Warming up

With a minimum of fuss, Budget 2014-15 seeks to prepare the economy for the marathon

By Mohan Sule
Right at the beginning of his speech, Finance Minister Arun Jaitley cautioned not to expect too much from a 45-day government. With a short span of seven months for execution before the presentation of a full-fledged budget for the next fiscal, his warning was understandable. Expectation of big-ticket reforms, hence, was unrealistic. Also, the slump in the economy was not due to any policy measures but inaction in clearing projects. The Union Budget 2014-15 aims to assemble a rainbow coalition of the poor; those at the fringes of mainstream society; the farmer; the common man, the aspiring Indian; the middle class; the entrepreneurs; small, medium and big companies; and foreign direct and portfolio investors. The resources-guzzling rural employment guarantee scheme has not been scrapped. It, however, is linked to productive activities, with emphasis on agriculture, thereby ensuring that funds contribute to the GDP. There is promise to tackle fuel and fertilizer subsidies, a big worry for the market, without any timeline. This means there will be small steps in this direction as surging crude prices due to the Iraq crisis and farmers’ precarious state due to weak monsoon have nixed any attempt to fast-track this reform. Overhaul of direct taxes has been done by the Direct Taxes Code and that of indirect taxes will happen when a consensus emerges between the states this year. As such there was no point in going on a road well traveled.

Yet the budget managed to translate all poll promises into policies. There is focus on boosting infrastructure and manufacturing with cuts in excise and import duty, empowering women, putting religious places on the map, bringing the northeast into the mainstream, imparting skills training to the youth, increasing the savings and consumption potential of the middle class, providing 24x7 power supply through 10-year tax holiday to generators and distributors, and improving access to rural areas by building roadways with a fixed daily target. There is interconnectivity between these apparently random allocations. All have the potential to fire up the economy. Prime Minister Narendra Modi has brought into the mainstream sanitation as a catalyst for growth. This does not require large capital but could have a multiplier effect. As the finance minister noted, many countries’ economies solely thrive on tourism. Airports in tier 2 and 3 cities will be a powerful fillip to commerce. Besides directly bolstering the share of services due to the boom in the hospitality industry, indirect beneficiaries will be commodities and family businesses involved in the arts and crafts. Smart cities with low-cost housing will accelerate the process of urbanization of India. Market gain of foreign investors will be on par with that of domestic investors instead of being treated as business income: nil long-term capital gain. Another reason for them to be happy is the promise to keep the fiscal deficit target at 4.1% of GDP, a trigger for soft lending rates. Small investors will get to operate through a single demat account, while small savers get to save more and pay less income tax. For the reform-oriented, FDI ceiling in the defence and insurance sectors has been raised to 49%.

The concern over banks’ health, too, has been addressed. The prescription is recapitalisation through sale of shares and not government-funded infusion, giving them operational autonomy and setting up more debt recovery tribunals. This will ensure that banks become responsible in their lending habits lest these are reflected in the stock prices. An ambitious PSU divestment target of Rs 58425 crore has been fixed for this fiscal. The referring of ongoing legal tussles to a high-powered panel to be constituted by the Central Board of Direct Taxes, though a welcome step, is a throwback to the UPA II era of ruling by committees. Setting up more interactive sessions involving assessees to thrash out knotty problems will be productive only if the solutions are translated into legislations without sacrificing revenue. The period to benefit from long-term capital gain arising from investment in debt mutual funds has been increased to three years and the tax rate doubled under the impression that these vehicles are used predominantly by companies. In fact, many small investors were buying these units of late to escape from equity market volatility. There is also an element of risk as debt funds absorb the fluctuations in interest rates quickly. This proposal could have been made applicable for investment undertaken after the budget. Overall, the budget has avoided any controversial proposals. In Congress vice president Rahul Gandhi’s words, there are no pulse-quickening measures. Perhaps his pulse will race when India is firmly on the double-digit expansion path within five years.