Budget 2016 is make-or-break for Jaitley

The Union finance minister should unveil a bold plan to simplify personal income tax and exemptions.

 |  5-minute read |   02-02-2016
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The early signs aren't good.

Union finance minister Arun Jaitley has warned that the 2016-17 Union Budget he delivers on February 29 will not be "populist".

Let's decode that. It means, first, that Jaitley will repeat the mistakes of his first two Budgets in July 2014 (interim) and February 2015 (his first full Budget). The basic mistake is to treat the Budget as a mere balancing of the nation's books. As long as the fiscal deficit for 2015-16 is kept to the promised 3.9 per cent of GDP, Jaitley and his team of bureaucrats and economists will be happy. They shouldn't be.

India's economy is in a deflationary phase. Industrial production is stagnating. Exports are down year-on-year by 18 per cent. Corporate earnings are flat. In this environment, the last thing the Indian economy needs is more of the same cautious book-keeping.

To get the economy up and running, it needs investment and consumption. With banks groaning under bad loans, lending to corporates has slowed. In turn, corporates are stuck with foreign exchange loans that have ballooned with the rising dollar. In the absence of domestic bank loans, corporate investment is shrinking.

Also read: Can India finally see a Modi Budget in 2016?

Meanwhile, consumption has dried up. FMCG companies like Hindustan Unilever are reporting sharply lower sales from previously booming small towns. The only way to reignite the economic engine is for the government to spend - even if it means a temporary increase in the fiscal deficit.

In any case, low crude oil prices have given Jaitley some fiscal elbow room: the country's net oil import bill is likely to fall below $45 billion in 2015-16 compared to over $100 billion in 2013-14. Tax receipts are buoyant but part-provisioning for the Seventh Pay Commission, the One Rank One Pension (OROP) scheme and other expenditure has absorbed much of the windfall from plunging oil prices.

Reserve Bank of India (RBI) governor Raghuram Rajan recently warned the government against missing the fiscal deficit target of 3.9 per cent by spending to revive growth. He is wrong. Had he given the same advice to the US Federal Reserve five years ago when the US economy was sputtering, it would have been (rightly) discarded.

It should be by India too. Unfortunately, Jaitley is unlikely to show the same courage and insight of the Fed whose stimulus and low interest rates have returned the US economy to the highest growth (2.5 per cent) among advanced economies along with low unemployment (five per cent).

Tax reform

It is a scandal that the regressive retrospective tax introduced in 2012 by then finance minister Pranab Mukherjee has not yet been repealed. Jaitley has said that the retro tax will not be used. Why then keep it on the statute books?

Jaitley says that there are just a few retro tax cases which will wind their way through the judicial system and eventually be extinguished. The only people who will benefit from this are highly-paid lawyers whom global companies like Cairn and Vodafone are forced to hire to fight totally unnecessary tax cases. Meanwhile, foreign investors drawn by India's potential hesitate to commit themselves fully given such a glaringly unfair retrospective law.

The last thing Jaitley should do in this Budget is make small changes in tax rates. Instead he should unveil a bold plan to simplify and rationalise personal income tax, TDS, service tax and exemptions. Corporate tax was to drop in steps from 30 per cent to 25 per cent by February 2019. That process must begin with this month's Budget.

Also read: India cannot afford to ignore states' public expenditure in 2016

India's start-up entrepreneurs have shown how dynamic Indian business can be if it's left well alone. The government must reduce its role in business by removing complex duty and tax structures. These give bureaucrats in the finance ministry discretionary powers. Misuse is inevitable.

One of the errors this government has made is to hand over too much power to bureaucrats. As author and columnist Tavleen Singh wrote recently in the Indian Express, this can be fatal: "Is the prime minister in danger of having his political agenda crushed beneath the feet of the mighty mandarins of Lutyens' Delhi? Has he noticed this and is this the reason why he is reported to have given senior bureaucrats a pep-talk last week? In search of answers I wandered about the corridors of power listening to whispers and rumours, and what I gleaned from this exercise was that the prime minister has relied more on bureaucrats than on his political team and that this is one reason why almost nothing has changed in terms of governance.

"It will not change in the near future either, because there is nothing that our civil servants hate more than change. If Indian governance has remained in colonial mode nearly several years after the British Raj ended, it is because of the extraordinary ability of the Indian bureaucrat to resist change. Even so powerful a prime minister as Jawaharlal Nehru acknowledged towards the end of his long tenure that he had been wrong not to have made a serious effort to change the bureaucracy. Narendra Modi must not wait too long before recognising that bureaucrats are incapable of implementing political change, and that when they are given too much power, they become an obstacle in the path of parivartan and vikas."

There are two kinds of "bureaucrats" who reflexively resist change. In the first category are IAS generalists. In the second category fall economists who have served in the International Monetary Fund (IMF) and global think tanks - for example, RBI governor Raghuram Rajan and chief economic advisor Arvind Subramanian.

This is Jaitley's last opportunity to deliver a Budget high on vision and low on book-keeping. Next year will be too late to change course - and we might anyway have a new finance minister by then.

Also read: With BJP voter losing faith in Modi, cabinet reshuffle is in order

Writer

Minhaz Merchant Minhaz Merchant @minhazmerchant

Biographer of Rajiv Gandhi and Aditya Birla. Ex-TOI & India Today. Media group chairman and editor. Author: The New Clash of Civilizations

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