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ECHO DIN- Been there, heard that: Big bang in Jaitley’s play-safe budget is noise from the past

Published On : 01 Mar 2015   |  Reported By : Courtesy: The Telegraph   |  Pic On: photo credit: The Telegraph


New Delhi, Feb. 28: Finance minister Arun Jaitley's budget did not emit the sound of "Big-Bang Reforms" and he seemed surprised when asked why.

"What's missing from this budget?" Jaitley asked a reporter at a media conference after presenting his budget.

When she fumbled for a reply, he pressed home the advantage: "That is exactly how industrialists behave when I ask them to come up with that big-bang reform idea that we don't have."

While wrapping up his 90-minute speech in Parliament, Jaitley said: "People who urged us to undertake big-bang reforms also say the Indian economy is a giant super-tanker or an elephant, which... moves slowly but surely. Even our worst critics would say we have moved rapidly."

Beyond the rhetoric - which sounded similar to that which had marked several budgets in the past decade - the budget left the markets, several economics pundits and many a common man cold.

All the pre-budget talk about pump-priming the economy through an increase in public spending sounded like hot air after the budget figures revealed that overall government spending had actually been scaled down by almost 1 per cent to Rs 17.77 lakh crore from the previous year's budget estimate of Rs 17.94 lakh crore.

What's worse, this situation isn't going to change anytime soon.

"Going forward, with fiscal consolidation and limited revenue share, it is projected that as a ratio of GDP the total expenditure budget of the Centre will contract, with lesser non-plan and plan size," the government said in its medium-term fiscal policy statement, a document that forms part of the budget papers.

The government promised to cut corporate tax to 25 per cent in the next four years - and slapped an additional 2 per cent surcharge on firms with a taxable income above Rs 10 crore.

Although industry welcomed the cut, the fact is that the effective corporate tax in India is about 23 per cent because of several tax exemptions they enjoy. The government plans to start a dialogue soon with all stakeholders to scrap these exemptions before it pares the corporate tax rate to 25 per cent, which means there is little reason for industry to be so gung-ho about the proposed cut.

Individuals with taxable income of more than Rs 1 crore will also have to pay an additional 2 per cent surcharge - categorised as a tax on the super-rich - which comes in place of the wealth tax that has now been abolished because of poor collections.

Jaitley appears to have taken a leaf out of the UPA's playbook by deciding to soft-pedal on the rigorous fiscal consolidation targets. He had capped fiscal deficit at 4.1 per cent in 2014-15 - fulfilling a commitment that he had affirmed last July when he presented his first budget.

He should have taken it down to 3.6 per cent next year as per the glide path that had been set earlier under the FRBM Act. But he chose to stretch the schedule by another year: he has set the fiscal deficit target for 2015-16 at 3.9 per cent and intends to take it down to 3.5 per cent in 2016-17 and 3 per cent in 2017-18 - which is the ultimate goal.

"I will complete the journey to a fiscal deficit of 3 per cent in three years, rather than the two years envisaged previously," he said, adding that the additional fiscal space would be used to fund infrastructure investment.

Chidambaram did the same thing in Budget 2005 when he hit the pause button on fiscal deficit targets as he grappled with the burden of the 12th Finance Commission's award that had given more funds to states.

Jaitley has been cast in the same position after the 14th Finance Commission raised the total devolution to states to 42 per cent of federal taxes. The finance minister claimed that the actual payout to states would be as high as 62 per cent because of grants and plan transfers, severely limiting the Centre's fiscal space.

Prime Minister Narendra Modi tweeted that the budget would "further re-ignite our growth engine".

India's economy grew by 7.4 per cent in 2014-2015, according to new calculations based on changed parameters and the new base year of 2011-12. Economists, however, say growth calculated on the older base year of 2004-05 would have been somewhere between 6 and 6.5 per cent.

Markets were volatile through the trading day. The sensex was on a roller coaster, rising and falling by 700 points during the day before clawing back at the close to record a gain of 141.38 points.

The average central excise duty, or manufacturing tax, was raised to 12.5 per cent, from an earlier effective 12.36 per cent in order to prepare taxpayers for the new GST regime.

Service tax was similarly raised from 12.36 per cent to 14 per cent which will raise the cost of air travel, dining out and visits to beauty salons.

The government said it was keen to turn India into a cashless society and promised to incentivise the use of debit and credit cards without clearly spelling out what these were. At the same time, the government intends to discourage cash transactions.

However, managers at some points of sale charge a small, arbitrary fee for payment through cards. The government has no control over this business practice, which could undermine the endeavour to promote the use of cards.

As part of the effort to curb the generation of black money, the government decided to prohibit the acceptance of an advance of more than Rs 20,000 in cash for the purchase of immovable property. Last year, it had said that the payment of any advance on a property deal would be treated as a taxable income.

Foreign investors had some reason for cheer as the distinction between foreign direct investment (FPI and foreign portfolio investors (FPI) has been removed -- creating greater headroom for investors to pile into India's capital markets. Stocks of banks like Axis Bank and Kotak Mahindra Bank soared as a result.

The budget also lowered the taxes on royalties that foreign corporations can repatriate.

The middle class won some tax concessions but not as much as hoped. Over and above the Rs 1.5 lakh tax-saving window, individual taxpayers can claim another Rs 50,000 by way of investment in the New Pension Scheme. Deductions claimed on medical insurance were increased from Rs 15,000 to Rs 25,000, while exemption on transport was increased to Rs 1600 a month, a figure far lower than what many spend to commute to work. In all, Rs 69,200 more can be deducted from taxes through various savings.

"These are cosmetic concessions, tax slabs were left untouched... people, who have been battling inflation, were looking to have more money in their hands to spend," said chartered accountant P.J. Khanna of P.N. Khanna & Co.

Despite bold assertions that the economy would grow by 8 to 8.5 per cent in the coming year, sluggish industrial growth and weak demand saw revenue collections dip by 4.7 per cent, to Rs 11.4 lakh crore, against the budget estimates for 2014-2015.

Smarting from losses in the recently held Delhi elections, the BJP government expanded insurance coverage and minimum pensions for the poor.

It also set up a National Investment and Infrastructure Fund which would channel an annual flow of Rs 20,000 crore into the infrastructure sector to fund road, port and airport projects and urged state-run large ports to corporatise so that they could raise money through share and bond flotations and fund their expansions.

In all, an additional Rs 70,000 crore is to be pumped into infrastructure, Jaitley said.

The minister also vowed to crack down on black money, bringing back penal rules which some finance professionals said reminded them of the much-feared law FERA which had been repealed in the 1990s. Concealment of foreign incomes and assets and tax evasion abroad will become a prosecutable offence with a maximum penalty of 10 years' imprisonment.

Even inadequate disclosures of foreign assets could make individuals and businesses liable to seven years' imprisonment.

The subsidy bill of the government will shrink by 8.6 per cent to Rs 2.43 lakh crore over the revised estimates for 2014-15. The petroleum subsidy is being more than halved to Rs 30,000 crore, but the fertiliser subsidy bill stays flat at Rs 72,968 crore and the food subsidy bill will rise slightly to Rs 1.24 lakh crore.

The government has also decided to retain the UPA's flagship rural job scheme, which has been allocated Rs 34,699 crore with the promise of more funds if possible.

The government said it would amend the Reserve Bank of India Act to create a committee that will decide on interest rates in much the same way as in the US and the UK.

At present, the RBI governor is the sole arbiter on monetary policy.

 







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