Intro: Economic Survey states that India’s economy is at a 'sweet spot', which is a rarity. India is about to overtake China as world's fastest growing economy. Union Finance Minister Arun Jaitley said during the Union Budget 2015-16 that now it's India's turn to fly.
India had the GDP growth rate of 7.4 per cent this year and 8 to 8.5 per cent next year; 5 per cent consumer inflation and wholesale inflation getting negative; Current Account Deficit of only 1.3 per cent this year and expected to be one per cent of GDP next year, against nearly 5 per cent a couple of years back, all indicates at favourable macro-economic indications.
Despite falling international crude oil prices and picking up of growth, government has less budgetary resources this time. Due to recommendations of the 14th Finance Commission, Union Government will have to share much greater tax revenues with the states, and therefore, little money is left for the budget. Compared to rupees 3.8 lakh crore in 2014-15, rupees 5.8 lakh crore will go to states in 2015-16. Union Budget estimate for total spending in 2015-16 are given as rupes 17.77 lakh crore, which is smaller than the Budget estimate of rupees 17.9 lakh crore for 2014-15. Statement of the budget is that not much money is now left with the Central Government, to spend.
Mostly Expenditures are Rigid Downward
Government spending on many items is mandatory and therefore is exceedingly rigid. Interest payments; salaries of government employees, police, defence expenditure etc are some expenditures, which cannot be curtailed, despite scarcity of resources. Rather these expenditures grow faster than the size of the budget itself. The obvious victim of the limiting size of the budget is government's spending on social services. Expenditure on economic services also would be hit naturally. Increase in spending on health is minimal. Thus, it is obvious that there is a substantial pressure on the government to reduce or keep on hold expenses on social services.
Tough on Black Money but Soft on Corporates
Budget has proposed, for the first time, tough action on parking illegal money abroad. This is a welcome move, as this would act as a deterrent to park illegal money overseas. Although budget aims to acts against black income earners, it showered favour for corporates as it proposes reduction in corporate tax rates, from present 30 per cent to 25 per cent, over a period of 4 years. However, it is welcome that exemptions enjoyed by the corporates would also be reduced, and it is expected from the government that the Finance Ministry would prepare a road map for the same. Given the fact that marginal rate of personal income tax is retained at 30 per cent, lowering of marginal rate of tax on corporates is being seen as something as a favour to corporates; yet the Finance Minister is legitimising this move, as the same is aimed at correcting tax rates, to make India as a preferred investment destination. Announcement of postponing implementation of GAAR (General Anti Avoidance Rules) is yet another attempt to please foreign investors, although government is giving the reasoning that the government is looking into the issues involved in implementation of the same. Another favour given by the Finance Minister to foreign investors is that foreign portfolio investors need not pay Minimum Alternate Tax (MAT).
Another Budget Analysis: Fine Tuned for a Quantum Leap
Over the years, India has witnessed huge fiscal deficit. According to the revised estimates for 2014-15, fiscal deficit was somehow contained at 4.1 per cent of GDP. Finance Minister has proposed to reduce the same to 3.9 per cent next year and to 3 per cent in next three years. It is notable that the fiscal deficit reached 6.0 per cent in 2008-09. In previous years, large fiscal deficit has been a major reason behind the persistent inflation. Fiscal deficit is partially made up by borrowing from the public, including institutions. However, a major chunk of this deficit is filled up by monetisation, which is, printing of currency notes by Reserve Bank of India (RBI), which obviously leads to inflation. This kind of financing is rightly called inflationary financing. If we take stock of the past few years, we find that as result of monetisation of deficit, there has been 9 to17 per cent increase in the size of the currency held with the public. Unlike his predecessors, commitment shown by Jaitely to control fiscal deficit, is expected to cost inflation.
Making 'Make in India' Possible
'Make in India' is the slogan of the present government, which means encouraging the domestic production. It is notable that amongst manufactured goods imports, telecom imports form a sizeable chunk at nearly $100 billion. India is today importing huge quantities of goods ranging from computer chips to computer, mobile phones and household electronic goods.
Economic Survey underlines that the main reason for ever rising imports is low rate of import duty on imports of these goods, while production in the country attracts more tax. Domestic production therefore needs to be provided with level playing field, vis a vis imports. So it was natural to remove this anomaly in order to make government's 'Make in India' programme successful.
Although the government has said that trade and business rules will be simplified, with automatic permissions; a roadmap is yet to evolve. Announce-ment of the 'Plug and Play' model by the Finance Minister in the budget is a step towards lessening the list of approvals in starting a business. In the end one can say that despite the constraints faced by Jaitley in terms of the size of the budget, he has tried to please all, ranging from poor and deprived, working class to the corporates.
Dr Ashwani Mahajan (The writer is an Associate Professor in PGDAV College, University of Delhi)