Finance Minister Arun Jaitley’s maiden budget repeats so many figures of Chidambaram’s interim February budget that global analysts call it a cut-and-paste job. I call it a Chidambaram budget with saffron lipstick.
Chidambaram’s February figures were attacked at the time as bogus and inflated by the BJP. The same figures have suddenly become the BJP’s new truth. Figures apart, Jaitley should have used his maiden budget for an overall five-year vision. He should have explained exactly why economic growth halved under the UPA, and what tough decisions would be needed to rectify that. Alas, he didn’t.
Projects galore cleared by Chidambaram remained unexecuted for want of land acquisition and state-level clearances. Jaitley has pledged to increase Plan spending (as Chidambaram did twice earlier), but not said how he will overcome the hurdles that hobbled Chidambaram. Jaitley also announced a cascade of small projects for every conceivable vote bank. Is this really compatible with his slogan of ‘minimum government, maximum governance’?
The old licence-permit raj was based on industrial and import licences. A new licence-permit raj has now emerged, resting on four pillars — land acquisition, environment, forests and tribal concerns. Jaitley’s speech showed no way out of the new mess.
It said nothing about reforming labour laws, which have thwarted employment growth. It said nothing about coal de-nationalization, or lowering government in equity in banks below 51%. He hinted at subsidy reform, but the budget figures revealed an unreformed subsidy regime. This was the biggest disappointment of all. He announced an increase in the FDI equity limit in defence production and insurance from 26% to 49%. But foreign manufacturers say they need at least 51%. As for insurance, Chidambaram had proposed the same 49% limit, which the BJP at the time had opposed. What’s new? Modi and Jaitley have often spoken of the need for tough decisions and bitter pills. Amazingly, the Budget had none at all. Jaitley cut direct taxes by Rs 22,500 crore, mainly by raising the income tax exemption limit and giving tax breaks for savings by the middle class. This was a sugar-coated pill, not a bitter one.
How, despite such giveaways and increased Plan outlays, did Jaitley stick to Chidambaram’s fiscal deficit target of 4.1% of GDP? By assuming that nominal economic growth of 13.4% would generate tax growth of 17.7%, and that dividends from government companies would boom with “achche din”. Very optimistic.
Jaitley highlighted the need for a Goods and Services Tax. But Chidambaram also did so earlier, and in vain. The chief ministers are not yet close to clinching a GST deal. Jaitley could have produced a five-year tax vision. He could have echoed the Economic Survey, pledging a phased shift to ASEAN direct tax levels in five years, making India globally competitive. Instead he just promised another look at taxes.
He could have said categorically that retrospective taxation is a bad thing, to be used only in the rarest of cases. Instead he defended it as a fundamental right of sovereign governments, while promising a new mechanism to screen new cases and avoid frivolous ones. Lawyer Harish Salve said, “This does not bridge the trust deficit between foreign investors and the government.”
Infrastructure is India’s Achilles Heel. Jaitley outlined many steps to improve bank and private investor funding of infrastructure. That’s positive, yet the harsh truth is that the public-private partnership (PPP) model is broken. Delays in clearances, insufficient traffic growth and fuel shortages have saddled infrastructure companies with such colossal losses that these threaten the solvency of the banks that financed them. Jaitley must fix the underlying problems, not just the financing. He is banking heavily on the PPP model for many other schemes, and we now know that has risks. Perhaps I am too harsh and impatient. Jaitley says he has been only 45 days in office, this is just the first of many steps, and his Budget is directional, not a detailed blueprint. Fair enough: let’s give him more to time to prove himself. But he’s off to a disappointing start.
Meanwhile, he needs some luck. UPA-1 was lucky to benefit from an unprecedented global boom and easy global money. Chidambaram in his last two years was unlucky to be caught in a global slowdown. If Jaitley is lucky, the global economy will pick up sharply. If he’s luckier, the global price of oil and fertilizers will fall, slashing his budget subsidies. Brent crude fell to $108/barrel on budget day, below Jaitley’s budget assumption of $110. A portent? Napoleon once said good generals had to be lucky, not just talented. That’s true of finance ministers too.