Hinterland In Sight

The looming background noise of demonetisation, the rail budget’s integration, a controversial advancement to February 1, the cusp of a crucial election season—Budget 2017 had a lot brimming around it that was circumstantially novel. And yet, in retrospect, the alarm among Opposition parties proved to be unduly excessive. They would have feared, perhaps justly, that the Modi government would roll out a gravy train with an eye on the five poll-bound states. However, fina­nce minister Arun Jaitley’s fourth budget—an exercise in balance that took great care not to upset any segment of voters without deviating from the path of fiscal prudence—had nothing in its content to evoke political uproar. “We were expecting fireworks, we got a damp squib,” Congress leader Rahul Gandhi told media afterwards. The tone signalled more relief than disappointment.

Was the budget really a damp squib? Not really. There’s a consensus among experts that the FM had to walk a tightrope to formulate this year’s budget because there was little elbow room for him to paint in bold strokes across the canvas. For one, the economy is still coming out of the shock induced by dem­onetisation. And then, there’s another big bang to look forward to—the indirect tax reform via GST, which will set in from July this year. Bracketed bet­ween two tectonic events, the FM had little cause to cook up another storm with his budget. For inst­ance, there was a subtle tinkering in personal tax rates—which would halve the tax burden on those in the lowest slab—and not the grand I-T perestro­ika dreamt up by social media speculators. The coming polls could have occasioned some populism, but whether out of political caution (because of EC diktats) or fiscal prudence, Jaitley didn’t fall for the bait and instead went for quiet, long-term goals.

The budget’s overarching tenor was a non-controversial one: pushing inc­lusive growth. This is to come about via a stepped-up focus on infrastructure, whether in rural development or the construction sector, especially through higher public inv­estment. Judged against its own orientation towards the economic fundamentals, though, the budget also fell woefully short in many quarters, particularly in the vital sectors of health and education. India is in serious danger of eroding its demographic dividend—the largest young population on the planet will turn into a bleeding liability if quality education and nutritional indices do not get urgent budgetary attention.

To be sure, as a broad document of int­ent, the budget showed a keenness to add­ress rural distress, especially after two years of drought. The government has taken care this year to step up investments in rural, agriculture and allied sectors by 24 per cent to Rs 1,87,223 crore. Development economist Jean Dreze is a tad under­whe­lmed, though. “The budget, along with the finance minister’s speech, indicates yet again that the NDA government has little interest in social policy. The general pattern is one of roughly constant expenditure in real terms on social programmes in 2017-18, compared with the Revised Estimates for 2016-17. In a fast-growing economy, this is not good enough,” he says.

Dreze cites cases like the National Social Assistance Programme (one of India’s best anti-poverty schemes), the allocation for which has been kept constant even in money terms. Also, the central government continues to abdicate its legal responsibility to pay maternity benefits of Rs 6,000 per child to all pregnant women: the budget allo­cation for this is sufficient for barely one-third of all pregnant women in India. “More than lack of funds, what is striking is the lack of creative ideas and initiatives in the field of health, education and social security,” says Dreze.

Development expert N.C. Saxena also feels this is an “incremental” budget—with “some increases but not enough to make a difference”. In real terms, he too says, there is a “decline in expenditure provisions”. The feel-good factors are not supported by adequate resources, says Saxena. For him, this could have been addressed by slashing many among the 960 government-run/subsidy schemes and channelising reso­urces into better implementation of the good ones. The government is handicapped on the revenue side: only a 6 per cent rise to Rs 15.16 lakh crore is exp­ected in 2017-18, as against the Rs 14.23 lakh crore revised estimate for 2016-17 and Rs 11.95 lakh crore in 2015-16. “If you are not expecting more revenue, you cannot spend more. Much of the added expenditure will be on salaries,” Saxena points out.

And yet, there is a distinct rural focus, consisting of a promise of better irrigation facilities and market linkages. And an intent to go big on infrastructure via affordable housing and transportation—roads, rail, waterways and airports. One tangible feel-good factor lay, of course, in the tax relief that would be substantial for those at the base of the pyramid. Clearly, the largesse is not just meant to improve tax compliance and widen the tax net (currently only 3.7 crore individuals pay tax) but also to boost consumer sentiments and spending by putting more money in the pockets of middle-class consumers. The biggest gainers are the 1.95 crore taxpayers in the Rs 2.5-5 lakh per annum income bracket, with the FM slashing their tax liability by half to 5 per cent. Those in higher slabs too will get a Rs 12,500 tax relief—except those earning above Rs 50 lakh as annual income, who need to cough up a 10 per cent surcharge. Increased spending by the aspirational classes is expected to address the present challenge posed by large consumer goods inventories and, as a corollary, reinvigorate investments.

Similarly, micro, small and medium ente­rprises with a turnover of up to Rs 50 crore have been provided a 5 per cent tax relief, bringing their slab down to the promised 25 per cent. This is expected to encourage MSME units to move into the formal sector and also help create more jobs with better social security. The tax relief to the lower middle class and MSMEs is a politically astute move that can also bring economic dividends. MSMEs with a turnover up to Rs 50 crore account for around 96 per cent of all companies in India and were among the hardest hit by the money squeeze in the wake of demonetisation, leading many units to temporarily shut operations and send home casual workers.

The farm sector, similarly, is in focus, with the target for agricultural credit in 2017-18 raised to a record level of Rs 10 lakh crore. Agricultural economist Dr Ashok Gulati calls the allocation for rural development “a way forward in the right direction, coming in the wake of two years of drought”. In particular, he is happy about the greater focus on creating and expanding irrigation facilities: the corpus of the Long Term Irrigation Fund, already set up in NABARD, has been doubled to Rs 40,000 crore to help achieve the objective of ‘per drop more crop’. The fund is to have an initial corpus of Rs 5,000 crore. Gulati is disappointed that “there is no radical reform as no attempt has been made to rationalise food and fertiliser subsidies that together account for a Rs 2,15,000 crore outgo.” He did appreciate the provision for improving and expanding dairy and food processing facilities at the local level, though.

Yet, the outlay of Rs 8,000 crore for dairy development and Rs 9,000 crore for higher insurance coverage for crops has left many dissatisfied. Raju Shetti, MP and leader of Swabhimani Paksha, the political wing of Swabhimani Shetkari Sanghtana of Maharashtra, says the “insurance enhancement will benefit insurance companies more than farmers. If this was a pro-farmer budget, it should have provisioned for a price stability fund to protect farmers’ interest, particularly when there is excess production. We have been seeking more infrastructure for storage, processing and exports, including cold storage, warehouses and packhouses etc. There is hardly any provision for these.”

For last few years, Shetti has been pressing the government to engage the Food Corporation of India (FCI) in helping farmers with the storage and marketing of crops like onion and pulses. Though Swa­bhimani Paksha has been supporting the BJP in Maharashtra, Shetti is upset that his party’s political ally has not done enough to keep its electoral promise to double farm incomes. “The government should at least try to bridge the growing disparity bet­ween the incomes and economic well-being of urban and rural populations,” says Shetti. “The BJP cannot expect any political gains if it does not address the real issues and concerns of farmers.”

Krishan Bir Chaudhary, executive chairman of Bharat Krishak Samaj, too feels the government could have done more to address the real issues of farmers, many of whom are leaving agriculture as “it is not a profitable enterprise. It can only be profitable if processing and value addition facilities are provided together with direct market links to consumers.”

Indeed, farmer leaders are positive about the thrust being given to agriculture marketing reforms, including e-mandis, and the plans to set up 600 skill development centres and soil testing labs in panchayats, beside encouraging entrepreneurs from the agri sector. Yet, there is also considerable dissatisfaction at the neglect of key reforms, including in PDS. Chaudhary calls for a proper assessment of outcomes, particularly with irrigation facilities, to know where the money has been spent. He cites the example of Madhya Pradesh where improved irrigation facilities have considerably helped improve productivity without any additional technology inputs.

The proposals for infrastructure growth in rural areas have been appreciated by industry, which feels the measures will help push India’s growth processes to the hinterlands. Says Shailesh Pathak, CEO, City­Infra Capital, “The budget is focused on 90 per cent of India. It would help youth, the poor and farmers. With focus on infrastructure, everyone benefits, since infrastructure is always pro-poor. After demonetisation, the budget will help push growth and investment, with additional resources coming from better tax compliance.”

Pankaj Munjal, chairman & MD, Hero Cycles, echoes this. “There are no big-bang announcements, but there are small progressive steps. From a rural perspective, the increased allocation under NREGA also comes as good news. The finance minister’s announcement of more impending steps to benefit farmers promises to help revive demand in the rural economy.”

On the lack of ‘big-bang’ steps, exp­erts cite the many constraints and conflicts the FM had to overcome. Says Girish Vanvari, national head of tax with KPMG in India, “There were three main conflicts for the budget: the FRBM Act and fiscal deficit, how to spur demand as demonetisation had slowed demand, and how to convince people in the face of elections as people were largely unhappy post-demonetisation..” At the same time, he says, there were many external constraints. These include the looming uncertainty over Donald Tru­MP’s policies and what those may portend, the chaos that GST could bring in during its first six months, and uncertainties over how the monsoon will behave and how oil prices will move. Low crude oil prices for most part of 2016-17 helped India lower its import bill by 18 per cent. But with the price of India’s basket of crude rising from $39.9 in April 2016 to $52.7 in December 2016, the import bill is likely to come under renewed pressure—and this may well spill over to the subsidy bill for kerosene and cooking gas too. This means a bout of popular anger may well be on the cards later this year, since the government has largely been committed to a policy of keeping a check on fuel subsidies to domestic consumers, and is not likely to reverse its stance. GST, simultaneously, will help its revenues through greater compliance.

The broad tendency to err on the side of caution and fiscal prudence—keeping the fiscal deficit target at 3.2 per cent—has been appreciated by the markets, which went up soon after the announcement of the budget proposals. Yes, the absence of a dreaded shock in the shape of a capital gains or inheritance tax helped too. In sum, the market response seemed faintly analogous to the political one expressed by Rahul Gandhi, albeit sarcastically.

“No big bold measures have been anno­unced and most importantly, while he has not done anything to benefit people in a big way, he has not done anything to hurt anyone either,” says Gokul Chaudhri, leader, direct tax, BMR & Associates. “It was a bold move to raise capital expenditure by 24 per cent in the given circumstances. The finance minister is trying to deploy sufficient amounts of capital to kickstart the economy. Despite the fact that revenue collection might not be as high next year, he has committed to growth.”

Some sections of industry, particularly in the renewable energy sector, are feeling a little ignored. Besides solar power, the budget makes no provision for other rene­wable sources. Says Suzlon Group CMD Tulsi Tanti, “With a special mention about the drive towards 100 per cent electrification, the renewable industry was hopeful of an announcement to support the achievement of the government’s RE target of 175 GW, and a long-term policy framework to achieve our INDCs and commitment made at COP-21 to reduce carbon emission to 30-35 per cent by 2030.”

That said, the infrastructure sector is generally happy with the increased outlays. “The budget attempts to enhance domestic demand by increasing the outlay on key economic and social segments as well as taking measures to improve the ease of doing business,” states T.V. Narendran, MD, Tata Steel India & SEA. “Focus on areas such as ports, roads, affordable housing, physical infrastructure should provide the economy, the industry and steel sector the necessary impetus to meet its growth targets. This focus on infrastructure will definitely improve the efficiency and competitiveness of the steel sector.”

An area where the FM has laid significant emphasis is rural and affordable housing, which is expected to attract and benefit a lot of home buyers. Still, the lack of specific incentives to new buyers is seen as a drawback, particularly in a realty scenario where buyers continue to remain cautious. Says Anuj Puri, chairman & country head, JLL India, “The Budget missed out on giving any additional I-T incentives to first-time home buyers or providing higher tax savings on housing loans and house insurance premiums. Nor did it raise house rent deduction limits.”

In the aftermath of demonetisation, the continuing push to digital transactions has received an upbeat response,  at least in urban centres—on the rural side, it continues to face huge challenges and the gap will take some more years to bridge. Experts are upbeat about the outcome of measures to push the digital economy and Aadhaar payments. While a fully digital economy is expected to yield a higher taxpayer base, reduce scope for evasion and improve compliance, Aadhaar-linked payments are expected to plug leakages in subsidy transfers and tax compliance loopholes.

Anant Maheshwari, president, Microsoft India, is fully supportive of the “continued push to using technology to aid a digital economy. I’m glad to witness the increasing focus on cyber security, which is critical to securing the economy’s digital transformation.” Mishi Choudhary, international technology lawyer, however, has misgivings over the move to expand Aadhaar for payments. “We applaud the focus on imp­roving digital infrastructure. But the focus on Aadhaar without a right to privacy and data protection law shows lack of comprehensive policymaking. A democratic soci­ety without rights for its citizens and security for its financial infrastructure may be efficient but is far from just,” he says.

Many experts lean towards a broadly sanguine view though—in due course, they feel, many of these proposals, including the abolition of FIPB, Aadhaar, the digital push, and specific legislations like the Metro Act to promote and improve public transportation, would all converge to make the economy look much better.

But will it bring political dividends for Modi in the states going to polls or, further up the road, in 2019? Political economists are not too sure, given that there are too many gaps to be bridged in meeting people’s aspirations. Joblessness is yet to be meaningfully addressed, and the levels of farm distress are such that a general tonic cannot bring about a miraculous recovery—or a bumper harvest of votes. The government pins its hopes on its big-ticket measures outside the budget. Within it too, there are little baits, like the proposal to confiscate assets of big defaulters like Vijay Mallya. Seeing the rich pay the price of fraud always has universal appeal.

By Lola Nayar and Arindam Mukherjee