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Jaitley's sharp Left turn shows Modi eager to please Lutyens' Delhi

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Minhaz Merchant
Minhaz MerchantMar 01, 2016 | 19:34

Jaitley's sharp Left turn shows Modi eager to please Lutyens' Delhi

First, the good news. Finance minister Arun Jaitley didn't let his Lutyens' buddies down: he presented a socialist budget Congress president Sonia Gandhi would have been proud of.

That's actually the bad news. Spooked by Congress vice-president Rahul Gandhi's "suit-boot ki sarkar" jibe, Prime Minister Narendra Modi has tilted Left. His finance minister Arun Jaitley, who like Rahul in private is a Savile Row suit capitalist and in public a kurta-pyjama socialist, was delighted to oblige.

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That's why the Union Budget for 2016-17 looks as if it was written with one eye on the Lok Sabha election in 2019 and another on jobs, GDP growth and fiscal prudence that would protect India's international credit rating and lead to lower bank interest rates for companies groaning under debt.  

modi-jaitley-budget-_030116073027.jpg
Arun Jaitley presents Union Budget 2016.

Like everything that's hybrid, this Budget falls between two stools.

The good points:

1.    An allocation of Rs 2.87 lakh crore for gram panchayats, villages and towns, along with the pre-budget crop insurance scheme, will ease rural distress, improve rural infrastructure and is one of the Budget's best points.

2.    Spending Rs 2.18 lakh crore on roads, railways and national highways is another excellent move. It will upgrade several state roads to national highways, boost civic projects and create jobs.  

3.    Keeping the fiscal deficit down to 3.9 per cent in 2015-16 and 3.5 per cent in 2016-17 will infuse confidence amongst global investors in the government's economic management. It will allow Reserve Bank of India (RBI) governor Raghuram Rajan to lower interest rates, drive consumption and kickstart corporate investment. This is why the stock market surged on Tuesday when it had absorbed the fine print of the budget.

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In the fine print though lies a devil or two. The biggest is the proposed tax on 60 per cent of Employee Provident Fund (EPF) withdrawals after April 1, 2016.

This isn't just a bad idea; it is unconscionable to penalise middle class savers in such arbitrary fashion. Jolted by the angry public reaction, the ministry of finance has said it might alter some elements of the proposal by taxing prospectively only the interest (not the principal) on EPF. That too though would be deeply unpopular.

Other negatives? Allocating Rs 25,000 crore for bank recapitalisation is clearly a drop in the ocean. Banks need at least Rs 3.50 lakh crore to emerge from the black hole their balance sheets were sucked into between 2004 and 2014.

The new tax of 10 per cent on dividends above Rs 10 lakh is another nice socialist gesture that will punish dividend-paying companies which already pay tax on dividends before they are distributed to shareholders and create new jobs in the economy.

Jaitley had promised in his previous budget to lower corporation tax from 30 per cent to 25 per cent by 2019. He has now committed to bringing it down to 29 per cent in 2018, making the 25 per cent target for 2019 unrealistic.

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To compound matters, the FM has added new cesses, including an infrastructure cess. This will fuel inflation. Carmakers like Tata Motors have already announced steep increases across models. The cess also flies in the face of simplifying the tax regime that Jaitley has rightly tried to achieve by forming a new tax dispute resolution mechanism and widening the concept of presumptive tax to ease the burden on smaller companies and professionals.

By not repealing the retrospective tax - former UPA finance minister Pranab Mukherjee's most lethal legacy - Jaitley has shown his lawyer's instincts. These are not a reformer's instincts. The FM's offer to waive penalty and interest on retro tax claims pending against, for example, Vodafone is academic since the company, citing a Supreme Court order, claims no tax is payable in the first place on its offshore transaction.

An eerie silence hung over Jaitley's private office room in Parliament House when I arrived, following an invitation to watch his Budget speech live from there. The PM later gave the Budget an A+. Why? Because it's ostensibly a farmer-oriented, rural-focused Budget and may seem to suit an electoral purpose. But with little devils in the detail still popping up here and there, that may be wishful thinking.

Last updated: March 02, 2016 | 15:54
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