When finance minister Arun Jaitley gets up in the Lok Sabha on Saturday to present the Union Budget for 2015-16, he will almost certainly seek to emphasise how his government will ease the way business is done in the country. The new policies and programmes announced in the Budget will seek to reduce the role of the government in India’s economic life, in keeping with Prime Minister Narendra Modi’s pre-election slogan: “minimum government, maximum governance”. But Mr Jaitley will have to ensure that his pro-business Budget rhetoric is not perceived as anti-poor.
The government has had more than its share of beginner’s luck. International prices of crude oil have collapsed by more than 50 per cent, which is a huge boon for the country’s economy because India imports roughly 80 per cent of its total requirements of crude oil. While the government has reduced domestic prices of petrol and diesel by around 20 per cent, it has mopped up the remaining 30 per cent benefit by increasing excise and customs duties.
The flip side of the fall in world prices of crude oil is that this phenomenon is a consequence of, among other things, a slowdown in world demand, especially in countries in Europe, besides Russia, Japan and China, all of which is having a negative impact on exports from India. Thus, while the country’s import bill has come down substantially, so have earnings from exports. What has added to pressures on India’s external balance of payments and current account deficit is the weakening of the rupee vis-a-vis the US dollar.
Mr Jaitley wants to keep the fiscal deficit under check and bring it down further to, say, 3.6 per cent of GDP in the coming financial year that begins on April 1, 2015. He has been rather fortunate this financial year because of the fall in oil prices and earnings from auctions of telecommunications spectrum. He is expected to meet the fiscal deficit target of 4.1 per cent of GDP during 2014-15 despite the fact that tax collections — both indirect taxes (excise and customs duties) and direct taxes (personal income tax and corporation tax) — have hardly grown. One reason for this is the sluggish state of the manufacturing sector.
How will he achieve this deficit target? One way could be by curtailing the Central government’s expenditures on healthcare, education, other social welfare programmes like the one under the Nrega, as well as on agriculture and rural development.
However, Mr Jaitley cannot cut such expenditures in an obvious and blatant manner. He will adopt a more subtle and nuanced approach or else he will be severely criticised as being anti-poor and anti-farmer. He will argue that it is no point making high budgetary allocations if the funds cannot be spent. If expenditure cuts are made, it will not go down well with a section within the Sangh Parivar (which is also opposing his intention of changing the land acquisition law).
Nevertheless, Mr Jaitley will have to stick to his assurance that the humiliating defeat of his party in the Delhi Assembly elections will not result in “economic reforms” decelerating. Already, sections of the corporate sector — including people like Deepak Parekh — are complaining that the government has not done enough. The finance minister will have to placate big businesses, not merely because they actively supported Mr Modi in the run-up to the 2014 elections, but also on account of the government’s dependence on this section of industry for the PM’s Make in India campaign.
Ensuring that the investment climate revives is easier said than done — given the state of the country’s physical and social infrastructure. Even as Mr Jaitley may extend the tax benefits given to sections of industry, including possibly the automobile sector which has been in doldrums, he will have to make special efforts to woo foreign investors in general and foreign institutional investors in particular so that stock market sentiments do not sag. The tax exemptions granted to the corporate sector that are reflected in the “statement of revenue foregone” in the Budget documents, could, therefore, be expected to exceed the Rs 6,00,000-crore mark. These would, of course, be described as “concessions” and “incentives” and not “subsidies” which is a dirty word in the lexicon of neo-liberal economists.
What is likely to happen is that the finance minister may ease the personal income tax burden on the middle classes either by lowering tax rates or by increasing the exemption limits or by a combination of both. This will undoubtedly earn him applause from a section of the population that has been supportive of Mr Modi. He will probably not increase taxes too much — except on the usual sinful products such as cigarettes — but assume that GDP growth will be buoyant (say, at around 8 per cent) and inflation will be relatively muted (at approximately 5 per cent) in his budget calculations.
What is also more or less certain is that Mr Jaitley will assume that there will be substantial earnings to the exchequer through the sales of shares of public sector undertakings. This will be very much in keeping with the right-wing, ideological position of the government. It is a separate matter altogether that this strategy of raising resources by divestments to bridge the budget deficit has significant negative consequences in the medium and long term. Family gold cannot be sold again and again.
More importantly, the proceeds from the sales of this gold should be used for the daughter’s education or for building an extension to the house and not for paying grocery bills. However, such logic has not impressed the likes of Mr Jaitley in the past and will not on this occasion as well. He will surely resist pressures from within his own party to go in for “populist” measures such as increasing the subsidy bill on food and fertilisers. He is also expected to refine the roadmap for implementing a common goods and services tax in the country, presumably excluding petroleum products from its ambit.
Budgets in India are much more than statements of financial accounts. They are important pronouncements on the political economy of the country. If his July Budget is any indication, this one too, will be dense with detail. The Prime Minister and his second-in-command in North Block have been incredibly lucky so far. They will surely hope that their luck will not run out on them in the year ahead.
The writer is an educator and commentator