Introduction
As a long term
observer & commenter on budgets there are three aspects that are noteworthy
from my perspective. One, the fiscal objectives of the government & action
taken in achieving them, two the actions required post-demonetization to
achieve/sustain its positive effects, and three the policy reforms in the
budget that help achieve efficient growth & employment creation.
Fiscal Prudence & Programs
After achieving the fiscal targets for
2016-17, the issue was weather to stick to the target of 3% for 2017-18 or to
exceed it in the interest of greater investment expenditure on infrastructure.
Govt managed the delicate balance, by relaxing the target by 0.2% to 3.2% while
raising capital expenditure by 25% in BE terms (11% BE/actual). This allowed it
retain its hard won fiscal credibility while addressing concerns over falling
national investment rate by stepping up infrastructure investment &
encouraging complementary private investment.
The budget also fine tuned allocations on existing programs of the
govt. (Swach Bharat, Skill India, Digital India/e gov) without introducing any
adventurous new programs, that could become budget guzzlers. This was widely
welcomed, though there was some disappointment that the move from inefficient,
leaking subsidies to direct benefit transfers wasn't accelerated despite the
success of LPG subsidy reforms.
Managing De-Monetization
Soon
after the demonization I had defined three potential areas of benefit and the
policy actions needed to actualize and sustain them. The budget (&
pre-budget announcements) offered some action on each, thus meeting the
benchmarks one had set. Despite the predictable negative effects on GDP one had
projected an increase in income tax related declarations & collections.
This however needed to be sustained by implementation of promised corporate
income tax reductions, and some movement on personal income tax reform(PIT).
The PIT rate in the lowest bracket was reduced from 10% to 5% to incentivize
new tax payers to enter the system. As this creates a sharp jump in rates
between the first and second brackets(20%), and the reduction was offset by a
rise in surcharge, it will require more comprehensive PIT reform in the next
budget, including another look at exemptions & deductions. A clever way was
also found to identify a set of CIT paying companies with high effective rates
(>30%) and to reduce these to 25% without changing either the rates or the
deductions-exemptions for the rest. Again in this case we would expect a more
comprehensive reform in the next budget.
The second area was housing and real estate. I had projected that
demonetization would reduce prices, by reducing the black money part of the
price. However, policy actions should make it easier for prices to fall (e.g.
By reducing circle rates & stamp duties) and to make it easier to get
credit for and do transactions in white. Pre-budget announcements on credit
& interest subventions for low cost housing were followed in the budget by
reduction in effective capital gains for one house, and easing of rules &
conditions for creation of affordable housing. Eventually the whole policy
approach to Housing & real estate would have to change from viewing it as a
UN of black money to a white investment on par with investment in machinery
& equipment of financial instruments.
The third area was political-bureaucratic-police corruption, which has
become the most important generator of black money in the last 30 years. To my
surprise the budget accepted the Election commission recommendation to reduce
the limit for acceptance of cash donation from an upper limit
Rs
20,000 to 2,000. Political parties who have complained that it is still too
high should join the govt in reducing this further to Rs 200 or Rs 20. The 2nd
proposal was the introduction of a bond that would make it possible to use tax
paid income to make donations to a political party instead of being forced to
generate black money to make anonymous donations. The bond will not make
donations transparent, only make it possible to use "white" money for
political donations.
Policy & Institutional Reforms
Reform of ESI, PF and other social security subventions, which add ~
30% to the cost of labor(with << commensurate benefits to workers), was
promised in the last budget, but has made slow progress. Without it, the ban on
cash payments above Rs 3 lakh is likely to have unanticipated consequences. It
will make large scale subcontracting of labor very difficult and thus reduce
informal employment further. At the same time the 30% addition to wage costs
will continue to incentivize more capital intensive production methods in the
organized sector.
Reforms
for sustaining economic growth and employment generation are a continuing,
incremental process, and this budget had its complement of small but welcome
announcements in several areas. In agriculture this included an intention to
remove perishables from the ambit of the APMC, a model law for contract farming
and further progress the national agricultural market (E NAM). There was also a
commitment to integrate the 50 odd labor laws into 4 rationally organized ones.
This is an essential compliment to the two track approach to labour reforms,
where certain politically difficult issues are left to the States, while Center
carries out the broader reform. Two other small but critical steps were the
intention to abolish the Foreign investment promotion board (FIBB) and to
resolve the legacy problems of PPP contracts by including it in the Arbitration
law. The FIPB is a symbolic step but along with continuing reduction in Sectoral
restrictions has a good effect on new investors. Financial sector reforms
continued along the direction set by the Financial sector code. An announcement
which is critically dependent on implementation is Strategic sale. The receipt
budget made a provision of Rs 15,000 cr out of a total disinvestment target of
Rs 72,000 cr. I read that as in indication that this process will finally start
in 2017-18.
Conclusion
In conclusion and on balance a good budget, as it was consistent with
my expectations and benchmarks.
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A
version of this article appeared in the Hindu Business Line of February 28, 2017, under the banner,
"Viewing the Budget in Black and White." http://www.thehindubusinessline.com/todays-paper/tp-opinion/viewing-the-budget-in-black-and-white/article9562509.ece
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