Viewing the Budget in black and white

As a long-term commentator on budgets, there are three aspects that are noteworthy from my perspective. One, the fiscal objectives of the Government and the action taken in achieving them; two, the actions required after demonetisation to achieve and/or sustain its positive effects; and three, the policy reforms in the Budget that help achieve efficient growth and employment creation.

After achieving the fiscal targets for 2016-17, the issue was whether to stick to the target of 3 per cent for 2017-18 or to exceed it in the interest of greater investment expenditure on infrastructure.

The Government managed the delicate balance by relaxing the target by 0.2 per cent to 3.2 per cent while raising capital expenditure by 25 per cent in BE terms (11 per cent BE/actual). This allowed it to retain its hard-won fiscal credibility while addressing concerns over falling national investment rate by stepping up infrastructure investment and encouraging complementary private investment.

The Budget also fine-tuned allocations on the existing programmes of the Government, such as Swachh Bharat, Skill India, Digital India/e-governance, without introducing any adventurous new programmes that could become budget guzzlers. This was widely welcomed, though there was some disappointment that the move from inefficient, leaking subsidies to direct benefit transfers wasn’t accelerated despite the success of the LPG subsidy reforms.

Soon after the demonetisation I had defined three potential areas of benefit and the policy actions needed to actualise and sustain them. The Budget offered some action on each, thus meeting the benchmarks one had set.

Despite the predictable negative effects on GDP, one had projected an increase in income tax-related declarations and collections. This, however, needed to be sustained by implementation of promised corporate income tax reductions, and some movement on personal income tax reform (PIT). The PIT rate in the lowest bracket was reduced from 10 per cent to 5 per cent to incentivise new taxpayers to enter the system. As this creates a sharp jump in rates between the first and second brackets (20 per cent), and the reduction was offset by a rise in surcharge, it will require a more comprehensive PIT reform in the next Budget, including another look at exemptions and deductions.

A clever way was also found to identify a set of CIT-paying companies with high effective rates (>30 per cent) and to reduce these to 25 per cent without changing either the rates or the deductions-exemptions for the rest. Again, in this case, we would expect a more comprehensive reform in the next Budget.

The second area was housing and real estate. I had projected that demonetisation would reduce prices by reducing the black money part of the price. However, policy actions should make it easier for prices to fall (for example, by reducing circle rates and stamp duties) and to make it easier to get credit for and do transactions in white. Pre-Budget announcements on credit and interest subventions for low-cost housing were followed in the Budget by reduction in effective capital gains for one house, and easing of rules and conditions for creation of affordable housing. The policy approach to housing and real estate would have to change from viewing it as a repository of black money to a white investment on par with investment in the equipment of financial instruments.

The third area was political-bureaucratic-police corruption, which has become the most important generator of black money in the last 30 years. To my surprise the the Election Commission’s recommendation to reduce the limit for acceptance of cash donation was accepted, and it was brought down from an upper limit of ₹20,000 to ₹2,000. Political parties who have complained that it is still too high should join the Government in reducing this further to ₹200 or ₹20.

The second proposal was the introduction of a bond that would make it possible to use tax paid income to make donations to a political party instead of being forced to generate black money to make anonymous donations. The bond will not make donations transparent, only make it possible to use ‘white’ money for political donations.

Reform of ESI, PF and other social security subventions, which add 30 per cent to the cost of labour (with benefits to workers), was promised in the last Budget, but has made slow progress.

Without it, the ban on cash payments above ₹3 lakh is likely to have unanticipated consequences. It will make large-scale subcontracting of labour difficult and reduce informal employment further. At the same time the 30 per cent addition to wage costs will continue to incentivise more capital-intensive production methods in the organised sector.

Reforms for sustaining economic growth and employment generation are a continuing, incremental process, and this budget had its complement of small but welcome announcements. In agriculture this included an intention to remove perishables from the ambit of the APMC, a model law for contract farming, and further push the national agricultural market (eNAM). There was also a commitment to integrate the 50 odd labour laws into four rationally organised ones. This is an essential complement to the two-track approach where certain politically difficult issues are left to the States, while the Centre carries out the broader reform.

Two other small but critical steps were the intention to abolish the Foreign Investment Promotion Board (FIPB) and to resolve the legacy problems of PPP contracts by including it in the arbitration law. The FIPB is a symbolic step but along with continuing reduction in sectoral restrictions it has a good effect on new investors.

An announcement which is critically dependent on implementation is strategic sale. The receipt budget made a provision of ₹15,000 crore out of a total disinvestment target of ₹72,000 crore. This is an indication that this process will finally start in 2017-18. On balance it is a good budget, consistent with my expectations.

The writer was chief economic advisor