The real test of Modi’s “maximum governance” lies in the Union Budget’s implementation
If not for the avoidable controversy of bringing the employee provident fund (EPF) under tax regime, Union Budget 2016 would have been known for some bold steps that outlined the future economic strategies of the government.
It would be known for government’s shift towards rural economy, which was so evident (especially when the impact of the EFP taxation was not realised by many) that in a post-budget press conference, a journalist asked Finance Minister Arun Jaitley if the budget was indeed prepared by a right-of-centre government.
Responding to the journalist’s jibe, the finance minister said people are free to give it any label, but the Budget had tried to address the problem faced by the rural and agriculture sector due to two consecutive years of draught.
No one can also deny that there was a sense of urgency in the government to change people’s perception that it is only concerned about the urban middle class and the rich. This was an important shift for the government, given the forthcoming state elections.
Apart from its rural focus, two other themes that come out clearly from the budget are the government’s decision to stick to fiscal deficit target of 3.9 per cent, and to continue with its focus on infrastructure spending.
The rural largesse
The government has increased the allocation to agriculture and farm sector from Rs 22,958 crore (revised estimate 2015-16), to Rs 44,485 crore in 2016-17, a growth of almost 95 per cent. Although critics have attributed this sharp jump more due to financial jugglery than actual increase in allocation. The government has actually shown the money (Rs 15,000 crore) for interest rate subsidy on farm loans in the books of department of agriculture, rather than showing it in the books of the finance ministry.
A sum of Rs 87,765 crore has been allocated for rural development — including rural employment and rural road schemes — an increase of almost 11 per cent from last year’s allocation of Rs 79,279 crore.
It is important to note here that the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) — a scheme criticised by Prime Minister Narendra Modi as a symbol of the previous government’s failure — has received an allocation of Rs 38,500 crore higher than previous year’s Rs 36,000 crore.
One of the major thrust areas in the budget has been rural roads, which is part of the government’s overall focus on improving infrastructures across the country. The government has allocated Rs 19,000 crore for Pradhan Mantri Gram Sadak Yojna, reiterating the much-held belief that better road connectivity is crucial for rural development. Renowned economists have accepted that over the years the two main factors helping rural economy most are rural roads and penetration of telecom services in the rural sector.
Infrastructure spending
Despite limited resources and the need for a focus on social sectors, the government has not compromised on its commitment towards improving the country’s infrastructure. It has lined up Rs 97,000crore spending on roads and highways alone (including Rs 19,000 crore for rural roads).
Total allocation for capital expenditure (spending in asset creation) has been increased from Rs 2.38 lakh crore (revised estimate) in 2015-16 to Rs 2.47 lak crore in 2016-17. Though as a percentage of GDP, it is just around 2 per cent, but if the government manages to achieve this target, it would be a big plus for the country, which has not seen infrastructure spending as a percentage of GDP more than 2 per cent in a long time.
Sticking to fiscal target
Last year, the government gave a roadmap that by 2016-17, it would be able to reduce the fiscal deficit target around 3.5 per cent from the then 4.1 per cent. The Budget this year has stuck to the target despite “doubts” over its ability to do so, given it has committed much higher money for infrastructure spending and boosting rural economy.
In 2015-16, it would be been able to achieve the target of 3.9 per cent, primarily because of low import bill (due to drastic fall in crude oil prices) and record tax collection from indirect taxes — increased service tax collection and excise duty on petroleum products.
However, experts have cast aspersion on the government’s ability to achieve the 3.5 per cent fiscal deficit target in 2016-17, because it is unlikely that crude oil prices may fall further from the levels touched last year and, therefore, limited scope for windfall gains from excise duty collection on petroleum products.
The government is exploring additional avenues of mopping up funds to achieve the fiscal target. It seeks to collects Rs 8,000 crore from two new cesses imposed in this year’s budget-- Krishi Kalyan cess and infrastructure cess. It also hopes to mop up Rs 10,000 crore from Swachh Bharat cess,which came into being from November last year. It further expects to mop up an additional Rs 13,500 crore from clean energy cess, or the Clean Environment cess.
Tax reforms
Probably the one area that the budget disappointed the most is tax reforms. The government had last year announced that it would reduce the corporate tax rate in a phased manner to 25 per cent from the existing 30 per cent, by 2018-19. The government last year also announced the roadmap for phasing out exemptions and everyone thought it was a precursor to the likely rate cut.
However, what the government has done instead is create two new categories of tax payers within the corporate tax bracket. One, the new manufacturing companies that start operations after 1 March 2016. They would be taxed at a new rate of 25 per cent plus surcharge and cess, given they would not be able to avail the existing exemptions.
The second category is those companies with annual turnover up to Rs 5 crore, and they would be taxed at 29 per cent.
So, the government, instead of going for a uniform tax rate has actually further added to the web of different corporate tax rates. The government’s argument is that the benefit for most of the exemptions that would be phased out would be reaped only after 2016-17, and therefore, the government had little fiscal space to effect across-theboard cut in corporate tax rates.
On personal taxation front, there was no increase in basic exemption limit. However, for new home buyers, government has increased the deduction limit on interest payment on home loan up to Rs 35 lakh (for properties not more than Rs 50 lakh) by an additional Rs 50,000. This is an additional incentive given to affordable housing. This should encourage home buyers.