Jaitley's Budget 2016 shows Modi's grand vision

The 2016-17 Budget bears all the hallmarks of Prime Minister Narendra Modi's strategy of "hastening slowly".

It eschews grandstanding and does not go for headline-grabbing announcements that may win instant plaudits but have the significant risk of giving to the political opposition. The Budget, therefore, continues with Modi's programme for broad-based inclusion of - and appeal to - the farmers, poor, women, and significant segments of the middle class, including small and medium entrepreneurs.

Manifesto

The Modi-Arun Jaitley duo has, thus, made it clear to the Opposition that they will not be easily dislodged or be de-stabilised on economic grounds. The Budget takes a giant step forward on the path of bringing the government's policies and programmes in line with the BJP's election manifesto. Thereby, it prepares the ground for Modi to be the first non-Congress two-term prime minister.

There are several features of the Budget that would lead one to this conclusion. First, there is a huge focus on agriculture and rural development that has been allocated nearly Rs 88,000 crore in this Budget for expanding irrigation schemes, village electrification, groundwater rehabilitation (allocated Rs 6,000 crore), repair and renovation of village ponds and reservoirs, etc.

Add to this the Rs 2.8 lakh crore that will be handed over to gram panchayat and municipalities, Rs 27,000 crore on rural roads under the PMGSY and the highest ever allocation to MNREGA of Rs 38,500 crore and we have a massive package for not only reviving flagging rural demand but also provide a major push for rural infrastructure.

Second, the scheme to provide 50 million BPL (below the poverty) households with free LPG gas connections to replace the traditional wood-burning chulah, together with further expansion of the direct transfer of benefits by giving a statutory basis to Aadhar and initiating a pilot programme for DTB for fertilisers, will ensure much greater efficiency in targeting subsidies and preventing leakages.

With his Jan Dhan Yojana for zero-balance bank accounts, the three life insurance schemes, recently announced crop insurance schemes and further expansion of JAM, Jaitley has taken care to deflect any criticism of this government being a suit-boot ki sarkar. This is good not only for the current year when there are five state Assembly elections but also for building the insurance for the 2019 elections.

Third, this is the first time I have seen a Budget announcing a subsidy for increasing employment. The proposal for the government to absorb the cost of employees' pensions of up to 8.33 per cent of their wages, provided these are below Rs 15,000 per month for all new employees and those transferred from the informal to the formal ones, is path-breaking in trying to expand employment and also to start formalising the informal sector. The provision for doubling the cap to Rs 2 crore for availing the presumptive tax provision by MSMEs will also help them expand their employment.

Third, there is an allocation of Rs 2.21 lakh crore for the infrastructure sector that include roads, railways, etc. The Budget indicates that nearly 10,000km of highways and roads construction will be completed in 2016-17 and a similar number of new highways will be contracted out this year after having resolved pending issues with 85 per cent of the 70 stalled projects that the government had inherited.

In addition, the government has hiked the incentives for first time house buyers by raising exemption limits on interest deduction to Rs 50,000. I would have been happier if the Budget had announced a large-scale public housing programme, as that would give a further fillip to employment generation and demand impetus.

However, the focus on infrastructure will again address both equity and growth issues as the better availability of public physical infrastructure improves the mobility of the weaker population segments.

Incentives

The corporate sector could feel left out from Modi's scheme of things. It has not been given any special incentives and essentially left to its own devices to revive its fortunes. Even for the critical exports sector, a mere expansion and deepening of the duty drawback scheme has been announced. This will not suffice for Indian firms to expand their share in global markets, which they must do in the face of flagging global demand.

The Modi-Jaitley duo's understanding seems to be that if the government goes about improving the physical infrastructure, takes care of social needs and generates additional consumption demand by pumping in financial resources in the rural sector and improves the ease of doing business, the corporate sector will respond positively to this distinct improvement in the overall climate for investment. This will be further helped by the promise to strengthen the banking sector for which the Budget included a capitalisation of Rs 25,000 crore and the assurance that the government was solidly supportive of the public sector banks.

Reforms

The finance minister has chosen to retain the fiscal deficit target at 3.5 per cent of GDP for 2016-17. Along with structural reforms announced in the Budget, this will put the onus on the RBI to trigger the private investment cycle by lowering the capital costs in the economy by announcing a substantial interest rate cut sooner rather than later.

From my estimates, the public capital expenditure has been increased by a rather measly 3.9 per cent for 2016-17 over the previous year. This is lower than the capex (capital expenditure) increase announced in 2015-16 Budget of about 20 per cent. Let's hope that the corporate sector will oblige and ramp up private investments because in the absence of a strong upturn in the investment cycle, a number of assumptions on employment generation will not fructify. In this scenario, investment will remain subdued and the country could miss an opportunity to get back on the high growth trajectory.

Evidently, Jaitley has consciously taken the risk to assume that the corporate sector will play ball as it doesn't have many choices in the present global conditions.

The finance minister has given himself another chance by proposing a review of the FRBM Act to give himself more elbow room next year, just in case his assumption about the corporate proclivities is not borne out. Overall, this is an eminently reasonable approach in the circumstances.

(Courtesy of Mail Today.)