Those looking for big flourishes in what is probably finance minister Arun Jaitley’s last chance for big reforms had reason to be disappointed. There was no big income tax reform, just relief at the bottom-end though compliance is low in, say, the R10-15 lakh income range precisely because the 30% tax is too high—indeed, with tax slabs now at 5% and then 20%, tax theft will rise. Cutting corporate taxes selectively also opens up arbitrage opportunities.
Despite the Survey rightly pointing to the fact that cripplingly-high NPAs were contracting lending to, among others, MSMEs and also widening interest spreads, Jaitley stuck to business-as-usual, even cutting annual funds for bank-recap—this is stealth privatisation since relative market-cap of PSBs is collapsing but a cautious government prefers this to politically tough decisions on bad banks and 50-75% haircuts on loans. Despite huge leakages in all anti-poverty schemes, not even a pilot UBI was tried since this would mean cutting existing schemes; nor is there evidence of any sharp cut in tax disputes, though the finance ministry has repeatedly spoken of this.
The Budget’s biggest plus is what it did not do, as the relief rally in the Sensex made clear. So there was no capital gains tax or hike in STT despite the prime minister’s speech on market-players needing to pay more and the tax on FIIs by incorrectly using the Vodafone clause was formally scrapped—it appears a big negative could be a partial reintroduction of long-term capital gains taxes when unlisted firms get listed.
While poor economic growth made most call for higher government-spend, Jaitley stuck to the path of fiscal rectitude and even delivered on his FY17 promises despite the slowdown. Apart from disinvestment where a R78,000 crore FY18 target has been fixed despite Jaitley being at just over the half-way mark for the FY17 target, other revenue numbers look reasonable—the 60% hike in disinvestment target suggests the government will get serious about privatisation, but this flies in the face of the budget’s talk of consolidation of PSUs and even creating a vertically integrated oil one. Cutting telecom revenues from R98,995 crore in FY17—this was missed by over R20,000 crore—to R44,342 crore is welcome realism given the state of the industry. At just 12% compared to FY17’s 17% growth, tax projections for FY18 are realistic—even if income taxes growing 25% look unrealistic, the fact that excise growth has been budgeted at 5% versus a 34% growth in FY17 means there is enough scope for slippages in some areas. In any case, going by the demonetisation data—an average of R3.3 crore was deposited in cash in 1.5 lakh bank accounts—it is likely income tax collections will surge. Maintaining good macros means bond yields will remain weak, paving the way for more rate cuts and falling interest rates.
Apart from ensuring good macros, the Budget scores on its sectoral initiatives which include a textiles-type package to boost jobs and exports for leather and footwear. A dispute resolution mechanism for PPP projects is a corollary to releasing funds stuck in road project disputes last year. The plan to allow airports to sell city-side land and a new law to take care of the problems metro projects have in being able to fix their fares is not bold privatisation, but there is little appetite for that among infra-players anyway. There are good moves on housing and welcome attention to increasing crop insurance and setting up irrigation funds. The moves on cleaning up political funding have got rave reviews but amount to little till serious lacunae in election spending—there is no limit on what parties can spend—are addressed.
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If all goes to plan, the sectoral moves will add up and, with interest rates falling, growth will get a fillip. But when everything has to go right, things have a habit of going wrong, such as the global environment turning adverse for India’s growth needs. With private consumption slowing and private investment contracting 7% in real terms in Apr-Sept 2016—at R11.7 lakh crore, stuck projects are at an all-time high—getting the economy out of sub-7% growth won’t be easy; even a welcome low-cost-housing initiative will flounder in the absence of demand.