A Budget in continuity

The comments on Union Finance Minister Arun Jaitley’s maiden Budget have been cautiously laudatory. Commentators have spoken about continuity of UPA thinking, lack of big-bang reforms agenda, a plethora of schemes that do not appear to be fully funded, and the lack of a clear articulation of vision.

Others have welcomed the reforms agenda that has been unveiled, and a clear follow through on all the promises made in the BJP manifesto.

It is important to look at the Budget speech and the numbers from the point of view of what the government is trying to achieve, namely, to boost growth, fix inflation and to correct the fiscal deficit.

The budgetary numbers are constrained by the overhang of substantial unpaid bills, especially for food, fertiliser and energy subsidies.

Even if there is a promise to reduce the subsidy burden, past bills need to be paid.

The Budget is relying on substantial receipts from divestment to meet these obligations, without hardening the tax rates.

Healthy disinvestment receipts require an active and buoyant equity and bond market, and there are significant announcements for the financial markets and for FDI.

A 49 per cent FDI in insurance and defence is being offered and there are increased incentives for investment in real estate and insurance.

There is a budget provision for recapitalisation of banks, and a promise to allow retail sale of bank equity to help capitalisation. Infrastructure bonds issued by banks have been exempted from SLR and CRR norms, which might result in a big boost to availability of funds for infrastructure projects.

The measures unveiled for the commodity as well as equity and bond markets are intended to keep these markets buoyant for some more time, helping receipts from divestment.

These would also help revive equity offerings and new equity placements by existing as well as new entities.

In particular, infrastructure companies short of funds for implementation would have greater avenues to access capital.

This budget lasts only until next February, and it is important to clean up the books in terms of liabilities and debt overhang, so that the next budget can look at funding projects that have been announced in this budget.

In any case, several of the announcements have to be converted into feasibility studies and projects, before funds flow in any significant quantities is drawn down, and the steps taken in this budget allows the government the breathing room to do this.

In short, there appears to be a clear strategy of preparing for a big implementation programme next year, based on the announcements made.

There are also announcements that encourage savings, including additional deductions for investment in specified funds, greater flexibility for the savings schemes and certificates of the government.

In short, this budget attempts to bring the retail investor back directly into the equity as well as the savings market—an attempt not only to garner additional funds for the government, but also to reduce consumption liquidity and to take some pressure off consumption demand.

If successful, this would dampen inflationary pressures as liquidity is parked in savings rather than consumption.

Simultaneously, there would be greater investment capital in the hands of banks and corporates, especially in infrastructure, and that would help revive growth.

Market facilitator

The economic survey this year has already pointed out that the government sees itself as a market facilitator, and that its role would be to intervene only where markets do not perform.

It does not see itself as intervening in market mechanisms. In this regard, there is a clear distancing from the entitlements based approach of the UPA.

While the livelihood support programmes like the MNREGA have been retained, they are being oriented towards asset creation and improvements in agricultural productivity rather than mere wage-based daily activities. The change of direction towards a more market-oriented economy are clear.

The move for FDI in defence is interesting. Given 49 per cent and no control, it is unlikely that large armaments manufacturers or technology providers would appear enthusiastic.

Perhaps this should be seen more as an attempt to improve manufacture.

There is a large armed force as well as paramilitary organisations and the state police, who all require substantial support equipment—uniforms, bulletproof vests, night vision glasses, travel accessories, mine detectors and electronics etc.

This constitutes a huge market, and even accessible to the SMEs. Perhaps, there is an opportunity to leverage this announcement to invigorate the manufacturing sector.

Now, to the numbers. The minister has retained the fiscal deficit target of 4.1 per cent and revenue receipts look as aggressive as they were when his predecessor presented them a few months ago.

The target for plan expenditure on the capital accounts continues to be modest.

All programmes of the past are continuing, and revenue improvements are anticipated through solving litigation rather than extending coverage.

The concessions in customs duty follow the traditional cherry-picking model with no explanation of why these have been chosen and not others.

An incentive for manufacturing could have come through reduction in excise duties, but this has not happened.

The taxation part of the budget appears no different from any in the last two decades, and this is a disappointment and a lost opportunity.

Tax slabs have been retained, with some relief in initial exemption limits.  It is clear that the FM has been guided by continuity rather than need for change.

There is room to expect clearer articulation next time round, in February 2015.

It is also important to note that as the economy grows, the Central budget accounts for an increasingly smaller percentage of the total economy---less than 8 per cent of GDP this time compared to around 12 per cent, 10 years ago.

Clearly, the ability of public finances to leverage the economy is diminishing as the economy grows.

Related:

'High on rhetoric, low on delivery'

Only immediate concerns on Jaitley's political agenda