On TV , I rated the budget at just 5.5 out of 10, even though the Sensex zoomed 486 points. It zoomed not for what was in the budget–like higher capital and rural spending -as what was not. It did not contain anticipated, feared levies on capital gains and indirect FII gains, and an increase in service tax to 18%. This was a relief rally.
My criticisms are also about what the budget didn’t contain. What it did could be called a workmanlike effort. But I viewed it in longer perspective, as finance minister Arun Jaitley’s fourth and penultimate budget, and hence the last chance for structural changes promised in earlier years. These did not happen.
Earlier, Jaitley had proposed privatisation (the euphemism is now “strategic sales“ of PSUs). Niti Aayog even prepared a list of dud PSUs to be sold. But for the fourth time, he funked it. He has not sold government stakes in private sector companies (SUUTI), as promised.
Earlier, he pledged to convert the railways and port trusts into corporations. No action there. In 2014, Jaitley pledged to cut the fiscal deficit to 3% of GDP within two years. He has postponed that target date twice within four years, despite a bonanza from falling oil prices.Nobody forced him to set stiff targets. He could have said in 2014 that, given the mess he had inherited, he would get to 3% of GDP only in 2018-19. Instead he set and reneged on his target twice within four years. That dents India’s credibility . That’s why Moody’s rates India as barely investment grade.
Remember, the original target date for reaching 3% was 2008. A Great Recession intruded, but does not excuse slippage by 10 years. The combined deficits of the central and state governments are 6-7% of GDP. This is among the highest in the world, far higher than the level at which many countries have gone bust. India survives high deficits because of high savings and growth rates. But this leaves India looking vulnerable and lacking in political seriousness. It also leads to the highest inflation and interest rates among major economies.
Jaitley appointed an Expenditure Management Commission in 2014 to contain wasteful spending. That has sunk without trace.
He had pledged to cut the corporate tax rate from 30% to 25% to help India compete with Asian neighbours with much lower rates. Last year he cut the rate to 29% for some companies. This year he has cut the rate to 25% only for companies with a turnover up to Rs 50 crore. But these are not companies typically competing with Asian neighbours. The corporate tax for bigger ones should have been cut to at least 28%.
He has lost a golden opportunity to convert demonetisation into a political winner. He should have distributed part of the windfall from his crusade against black money to the masses. Even if uncashed high-value notes are just 2-3% of the total, that translates into Rs 30,00045,000 crore. Besides, he got a tax windfall from the second voluntary disclosure scheme linked to demonetisation. So he could have put a few thousand rupees into each of 26 crore Jan Dhan accounts, establishing a link between black money captured and cash benefits to the masses. That link was lost since the windfall went into general government spending. This reduces both BJP’s chances in the coming UP elections and the moral force of the crusade against black money.
To cleanse political life, Jaitley has cut the maximum cash donation to parties from Rs 20,000 to Rs 2,000.This will easily be evaded: parties will increase ten-fold bogus entries of Rs 2,000 each. Only a tiny fraction of political money enters party books, so the measure is toothless.
He has also proposed electoral bonds to attract legitimate political contributions. But both donors and parties prefer black deals. A risk is that electoral bonds will become a way of holding black money. They will be bearer bonds, which are used by drug lords globally.
His new cash limit of Rs 3 lakh per transaction will be ignored in rural India and the informal sector. Those that keep transactions black will shrug. Those who pay tax will split large transactions into several transactions of Rs 3 lakh each.
In sum, viewed as an annual financial exercise, this was a reasonable budget. But it slipped on many old pledges and could have done much more.