’. There could not be a more apt description.
Finance minister Jaitely has delivered wholeheartedly on the hopes and aspiration of 1.25 billion people of India who only 9 months ago had given Team Modi a resounding mandate to govern and extricate them from the deep economic morass they were plunged in to, courtesy a decade of mis-management and policy paralysis.
People gave command to Team Modi on five major planks viz., (i) inclusive development; (ii) building infrastructure; (iii) social safety net (iv) poverty alleviation and (v) countenancing the menace of corruption. On all these counts, the team has delivered without compromising on fiscal consolidation.
INCLUSIVE DEVELOPMENT
Implementing this agenda required huge resources and Jaitely was hamstrung by shortfall in tax collections. The recommendations of 14th Finance Commission (which Modi promptly accepted) to devolve 42 percent of its tax collection to states (up from extant 32 percent) made his task even more daunting. Yet, using a judicious mix of innovative ideas and financial engineering backed by an unflinching determination to deliver on the commitments, he has lived up to the challenge.
For propelling growth [in 2015-16, GDP is projected to grow @ 8 – 8.5 percent (against an estimated 7.4 percent during current year) and gunning for double digit growth there after], Jaitely has focused primarily on garnering resources from individuals and private sector including inflow of foreign funds.
Thus, individuals have been incentivised to increase financial savings. For instance, if a person puts Rs 50,000 in NPS (new pension scheme), he will get full deduction for this while computing income tax. The finance minister refrained from increasing exemption limit as he wanted money to be available for investment and growth; instead of merely boosting consumption.
Predictable and stable policy/tax environment
For mobilizing resources from the private sector including foreign funds, he has banked on creating a predictable and stable policy environment. Thus, he has announced a road-map for reducing corporate tax from existing 30 percent to 25 percent over a period of time. Concurrently, all exemptions will go.
This is a declaration of government’s intent to put corporate sector on advance notice (exact road-map will be notified later). This will result in dual benefit of making India an attractive investment destination vis-a-vis countries of East Asia on one hand, and eliminate scope for disputes/litigation (most of these arise due to difference in interpretation of exemptions under extant regime) on the other.
Close on the heels of substantially undoing the damage done by retrospective amendment of tax laws by erstwhile UPA government in 2012 (refraining from any fresh retroactive levies and not contesting decisions of high courts in pending cases such as Vodafone), the finance minister has removed yet another irritant viz., GAAR (general anti avoidance rules) by proclaiming that its introduction is being deferred by two years.
Jaitely has also announced a road-map for implementation of Goods and Services Tax (GST) beginning next year – having already introduced a constitutional amendment bill in the parliament. This transformative shift in the structure of indirect taxation will spur growth in GDP by up to 2 percent (Modi-government worked assiduously to evolve consensus with states on this).
He has also reiterated government’s commitment to align India’s direct tax structure with international standards. For now, action on Direct Tax Code (DTC) has been kept in abeyance even as he clarified – in an interview given to DD – that many of the points contained therein have been incorporated in successive finance bills including for 2015-16.
Monetization of idle gold
Jaitely has also announced innovative methods for monetization of gold lying idle with households (estimated to be around 20,000 tons). While, households will earn return on the gold stock lying dormant, funds raised against this can be used for giving boost to development. The specifics of various alternatives will be notified.
Boost to SMEs
The small and medium enterprises (SMEs) are the life line of Indian economy in view of their huge share in GDP, employment and exports. They are hamstrung due to lack of access to institutional finance. To remove this constraint, FM has announced a fund with contribution of Rs 20,000 crores as its initial corpus. This can be leveraged to support a credit line of over Rs 120,000 crores to SMEs through a net work of micro-finance institutions.
Unshackling projects
A major impediment to growth is delay in approval of projects which gets compounded by requirement to seek clearance from multiplicity of authorities. To deal with this endemic problem, FM has mooted a system of in-principle approvals based on ‘regulatory guidelines’. Project proponents can proceed with execution on compliance with these guidelines and need not have to wait for actual approvals to come through. This will unshackle the projects leading to timely implementation and fillip to development.
Bankruptcy Code
The existing laws like SICA (Sick Industrial Companies Act) are a major stumbling bloc in the way of closing an undertaking which is terminally sick. These units are neither nursed back to health nor they are allowed to die and remain in this pathetic state for prolonged periods. To deal with this endemic problem, facilitate seamless closure of terminally sick units and fix accountability on promoters, Jaitely has proposed a ‘Bankruptcy Code’ on the lines existing in developed countries like USA. This will go a long way in preventing contagion effect from spreading, making space for efficient players to come in thereby unleashing forces of growth.
Banking Bureau
The public sector banks (PSBs) are afflicted by un-sustainable high NPAs (non-performing assets) caused by too much of government control and lack of autonomy in management decisions. Taking a serious note of this, finance minister has mooted setting up of ‘Banking Bureau’ which will guide individual PSBs on all key policy and functional areas including re-capitalization. This is a precursor to setting up of a ‘holding company’ where government’s equity will be vested. This is a revolutionary reform that will make banks truly autonomous, stem the problem of rising NPAs and turn them in to viable entities capable of meeting the needs of rapidly growing economy.
BOOST TO INFRASTRUCTURE
Jaitely has unveiled a multi-pronged strategy to give a boost to infrastructure which Modi – government considers as the most crucial component of its agenda for rapid and sustained economic growth. First, he has provided for an unprecedented allocation of Rs 70,000 crores during 2015-16. To fill the void in power sector, the budget proposes setting up 5 mega-power projects of 4000 mw each.
Second, he has mooted setting up of an infrastructure fund with an initial contribution of Rs 20,000 crores from central government. This corpus can be leveraged to raise more capital which in turn, can be lent to financial institutions in the infrastructure sector viz., India Infrastructure Finance Company (IIFCL), National Housing Bank (NHB) etc for onward lending to power, road, highways, port etc.
Third, he has proposed tax free bonds for projects in rail road and irrigation. This is to support massive investment of over Rs 100,000 crores proposed by Suresh Prabhu in the rail budget for which the borrowing component is about Rs 35,000 crores. Likewise, investment in irrigation is a top priority for the government as at present only 39 percent of cultivated area is under irrigation.
Fourth, the public-private-partnership (PPP) model for infrastructure development which during the last couple of years had shown signs of fatigue will be revitalized with government bearing majority of the risk. Sufficient flexibility will be built in to the contracts to allow for entry of new promoters in the event of original project proponent facing issues with resources.
SOCIAL SAFETY NET
For the first time ever, any government has seriously thought about providing a ‘social safety’ net especially keeping in mind majority of the poor, vulnerable sections of the society who have nothing to fall back on in the event of accident or when they are out of work. Thus, by contributing just Rs 1 per month (to be diverted from Jan Dhan account), a person gets an accident insurance cover of Rs 200,000/-. Under Atal Pension Yojna, the government will contribute 50% of premium limited to Rs 1000 a year.
POVERTY ALLEVIATION
While giving a fillip to development that by itself will generate jobs and higher income, the government has kept in tact the existing direct interventions to alleviate poverty. For instance, the budget continues the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) – a flagship scheme of UPA dispensation with an additional allocation of Rs 5000 crores over current year. However, in implementation, focus will be on better targeting and minimizing leakages.
This philosophy will guide disbursement of funds under all welfare schemes. The scope of direct benefit transfer (DBT) will be progressively expanded to embrace payments under all schemes including subsidy on food and fertilizers. The number of beneficiaries under DBT will be increased from 10 million at present to 103 million. While limiting the benefit of welfare schemes and subsidies only to the poor, this will eliminate leakages and bring benefits of market forces and competition to the common man.
COMBATING BLACK MONEY
Finally, Modi – government has taken a bold step for combating the menace of black money. Jaitely has proposed to bring a comprehensive piece of legislation to deal with offenders who keep un-accounted money abroad with severe punishment that can land them in jail for 10 years apart from confiscation of their assets. An equally strict law will be enacted to combat generation of black money on the domestic turf.
Prior to that, the black money mongers may be given a small window of opportunity say 3-6 months to declare their unaccounted income, pay tax-cum-penalty and escape imprisonment. This will fulfil a major promise that Modi had given during his election campaign and even help in bringing back a substantial chunk of money thereby helping in tiding over the resource crunch.
A major step forward to realize Modi’s vision for resurgent India
In a nut-shell, finance minister Arun Jaitely has laid down clear-cut strategies and plan of action to be implemented over a period of time to realize the vision of our prime minister to foster development for the benefit of all and emancipate majority of the poor from the clutches of misery and lead them to a better living. While, the budget has given the direction, this government has made its intent very clear to be in action mode on a continuous basis through out the current year indeed, for the rest of its term to fulfil the commitments made to the people.