Business as usual


Jaitley will take the chance to fix the economy, rather than play to the gallery

At the Vasanth Panchami luncheon hosted by Rajya Sabha member Vijay Goel in Delhi on February 13, Arun Jaitley showed few signs of stress on account of the Union Budget that he would present a fortnight later. In fact, the finance minister discussed everything but economics at the function. His nonchalance, however, does not mean he has an easy job in hand. On the contrary, it could be tougher this year than the last, with the growing impatience over the Narendra Modi government's failure to deliver on its promises and a global economic slowdown looming.


Among Jaitley's challenges are the manufacturing sector that remains in the doldrums and the agriculture sector that continues to wilt. It will also be the budget in which the government has to make provision for implementing the proposals of the Seventh Pay Commission and one-rank one-pension. Add to this the dreams and aspirations whipped up by Modi in his monthly Man ki Baat radio telecast and speeches at glitzy gatherings. It is, after all, Jaitley's job to convert these dreams, promises and aspirations into workable programmes.

Maybe because of this, Jaitely this time went beyond the usual consultations with industry, chambers of commerce, trade unions, economists and other stakeholders. He invited the public to vote for the funding priorities. Should it be Jan Dhan Yojana or Mudra Bank, or Jan Suraksha or gold schemes? Should it be Swachh Bharat or Make in India, or Skill India or Digital India that should get a higher allocation? Farmers or middle class, or women or the underprivileged? Agriculture or manufacturing and infrastructure, or services or startups? “Your views matter,” tweeted the finance ministry. And, people in tens of thousands pitched in with their views and suggestions. But, will it be a people's budget? Drawing Jaitley's attention to this public opinion taking aspect of the pre-budget exercise, I asked him what the people wanted. “They want taxes to be reduced or abolished, credits and concessions made easy,” he said. The reply was in a lighter vein, but it indicated that the finance minister knew the people wanted a populist budget.

Jaitley, however, is unlikely to oblige them. The BJP leadership was clear that the government had enough time to indulge in that. And Jaitley has his own challenges to tackle. “We are struggling to keep a decent growth rate,” he said at a conclave in January. “We have certain advantages. At the same time, we have challenges. Agricultural production is rain-fed, private sector is slow, government has limited potential to create jobs.”


People who responded to the finance ministry's twitter handle have given a clear thumbs-up to the government's focus on the agriculture sector and farmers. Hardly surprising, considering the pathetic figures of agriculture's contribution to the GDP. According to the ministry of statistics and programme implementation, the sector is expected to have “grown” by 1.1 per cent compared with last year's negative growth of 0.2 per cent. Yet there has been a decline in production of foodgrains and oilseeds. The absence of rural demand, experts say, has triggered lower production in the consumer goods sector as well as the capital goods sector. While the first reflects the falling consumer demand, the second reflects the fall in investment in the manufacturing sector. There are indications that Jaitley will take a fresh look at the agriculture policy and inject ideas that will help generate rural demand. He might announce a package that will address rural stress and social security for those in agriculture.

“To reboot the economy, the only option is to focus on agriculture,” said agri policy expert Devender Sharma. He said the the sector received a step-motherly treatment over the years, resulting in the farmers' income going up by just 3.6 per cent annually through the mechanism of minimum support price for wheat and paddy. “Even if the government manages to take agriculture growth to 6 per cent of the GDP, things won't change. The average income of the farmer household is Rs 6,000, and only half of this is from agriculture. We need an imaginative, big-bang scheme, like a Rs 2 lakh crore economic bailout package for farmers. It can be given to them through the PM's Jan Dhan Yojana. Tax concessions to industrialists since 2004-05 totals Rs 42 lakh crore. So this bailout package is not asking for the moon,” he said.


Sharma suggests the idea of a Farmers' Income Commission, by which a farmer gets the same salary as a chaprasi, the lowest-level government employee. These steps, he said, would make the economy gallop with the GDP crossing 20 per cent, rural consumption rising and, in the process, revitalising the manufacturing sector.

While farmer suicides across the country have become a symbol of farm distress, the failure to invest in the sector is indicated by the shortfall in the number of mandis in the country. According to the government, there are only 7,000 when there should have been 42,000 of them. Of every Rs 100 that appears as credit to agriculture in the government books, Rs 90 goes to agribusiness. Clearly, Jaitley has to look innovatively at India's villages and farmers who make about 60 per cent of the population. There are indications that he may favour amendments to the tenancy law so that farmers tilling leased land can avail of credit. The finance ministry thinks this will free them from the clutches of moneylenders, and make agriculture remunerative.

Infrastructure will be next only to agriculture in priority in the next fiscal. On many a platform, Modi, Jaitley and Transport Minister Nitin Gadkari have said that they wanted this to be the fastest growing sector. They have realised that there are gaps that need to be plugged and they favour infrastructure development through public-private participation. Though the forthcoming budget is unlikely to have doles or stimulus packages for the sector, banks might be empowered to stand guarantee for the projects, with clauses in place. “This is not all about the big builders; there are many medium to small players who could deliver more if the capital situation permits them to. We would like them to do it on their own, with us just facilitating them,” said a source in an infrastructure funding bank. Much of the work will include continuation and completion of works started on the highway corridors, and reasonable progress in the smart city projects.


The government might do everything it takes to make 'a palpable recovery' in the manufacturing sector to attract investment. “An effective and efficient infrastructure system is essential to the success of the Make in India campaign. We expect an announcement from the government to create more facilities to enable movement of raw material and transportation of finished products,” said Soumitra Bhattacharya, joint managing director of auto parts maker Bosch Ltd.


The reduction in health spending in the last budget continues to be criticised in all discourses on development. But the government found comfort in the fact that it came out with a health insurance scheme—Rashtriya Swasthya Bima Yojana. This year may see it extended to almost everyone in the form of a universal health insurance, with the government chipping in.

Jaitley had made a promise after raising limits of deductions on medical insurance premium. “As and when my fiscal capacity improves, individual tax payers will have a lot to look forward to,” he had said. The falling oil prices that came as manna from heaven for the government have significantly reduced the fiscal deficit, improving his “capacity”.

While Jaitely has never hesitated to admit that the falling oil prices have more than helped the Indian economy stay afloat at a time when the rest of the world is struggling to do so, he is unlikely to pass that gain to the taxpayer. “The windfall from falling oil prices is being invested in creating infrastructure. There is need to focus on investments in rural roads, electrification and irrigation, which will push rural demands that have been hurt through two successive droughts,” he said at a conclave recently.

The government is unlikely to increase direct taxes and may widen the tax base, which currently has four crore people. Deduction of interest on home loans for self-occupied houses is now capped at Rs 2,00,000 if the construction is finished in three years, and Rs 30,000 otherwise (under Section 24 of the Income Tax Act). The government may allow the interest deduction from the time when the buyer takes possession of the house. House rent allowance exemption parameters may also be tweaked. Exemption of tax to a notified class of investors, such as angel investors, might be given to boost the Startup India programme.

The budget will also prepare the country for a goods and services tax regime, regardless of whether it is rolled out this year or later. “This is a gradual process that has been on,” said Jayant Sinha, minister of state for finance.

Budget 2016 will provide for the implementation of the 7th Pay Commission and the one-rank one-pension proposals—Rs 1.1 lakh crore for the year 2016-17. The government has looked at not just the financial commitment, but also the positives that would arise—a lot more money in the hands of people. These people will spend more, spurring demand that will lead to production, which will eventually lead to investments in capital goods manufacture. They will also pay taxes and save to invest.


While the Modi government has been trying to inch towards a subsidy-free regime, it is unlikely to drastically cut the existing subsidies. “Much of that has become the responsibility of the states after the 14th Finance Commission,” said Sinha. The mid-year review of the economy by Chief Economic Adviser Arvind Subramanian lowered the GDP projection from 8.1-8.5 per cent to 7-7.5 per cent, and pointed to the fact that the economic growth had been dragged down by the 17.4 per cent decline in exports and the slow agriculture sector. He raised concern over the deceleration of growth and the ability to meet the fiscal deficit target of 3.9 per cent of the GDP. In other words, the government would borrow to spend, the review said.


The Reserve Bank wants a budget that will maintain fiscal prudence, continue structural reforms, and remain on the path of public expenditure. The government is in principle committed to fiscal discipline even though there are views that favour widening the gap if that can push the country on to a faster growth trajectory. “The government will give the revised medium-term fiscal consolidation plan a miss and raise the fiscal deficit target for 2016-17 to more than the 3.8 per cent target for 2015-16, which it may meet. This will be so primarily on account of the wage bill when the 7th Pay Commission proposals are implemented,” said a report by a private sector bank. So, what if a movie ticket or a meal at a fancy restaurant ends up costing more, the EMIs may actually reduce.

“Developing countries can sustain this rise in growth only if they transform themselves into inclusive societies where economic growth, human development and social progress move in tandem,” said Professor Deepak Nayyar, former vice chancellor of the University of Delhi. Whatever be the fine print, the budget will aim at taking the country on a path that the Modi government believes will lead to “acche din”.

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The Week

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