What Jaitley's Budget Is Trying To Do And How It Is Likely To Play Out

01/03/2016 9:16 AM IST | Updated 15/07/2016 8:26 AM IST
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NEW DELHI, INDIA - FEBRUARY 29: Arun Jaitley Minister, Minister of Corporate Affairs and Minister during a media interaction after presenting Finance budget for the year 2016-17 at National Media Centre on February 29, 2016 in New Delhi, India. Presenting his third Union Budget Finance Minister Arun Jaitley announced a slew of schemes, and income tax exemptions for small tax-payer and the small investors. Aiming to double farmers income by 2022, the minister also announced an allocation of nearly Rs 36,000 crore for the farm sector while raising the agri-credit target to Rs 9 lakh crore for the next fiscal. Growth of Indian Economy accelerated to 7.6% in 2015-16.(Photo by Vipin Kumar/Hindustan Times via Getty Images)

There is a clear policy direction to this Budget: The BJP declares its unequivocal and unconditional love for the farmer, and for the rural poor. Jaitley has thrown whatever resources he can conjure up at agriculture and at the rural and semi-rural economy.

The allocations for the hinterland rise by enormous amounts. Apart from Rs 9 lakh crore allocated for farm loans at subsidised interest rates, there are other large commitments. Panchayats will receive Rs 2.87 lakh crore, which is more than three times as much as in the last Budget.

There are big allocations to create new irrigation capacities; an acceleration of the rural roads PMGSY programme with a much higher budget; commitments to stepping up the pace of electrification, crop insurance, higher MGNREGA allocations, health insurance, digital literacy programmes directed at rural households, BPL gas connections, and so on.

Some of these allocations will undoubtedly create long-term uplift for rural and semi-urban areas. Improving access to bijli, sadak, paani for example, always leads to increased incomes. Modernisation of land records is another terrific idea.

At the same time, it's commendable that the Centre wants to reform the APMC system of food procurement. If APMC reform is successful, this could transform the food chain and allow farmers to receive a higher share of the prices their produce fetches.

farmers india

Jaitley has thrown whatever resources he can conjure up at agriculture.

It's very good news that 12 states have agreed to review respective APMCs. But of course, the devil will lie in the details. The APMC cartels are among the most embedded of vested interests in his nation. They have a lot of political clout in every party, including the BJP and may be quite capable of blocking real change.

The Budget also adds on an extra impost of dividend tax for entities receiving over Rs 10 lakh in dividend income. It will also hurt a lot of small entrepreneurs.

It is quite likely that a large share of the money allocated to agriculture and rural India will not really create assets even if it leads to improved consumption and temporarily higher living standards. For example, panchayat funding can easily be frittered away and misused, unless it comes tied to double-entry accounting systems and strong checks and balances. Most Indian municipalities lack double-entry accounting systems. So colour me cynical if I suspect that many panchayats lack the basic accounting systems and the managerial capacity to absorb and use this largesse well.

Farm loans also tend to go sour at alarming rates. The inability to repay their loans is why indebted farmers have a high suicide rate. Farm loans also tend to be forgiven on a regular basis by the political establishment. A chunk of that Rs 9 lakh crore will not generate returns, either for the lenders or the borrowers. It may however, help to generate some rural consumption demand in the short run. That would benefit corporates with rural markets.

Farm loans also tend to go sour at alarming rates. The inability to repay their loans is why indebted farmers have a high suicide rate.

It's anyone's guess what the potential impact of the crop insurance schemes could be, since the details are not known. It's perfectly possible that insurers will bear vast losses on this account. Floods, droughts, pest attacks, riots, etc., are all risks that crop insurers might have to bear. If you tot up the natural calamities that occur on an annual basis, the numbers could be grim. In the name of sparing farmers distress, the insurance sector could end up very stressed.

The FM expressed a preposterous hope that farm income would double in the next five years. That would imply a compounded growth rate of over 14 per cent per annum and it's very, very unlikely to happen (I am assuming he meant real income after inflation). Even the high -growth services sector does not begin to approach the necessary rates of growth. Agriculture has usually grown at 2-3 per cent per annum. But nobody is going to call out the FM on this "target" anyhow.

rural infrastructure india

Improving access to bijli, sadak, paani for example, always leads to increased incomes.

The FM also has to be commended for another major act of courage. He is going to try to hold the Fiscal Deficit to 3.5 per cent. Rumours say that the establishment was actually terrified that it would get hit with credit rating downgrades if it missed that benchmark. Whatever the reasons, it's good that the Fisc stays down. It also means that government borrowing should stay within the ambit of the reasonable, which one reason why the band market rallied. (GoI bond issues in 2016-17 may actually aggregate to a little less than in 2015-16).

The government hopes to put together a monetary policy committee (it will appoint three out of the six members) which sets inflation targets and policy rates that the RBI must abide by. This is close to international practice. But it could be a bad idea in the Indian context. Politicians have a tendency to want to open the monetary tap and sometimes (more rarely) to close it, at inopportune moments.

Politicians have a tendency to want to open the monetary tap and sometimes (more rarely) to close it, at inopportune moments.

arun jaitley budget 2016

Jaitley photographed before presenting the budget.

In several ways, the Budget disappoints a lot of folks. It hikes taxation effectively across the board by adding on cesses galore for all kinds of items. It will make air travel more expensive, and power charges will rise as well. It also proposes to make provident fund withdrawals taxable though this may not fly through Parliament and the BJP's own trade union leaders will oppose it.

The Budget also adds on an extra impost of dividend tax for entities receiving over Rs 10 lakh in dividend income. This will hurt Mukesh Ambani, who can probably afford it. It will also hurt a lot of small entrepreneurs. It will reduce net incomes for holding companies (such as Tata Sons), and hurt savvy mid-range investors who support entrepreneurship. It may also induce a degree of FII pullout.

The Securities Transaction Tax on "Options" being hiked may lead to a little, very temporary loss of liquidity in derivative markets. It's not entirely clear from the speech if this also applies to "futures" but I presume it would make sense for the STT hike to apply to all derivative instruments. It's hard to make any judgement as to how effective the disclosure of Income scheme will be.

job queue india

Indian youths queue up at a job fair in Mumbai.

In other respects, the Budget outlined the end of certain tax exemptions, which will be phased out in 2017-18. The compact was that corporate tax rates would be lowered along with the exemptions being phased out. But by how much will corporate tax rates be lowered? That will presumably depend on the success or failure of this Budget. The changes in taxation this year will benefit only some startups.

The disinvestment assumptions are probably unrealistic. The Budget assumes Rs 36,000 crore from stake sales and it targets another Rs 20,000 crore from strategic stales. In 2015-16, it targeted Rs 69,500 crore total and its achieved about Rs 18,000 crore. The renamed "Department of Investment and Public Asset Management (DIPAM)", will try to sell assets, instead of stakes.

The disinvestment assumptions are probably unrealistic.

In one area, the Budget triggers active apprehension. It is woefully under-funding bank recapitalisation at Rs 25,000 crore. Ten times that amount or even more is necessary. if the new set of farm loans start going delinquent at anything resembling the historic rate, the public sector lenders will be in desperate straits. Presumably the Budget is based on hopes that the monsoons will be good, agriculture will pick up, and a banking crisis will not happen.

This Budget might be best described as something on the order of an informed gamble, This government has been very lucky in that it has enjoyed two years of low fuel costs. But it has also faced two years of rural distress. GDP growth is just chugging along without much acceleration. The BJP has suffered two big electoral reverses, most recently in Bihar with its extremely rural profile. There are unhappy Jat farmers demanding reservations in Haryana.

There are lots and lots of assembly elections coming up. The Budget gambles on winning the rural votes now. Worries about writing off farm loans gone bad will come later.

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