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Business News/ Politics / Policy/  Bharat’s budget... and India’s too
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Bharat’s budget... and India’s too

If the budget pans out the way the govt wants it to, consumption and investment will get a fillip, without deviation from the commitment to work towards a fiscal deficit target

Photo: Getty ImagesPremium
Photo: Getty Images

New Delhi: It was mostly a budget for Bharat, yet Arun Jaitley, presenting his third budget, also succeeded in addressing, apart from the issue of rural and agrarian distress, the other two headline problems facing the Indian economy—under-investment and the slow pace of reforms.

In that sense, it was a budget for India too.

If the budget pans out the way the government wants it to, consumption and investment will both get a fillip, and more jobs will be created. Importantly, all of this will be achieved without wavering from the commitment Jaitley made last year to work towards a fiscal deficit target of 3.5% of gross domestic product in 2016-17. The bond markets endorsed the intent and the math of the budget by driving down yields.

By not wavering from the path of fiscal consolidation, despite siren calls to do so, Jaitley has also put the onus back on the Reserve Bank of India (RBI) to hold up its end of the bargain. There was always an implicit link between another round of rate cuts to the ability of the Union government to stick to its fiscal commitments.

“The government posted a pleasant surprise by sticking to the pre-announced fiscal deficit target of 3.5% of GDP (gross domestic product). This move is likely to have a far reaching impact on the macro economy by preserving stability," HSBC economists and analysts said in a note.

“We expect RBI to cut repo rates by 25 basis points as RBI has stated it will look at the fiscal deficit numbers for cutting rates," said Murthy Nagarajan, head, fixed income, Quantum Asset Management Co.

Still, while the big picture is better than expected, it is the small stuff that may well trip up the budget.

The salaried middle class is up in arms against the move to bring parity across all retirement benefit schemes—by taxing 60% of provident fund payouts on superannuation. They could take succour from the fact that the brunt of Jaitley’s fiscal rebalancing has been borne by the super rich who have been targeted with a range of taxes (good politics also makes for good economics).

Similar protests are likely to emerge from other quarters. That’s understandable, given that Jaitley, who is fiscally strapped, looked to rearrange items of expenditure in an order of priority. Clearly, some would win and others would lose in this trade-off. For the moment, criticism of the budget is still muted. After all how can you critique a budget for Bharat without sounding politically incorrect? More importantly, the National Democratic Alliance (NDA) may have succeeded in its efforts to reset the political narrative.

Focus on Bharat

It was the Congress-led United Progressive Alliance (UPA) which first introduced the idea of inclusiveness to the policy lexicon aggressively. The idea was brilliant, but the execution rapidly morphed into a burgeoning subsidy bill as the underlying ideology became populism. The gigantic Mahatma Gandhi Rural Employment Guarantee Scheme (MGNREGS) probably captured this idea of inclusion best.

The Bharatiya Janata Party-led NDA, bereft of any historical socialist baggage, railed against this notion. Its idea of inclusion is based on empowerment of people—by creating an enabling environment, either through imparting skills or improving the ease of doing business. It is exactly what it has tried to do in the first 18 months through programmes such as Stand Up India for Dalits and women and by creating the Mudra Bank to fund collateral-free loans of petty shopkeeper and small businesses.

Now, Jaitley has trained his government’s focus on rural India. Bharat is out of step with India and has long merited intervention. Despite the recent wave of urbanization, 68% of the country’s population resides in rural areas and 49% of the country’s workforce is still dependent on agriculture. Two back-to-back droughts and a collapse in global commodity prices have dealt a crippling blow to rural India. A squeeze in rural demand—the driving force behind consumer products—has started showing up on corporate balance sheets.

The budget seeks to address these concerns, both with short-term measures and structural change. “Government will reorient its interventions in the farm and non-farm sectors to double the income of the farmers by 2022 (an outrageous claim to most people). Our total allocation for Agriculture and Farmers’ welfare is 35,984 crore," Jaitley said.

In the short term, Jaitley has stepped up spending under MGNREGS to a record 38,500 crore. In the medium term, the finance minister has set the ball rolling for the creation of a national market for agricultural commodities, stepped up spending on rural roads, committed to providing electricity to every village by 2018, promised health insurance for the poor and formally launched the market instruments-based crop insurance scheme announced earlier through an allocation of 5,500 crore.

“Any transfer of income from the rich to the ’not so rich’ results in increased consumption, provided the transfer is efficient and with minimum leakage. This is where the most significant challenge for this government lies," said Rajiv Shastri, managing director and CEO, Peerless Funds Management Co. Ltd.

Tackling under-investment

A big concern that had emerged in the run-up to the presentation of the Union budget was the massive levels of under-investment in the economy. Owing to a combination of factors—inclement global economic conditions, the high cost of domestic capital, end of wholesale corruption leading to new governance norms, a squeeze in domestic demand—industry has become risk-averse. Given that the government has limited fiscal manoeuvre, it meant that investment demand started drying up.

The Union budget, together with the railway budget (which announced a medium-term plan of investing 8.5 trillion by 2019-20), has addressed this primarily through a step-up in public investment in roads. In addition, it has mooted the idea of asset diversion (or asset recycling), essentially getting public sector undertakings to offload some of their capacity and create fresh capacity in another part of the country.

The implicit assumption is that this big bet will serve as a force multiplier in the economy. If it works then it will generate growth (not to speak of jobs), which in turn would revive sectors such as steel, which are in the doldrums. This would also mean that many companies will be able to resume servicing debt, bringing welcome relief to the stressed balance sheets of banks.

Reforms push

Given Jaitley’s understated style of delivery of prepared speeches, in contrast to his compelling extempore style, his reform effort has largely gone under-appreciated.

The finance minister has accelerated the reforms of public sector banks initiated last year jointly with RBI. While RBI played the bad cop and nudged state-owned banks to get tough with wilful defaulters, the finance ministry pushed for a corporate governance reboot by empowering the boards and the top management through operation Indradhanush.

In this year’s budget Jaitley set the stage for a wave of mergers of state-owned banks. In a post-budget interview to Lok Sabha TV, he candidly remarked, “India still needs public sector banks. But do you need so many?"

Similarly, the finance minister has signalled the ‘Uber’ moment in public transport. The NDA is proposing to amend the Motor Vehicles Act and open up the passenger segment of the road transport sector, hitherto the preserve of the state sector (this is actually an idea that Rajasthan chief minister Vasundhara Raje implemented in her budget two years ago).

The finance minister also announced a series of reform initiatives, besides reiterating his government’s commitment to ensure passage of enabling legislation for a single goods and services tax, premised on legislative action (something that the Congress could veto, given its current belligerence and the reality of the electoral math in the Rajya Sabha). While this may be the case, it does sow the promise of a reworking of economic governance in the country by transitioning to a rules-based regime. This is evident in the plan, announced in the budget, to pass a Public Utility Resolution of Disputes Bill to address frequent disputes over enforcement of commercial contracts in infrastructure; these typically end up in courts and force inordinate delays and cost overruns.

Jaitley also hit the reset button on subsidies: henceforth it will accrue only to the deserving. The NDA proposes to introduce a legislation which will target these subsidies based on Aadhaar. Significantly, the government is moving a bill giving legal cover to India’s unique identity programme.

“Finally, the government has provided legislative backing that will unleash the full potential of such an incredible platform," said Vijay Shekhar Sharma, CEO, One 97 Communications, which runs Paytm.

It is then clear that NDA’s budget holds the promise of structurally rewriting the rules for India. The key will be how it converts this promise into reality.

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Published: 01 Mar 2016, 12:56 AM IST
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