The Budget and India’s Future

By Amit Kapoor,

The past few days have been particularly historic when talking about the impact they can have on India’s trajectory of growth and economic development. It is because the maiden budget from India’s new finance minister was announced on the July 10. It was a test of economic management on the part of the Narendra Modi government. There were a lot of expectations from the budget from all sections of society, be it business, agriculture or even the common man.

Support TwoCircles

This was the budget document that appeared to have provided for a strong economic vision. In a much anticipated move, the FDI limits in defence manufacturing and insurance were moved up to 49 percent from the 26 percent cap, which shows a firm intent on the part of the government to reform the economy.

Populism and the Economy

Over the past few years, the country has experienced growth in expenditure which has not been able to keep pace with the growth in revenue, leading to a fiscal deficit which is above the 3 percent limit prescribed by the FRBM act of 2003. It had led the finance minister to indicate in a speech to chartered accountants just days before the budget where he mentioned about the priority for fiscal constraint over mindless populism. It was because, according to him, mindless populism did not help the UPA win the general elections. Generally speaking, there is an “either/or” between populism and the economy. However, the finance minister, in his budget according to us has tried to marry the two.

The budget has not substantially cut down on the previous schemes but has recalibrated them in a manner, which could benefit the country. Some schemes on infrastructure – especially investment of Rs. 37,880 crore in the NHAI and state roads will have a multiplier effect on the economy. Also, several new schemes have been introduced, notably among them being 100 smart cities, National Level Skill Programme (Skill India) and Pradhan Mantri Krishi Sinchayee Yojana which will help address urbanization, employment and agriculture.

The focus for the budget was clearly on the economic aspects rather that pure populism, though continuing the previous government’s schemes goes to show the maturity of the present government in dealing with the issues that matter to the people. In our view, there was clearly a distinct rightward shift as is seen from the likes of scheme on entrepreneurship for which the finance minister has set aside Rs.10,000 crore as well as the step to increase the FDI limits.

Investment and Savings

Investments in India have taken a hit due to a decline in the overall business environment. The finance minister has done his bit by the asking the PSUs to invest Rs.247,941 to create a virtuous cycle of investment. It is in addition to lifting the cap on FDI as well as as providing relief (in tax terms) to Real Estate Investment trusts (REITs) which shows some definite steps taken to fuel investment. Apart from this, increasing the PPF (Public Provident Fund) limit, as well as the investment limit under Income Tax Act to Rs.1.5 lakh from Rs.1 lakh, will do their bit to encourage domestic savings and investment.

Common Man and the Business Community
One of the biggest achievements of the budget has been in its ability to provide relief and direction to both ordinary people and businesses. Be it increasing the tax exemption limit very minutely from Rs.2 lakh to Rs.2.5 lakhs in the case of individual taxpayers or addressing the issue of retrospective taxation (to be undertaken in fresh cases only by constitution of a committee by CBDT (Central Board of Direct Taxes) in case any action is initiated in such matters). Also, there is a focus on entrepreneurship and focusing on a stable tax policy as well as easing the conditions for doing business both for big corporations and small and medium sector enterprises.

What will separate this budget is not the content or form of it, but the way in which it gets implemented. We feel the revenue targets will be a difficult to meet. But all in all it is a visionary budget. In our, opinion the finance minister has been criticized for the 29 schemes that were of Rs.100 crore each, it is the best way really to put in the money. If massive allocations are done upfront the impact of failure is catastrophic. To gauge the depth of the river with one foot is indeed wise economic policy. Apart from that, it shows meticulous micro-planning. The budget seems to have taken the first corrective steps to reform the economic woes that the economic survey had pointed out in its chapter Issues and priorities. What remains to be seen is how these issues and priorities are resolved at the ground level. This will point to the general direction in which India is headed in the years to come.

(The article is co-authored with Sankalp Sharma, Senior Researcher at Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness & Editor of Thinkers. The views expressed are personal. He can reached at [email protected] and tweets @kautiliya)