Long On Hope, But Short On Substance

The annual Economic Survey, published a couple of days before Budget Day, provides the context against which the Finance Minister makes his proposals. This year's document was uncharacteristically enthusiastic about our situation — "The changing fortunes of India have been nothing short of dramatically positive", with a decline in inflation, the shriveling of the current account deficit, and a sharp recovery in economic growth.

This last has most economy-watchers surprised, since it is not supported by corporate results or tax collections; worse, if it is a statistical quirk, emerging out of the new method for calculating the GDP number, it may endanger the revenue estimates on which Mr Jaitley's second budget is based. Taxes collected by the government depend on economic growth, and if economic activity is over-estimated by the Budget, government revenues will fall short of projections, putting a stress on the fiscal deficit, and demanding greater borrowing.

The Finance Minister has, in any case, disappointed those who believe in fiscal discipline, in pushing out by one year the date by which he will reduce the government's fiscal deficit to 3 per cent. He also postponed by a year the introduction of two fresh commitments — the implementation of the GST, and a reduction in income tax rates for companies, from 30 per cent to 25 per cent. Meanwhile, he had no hesitation in raising — from 12 per cent to 14 per cent — the incidence of service tax, a hike required for it to converge with the tax levels on goods. 

Other initiatives that could be significant were mentioned, but not fleshed out, and would seem to be statements of intent, rather than specific proposals: these include easier bankruptcy laws, and a simplification of income tax rules governing individuals. Vague promises like these belong in an internal discussion or brain-storming, rather than on the floor of the house, and speak of incomplete homework, rather like declaring that yoga will be a charity. Someone will have to explain the budgetary significance of that to me, preferably while doing a headstand!

'Rich' individuals, defined as those with stated incomes over Rs 1 crore per annum, meanwhile, got hit with an additional income tax surcharge of 2 per cent, which is estimated to garner Rs 9,000 crore for the exchequer. This is in lieu of the attempt to garner resources by way of wealth tax, which Mr Jaitley has abandoned, since it has not yielded the desired revenue. 

I don't want to sound entirely negative about the budget, since there were two proposals in it that I really liked:

• The first was that the employee contribution to the ESI (Employee State Insurance) Scheme will henceforth be optional. Anyone who has visited an ESI-run hospital will welcome this move. Mr Jaitley's remark about employees being hostage to the scheme was spot on. So are companies, and I wonder when he will make the employer's contribution optional, too.
• The second was allowing 'pass-through' in Alternative Investment Funds (AIFs), such that gains in these funds are not taxed in the hands of the individual investors, much as for mutual funds. India needs diversified sources of financing for new business ventures, and AIFs are particularly active in private equity and venture capital deals.

On the subject of funding investment, the most startling gap, to my mind, was in the area of funding public sector banks. The Economic Survey had this to say about their performance: "The best public sector banks perform well below private sector banks on average, recognising of course that PSBs may be burdened with greater social obligations that places them at a competitive disadvantage relative to the private banks. The subtler problem with public sector ownership is that exit from debt difficulties is proving very difficult." Given the fact that PSBs account for over 70 per cent of the banking sector, and their balance sheets are hugely stretched, I anticipated a huge commitment to enhancing their equity base. The number, at just under Rs. 8,000 crore, seems piffling, especially for an economy which is projected to grow at over 8 per cent.

My editor asked me how I thought this budget measured up to the expectations of a Big Bang. "0 on 10", I answered. However, I had no such expectations, so I needed to assess it against more muted norms. I find it long on hope, but short on substance, and, I suspect, pinning too much on favourable winds in the larger world, most especially continued global liquidity, and low oil prices.

Fingers crossed.