5 ups and 5 downs of Jaitley's Budget 2016
This article has been co-authored by Suryakiran Tiwari and Subhash Chandra.
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Union finance minister Arun Jaitley presented his third budget on February 29 amidst challenging global conditions. The Budget tries to balance populism with growth and has a clear push on agriculture, rural sector and infrastructure. Despite the seventh pay commission recommendations and one rank one pension (OROP) proposals, Jaitley has promised to maintain a tight fiscal discipline with deficit targeted at 3.5 per cent of GDP.
With many states slated to go to polls till 2019, the Modi government realises it may have neglected rural India in its Digital India and Make in India push. It doesn't want to repeat the mistakes of AB Vajpayee's "India Shining" campaign. That's why even schemes like the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) which have been termed as a symbol of the Congress' failure has received an increase of ten per cent in allocations, to Rs 38,500 crore.
Sixty-nine per cent of Indians live in rural areas and 58 per cent of the rural households, comprising nearly 40 per cent of total population, depend upon agriculture for their livelihood. So this section can't be ignored. The Budget also shows that government policy is increasingly moving towards taxing the rich to pay for the poor.
However, it fails to bring path-breaking measures to increase the tax net to boost tax revenues, and focuses on burdening the current set of taxpayers only, which is less than three per cent of the population. Markets ended in the red at -0.66 per cent (BSE Sensex). However, a rider: this may not be the only and real indicator.
In this post, we focus on five most popular and five unpopular decisions of Budget 2016 presented by Jaitley:
A. Five popular decisions
The most popular decisions are focused on building a base for the country for future growth and efficiency in all walks of life. The benefits of these investments would impact all citizens, whether farmers, middle class citizens or corporate institutions.
1. Increase in agriculture allocation
Though the share of agriculture in the Indian economy has reduced considerably over the years, India is still an agrarian economy because the majority of households are dependent on it. In the past, the interventions in agriculture by the Central government have been on research or on fertilizers.
Now, in a major change, the government is planning to invest Rs 17,000 crore in irrigation this year. This number is huge. For example, a poorly irrigated state like Odisha spends Rs 2,000 crore a year. The scale of impact, particularly through micro-irrigation can be huge. Madhya Pradesh which had massively invested in micro-irrigation along with other inputs has witnessed a second green revolution of sorts.
2. Huge jump in spend on law and justice
The judiciary has been repeatedly asking for increasing spending, whether on technology or infrastructure, to improve the overall speed and quality of justice in India. It appears that the government has listened to them and has increased the budget by a massive 50 per cent this year to Rs 5,025 crore.
This will bring about significant improvements, including increased use of technology, setting up the national judicial commission, setting up new courts and improving infrastructure of the existing courts.
3. Boost to roads and railways
The government continues to emphasise its focus on infrastructure. After a 20 per cent jump in capital expenditure in the Railways, the ministry of road transport and highways gets a 21 per cent jump in budget allocations.
Railways and highways together would spend about Rs 1,80,000 crore in capital spending. This has more than doubled in the last two years and therefore, is building the base for massive productivity and efficiency gains over the next three-five years as India's infrastructure takes a new shape.
4. Skill development
This is extremely important as about 12 million young people are expected to enter the workforce every year. They need skills to be employed and the government has placed special emphasis in obtaining the right skills to be employed quickly.
This is also closely related to the Make in India initiative as availability of skilled workers will encourage companies to invest in India. There has been a 80 per cent jump in the government's spending to Rs 1,804 crore, primarily in setting up 1,500 multi-skill training institutes across the country. This will be a big plus in reducing unemployment and also enabling companies to find relevant talent quickly.
5. Urban development
The government feels that cities will be a hub for innovation, growth and employment and hence the smart city initiative. Cities can succeed only with the right infrastructure that can support the mass of population living in the city. In this regard, the government is proposing a massive 34 per cent increase in budget to Rs 24,130 crore to support urban development. This will ensure better transport infrastructure as well as other systems that will enable orderly development of key cities.
To boost the construction sector (specially low cost housing), an additional interest deduction of Rs 50,000 will be provided to first-time home buyers taking loans not exceeding Rs 35 lakh, where the value of the house is no more than Rs 50 lakh. This will help young adults and young families who are a critical vote bank for the BJP.
Other popular decisions:
(i) Job Creation: Government of India will pay a contribution of 8.33 per cent for of all new employees enrolling in the provident fund scheme for the first three years of their employment (Rs 1,000 crore). This would reduce the burden on new companies as well as encourage existing corporates to increase hiring.
(ii) Start-ups: Tax holiday for three out of the first five years of operations (but to pay minimum alternative tax, which is a dampener).
(iii) Curbing black money: Tax to be deducted at source at the rate of one per cent for the purchase of goods/services in cash exceeding Rs 2 lakh. This would help tax people who are not in the tax net (rich agriculturists, professionals, and others) and will discourage the circulation of black cash in the system.
(iv) New LPG connections: Five crore additional LPG connections are to be provided. Over two-thirds of Indians still burn wood and dung-based fuel for cooking, leading to a million deaths a year from indoor pollution (Source: United Nations Industrial Development Organisation (UNIDO) report titled "Sustainable Energy For All - July 2014").
(v) Increase in HRA for low income taxpayers: Annual housing rent reduction limit has been increased from Rs 24,000 to Rs 60,000. This will benefit people with income below Rs 5 lakhs.
5 Unpopular decisions
The vast increases in some heads implies that this could only come from more revenues or more taxes.
1. No relief for middle class taxpayers
No relief was provided to the middle class in form of tax breaks/tax concessions or increase in decade-old exemption limits (except for an increase in HRA exemption for income below Rs 5 lakh). Retail inflation has been increasing for the past few months. Corporate India has had a bad year, so hike in salaries/bonuses would be low. The full impact of low oil prices have not been passed onto the people. This class expected some relief. The only relief it got was acknowledgement of the "role of taxpayer in nation-building".
Despite this, the annual GDP growth of 7.6 per cent is primarily driven by consumption and investment and oil at lows of $30/bbl. Some amount of tax relief which would have given a boost to urban demand was the need of the hour. The finance minister played it safe. Additionally, the salaried/middle class taxpayer is not considered a vote bank which votes en bloc, hence successive finance ministers have taken the liberty to ignore this group of people. The trend continued this year.
2. Lower than anticipated capitalisation of banks
Rs 25,000 crore have been provided for the capitalisation of public sector (PSU) banks. This is part of the Rs 70,000 crore announced by the Centre to be infused over the next four years. Banks estimated a requirement of Rs 1.8 lakh crore to meet the new Basel III norms, with balance to be raised from the markets. Poor results of banks owing to high non-performing assets (NPAs) has meant that valuations are at rock bottom and the capitalisation may not be enough. PSU bank stocks except for that of State Bank of India (SBI) were resultantly in the red. This is not a positive for banks or companies that borrow from banks.
3. No clear roadmap for disinvestment and reduction in target
While Modi's mantra has been "minimum government, maximum governance", the Budget doesn't list measures to reduce the government's stake in public sector entities. For the year 2015-'16, only Rs 25,312 crore was raised through disinvestment as against a target of Rs 69,500 crores (36.5 per cent).
For 2016-'17, the target has been revised downwards to Rs 56,500 crore. The Budget does, however, mention that government-owned general insurance companies will be listed but there was no news on listing the mammoth Life Corporation of India (LIC) or other PSUs like Hindustan Aeronautics Limited (HAL), Air India or Bharat Sanchar Nigam Limited (BSNL). This is in line with Modi's strategy of keeping PSU ownership with the government in Gujarat.
4. Additional taxes and penalties on middle/rich class
In line with taxing the rich to pay for the poor, following announcements were made which would hurt market sentiment and reduce net take home of salaried taxpayers:
(i) Additional tax at the rate of ten per cent of gross amount of dividend will be payable by the recipients receiving dividend in excess of Rs 10 lakh per annum.
(ii) Surcharge to be raised from 12 per cent to 15 per cent on persons having income above Rs 1 crore.
(iii) Securities transaction tax in case of "options" is proposed to be increased from 0.017 per cent to 0.05 per cent.
(iv) Krishi Kalyan cess at 0.5 per cent on all taxable services, with effect from June 1, 2016. This is on top of the Swachh Bharat cess of 0.5 per cent implemented in November last year. This will make everything costlier from eating out to telephone and electricity bills.
(v) Infrastructure cess, of one per cent on small petrol, LPG, CNG cars, 2.5 per cent on diesel cars of certain capacity and four per cent on other higher engine capacity vehicles like SUVs. The green lobby would be happy but it has had a negative impact on the automobile industry and thus on Make in India.
(vi) Tax to be deducted at source at the rate of one per cent on the purchase of luxury cars exceeding Rs 10 lakh which is bad news for auto companies and upper middle class citizens.
(vii) Increased cess on coal is likely to increase our monthly power bills marginally.
5. No increase in expenditure on school education
In our view, this is the biggest disappointment from the Modi government. The government continues to pay lip service to education with only a three per cent increase in school education. While school education is a concurrent subject, any support from the Centre in ensuring consistently higher quality of teaching across the country would have been very helpful to the states which may not have limited resources. For example, the percentage of teachers who get in-service training is down by half over the last nine years. This has a significant impact on learning outcomes and therefore, the quality of citizens we are creating in the future.
One of the biggest risks in this Budget is that while the finance minister is expecting corporate tax to grow at a lower rate than last year (8.4 per cent, as against 12.6 per cent last year), he expects personal income tax to grow by 17 per cent compared to 14 per cent last year. It is unclear how this is likely to happen given the overall struggles of corporate India.
To sum up, the Budget overall, has some strong points and some weak ones. The focus on infrastructure, power and skill India for manufacturing jobs is very similar to the successful Gujarat model. Also, the likelihood of a good monsoon is quite high and the increased thrust of the finance minister on increasing rural income to boost rural demand will have a substantial impact on rural incomes and therefore, drive growth for companies selling to rural India.
The middle class living in urban India will get better infrastructure, their companies will perform better and overall, investors should be happier.
However, the increased taxes and the lack of focus on education are negatives that could have a long-term negative impact on the country. The Chinese model was built on a large number of citizens receiving school education, something that Modi is not focused on at this moment. Global economic tailwinds at this moment means that it is unrealistic to expect massive growth this year but with a little luck, even that is possible. However, it is clear that the base has been built for massive growth in 2017 and 2018, just in time for the Lok Sabha election in 2019. Everything depends on execution now.