Lots of smart initiatives to boost investments, even talk of privatisation, but little on subsidies
Given the build-up, finance minister Arun Jaitley was always going to disappoint. Not surprisingly, after a great deal of volatility, the Sensex closed lower than it opened—the Bank Nifty, though, soared. In itself, the Budget was not just well-crafted, it had a lot of imaginative proposals which added up to what would have been a credible reforms pitch in a normal year. But this was not an ordinary year, this was not an ordinary Budget, and this was not an ordinary government, and it did not have an ordinary mandate.
Jaitley, to be fair, tried to address most of the pain points. Economic growth was a big concern, and with private sector balance sheets stretched to breaking point, the finance minister decided to push public sector capex as much as he could, especially in areas like roads and railways that have significant multiplier effects. More important, he provided a raft of sops and more. Tax pass-throughs were cleared for real estate investment and infrastructure investment trusts as well as alternative investment funds, a promise was made to re-look PPPs in order to shift more risk towards the sovereign, tax-free infrastructure bonds were promised, and a national investment fund with an annual flow of R20,000 crore is to be set up—with this fund to raise debt and then invest in infra-finance firms which can raise their own debt, the leverage will ensure funds will not be a constraint. And, to kickstart projects, five plug-and-play—jargon for projects with all clearances given—ultra mega power projects have been promised. Indeed, like the Railway budget, a long-term investment plan was laid out to let investors salivate over what the future held—6 crore houses by 2022, completing around 1 lakh km of under-construction roads and then building another 1 lakh km. And for the first time since the Vajpayee government demitted office in 2004, the word ‘strategic disinvestment’ was heard—R28,500 crore is to be got from here. So much for all the fears that the Modi government was going to keep pushing even dud PSUs—if ever there was a reform that should have excited investors, this was it.
Since the last Budget didn’t quite allay investor fears in relation to aggressive taxmen, Jaitley had another go. The retrospective taxation, not surprisingly, was not done away with, but a lot of clarity was provided and attempts made to rein in mindless tax terror. So, given the fears of investors, GAAR was put off by another 2 years and it was made clear it would be prospective, it was clarified that there would be no MAT on FII investments in equity and clarity was provided on how global transactions (like Vodafone-Hutch) with an Indian leg were to be taxed—these would be exempted if the India portion was less than half the global transaction, or if this was simply the result of global reorganisation of assets (Cairn).
If stressed corporate and bank balance sheets were another pain point, Jaitley had something here as well. There was, unfortunately, nothing in the finance minister’s speech about the path to reducing government equity in banks along the lines recommended by PJ Nayak—this would have changed investor perception dramatically. But there was a promise to have a modern bankruptcy law within the year and special courts to try commercial disputes—that’s why the Bank Nifty soared. The Budget had a lot of innovations too. There were schemes to dematerialise gold that can, potentially, put tens of thousands of crore of savings to use; and the foundations have been laid for a robust pension system with Jaitley announcing the end of EPFO’s hostages-not-clients monopoly. Since fixing high India’s corporate taxes, replete with all manner of exemptions, isn’t easy, Jaitley laid out a 4-year roadmap for this.
What queered the pitch, however, was the complete lack of action on subsidies. The cornerstone of the Prime Minister Narendra Modi’s
flagship Jan-Dhan Yojana was a sharp rise in cash subsidies—this would plug leakages and, with money coming into accounts, would pave the way for viable bank overdrafts. Food cash transfers, in turn, would obviate the need for foodgrain mountains, for high MSPs … in other words, the farm revolution being promised was built on the foundation of moving to cash transfers. But not a word on this, indeed, food subsidies are up marginally. It doesn’t help that, despite the collapse in crude prices, the government missed the opportunity to cut the LPG subsidy.
Equally worrying, despite FY15’s bad experience with taxes falling short by over R1 lakh crore, FY16 has fairly optimistic tax targets. If divestment receipts fall short like they did in FY15—R31,350 crore vs the target of R63,425 crore—we could have another year of sharply curtailed capital expenditure. The only explanation is that the cricket buff in Jaitley, and the strategist in Modi, are not convinced these are the slog overs. They may just be right since critical legislation like the land Act are still in the balance.