The annual Budget is one of the most eagerly anticipated events in the Indian political-financial calendar. Though of late its impact on the overall economy and lives of the common people has reduced somewhat, it still carries considerable clout as an indicator of the government's plans, priorities and direction.
Every year, different sections of the population have varying expectations from the Budget. Farmers, the salaried class, small businesses, large industries and the financial markets all want tax breaks and preferential treatment, but with the limited resources and fiscal space available, it is almost impossible for the Finance Minister to keep everyone happy.
Pulls and pressures
The Modi government came to power in 2014 amidst a great deal of hope and a promise to turn around a gasping economy. Under the Congress-led UPA II, the wheels had fallen off from the India growth story due factors like corruption, populism and a slowing global economy, compounded by mismanagement and policy paralysis.
The reality of India is that the appetite for true free market capitalism is limited... government responsible for introducing [such measures] will have a hard time getting re-elected.
The general expectation then from the NDA administration was big bang reforms to unshackle the Indian economy and return it to the path of growth. However, the sharp political divide has been a real obstacle in the government's attempts to restructure the Indian economy. Repeated protests and obstructions by a determined Opposition have blocked the progress of several game-changers like the GST; land acquisition and real estate legislation and labour reforms have been stuck in the Rajya Sabha where the NDA is still a minority.
In addition, the government has been put under pressure with allegations of being pro-industry and anti-poor. The "suit-boot ki sarkar" moniker has been very damaging in a country that is still overwhelmingly rural and poor. The Bihar election was the turning point in Modi's thinking. The drubbing received by the BJP was a clear signal that the hinterland did not see it as being aligned to their needs and aspirations. The growing negativity against the government was beginning to take a toll.
While initiatives like the Jan Dhan Yojana, a revitalized MNREGA, Skill India, and various insurance, pension and health schemes were introduced to address the needs of rural India, they failed to get the government any credit. The rural electrification program was another significant effort at improving the quality of life in villages. However, in a vast country like India, such initiatives take multiple years to impact people's lives. In the interim, growing rural distress, two consecutive droughts, and the Opposition's high decibel campaign created a perception of elitism and pushed the Modi government on the back foot.
With several important state elections coming up, the BJP government had to demonstrate that it was prioritizing rural India...
The reality of India is that the appetite for true free market capitalism is limited. Staying the course on that path requires unpopular and hard actions like limiting subsidies, moving away from entitlements and removing archaic labour laws. While structurally critical for building a modern economy, these moves can create sufficient short- to medium-term discomfort to ensure that the government responsible for introducing them will have a hard time getting re-elected. The electoral fates of PV Narasimha Rao and Atal Behari Vajpayee bear testimony to this.
With several important state elections coming up, the BJP government had to demonstrate that it was prioritizing rural India, without whose support a second term for Modi would be virtually impossible.
The 2016 Budget (see full text of the Finance Minister's speech here), therefore, has to be seen in the context of this narrative.
Thrust on long-term gains, infrastructure
With the limited options available to it, the NDA government has presented a very solid, pragmatic, and far-sighted budget. Unlike the fiscal profligacy of the previous UPA regime, it resisted populist pressures and maintained the deficit at 3.5% of GDP, which is truly creditable. The temptation to bust the self-imposed deficit limits must have been immense, but while that would have yielded temporary benefits, it would have added to the pain over the longer term. This single aspect has given investors and rating agencies a great deal of faith and confidence.
Unlike the fiscal profligacy of the previous UPA regime, it resisted populist pressures and maintained the deficit at 3.5% of GDP, which is truly creditable.
Another notable element of the Budget is the investment in infrastructure. Bottlenecks and capacity constraints created by poor infrastructure have been amongst the major structural issues affecting India's productivity and competitiveness. The allocation of ₹ 2.21 lakh crore to infrastructure such as highways, railways, ports and inland waterways is an excellent utilization of funds. It will not only improve the company's infrastructure and reduce congestion, but it will also create much-needed employment.
The Budget also steered clear of politically controversial subjects like divestment, closing another potential flank for an assault from the Opposition. The Budget speech, for the first time in history, made no mention of defence allocation, which is a monumental shift. This, along with the marginal hike of in real defence spending (it works out to only 1.16%), points towards the Government's belief that India is unlikely to face external aggression any time soon and combating internal threats and structural problems is a bigger priority.
Winning over rural voters
The opening of processed food retailing to 100% FDI is another welcome step that will allow better storage and efficient distribution of the country's agricultural produce, while also reducing wastage.
The thrust on agriculture and farmers' welfare neutralizes a major weapon in the Opposition's arsenal.
This, along with investments in irrigation, organic farming, and enabling better market access for farmers, will play a significant role in achieving the government's stated goal of doubling farm incomes by 2022. The recently introduced crop insurance scheme is another enabler for improved conditions in rural India. While bringing immense benefit to hundreds of millions of Indians, this thrust on agriculture and farmers' welfare also neutralizes a major weapon in the Opposition's arsenal.
Managing the middle class
There have been some tax benefits, but they have been directed at small taxpayers. There is also a commitment to the roadmap for reducing corporate taxes. The one segment that could justifiably be disappointed with the Budget is the middle class. The tax slabs remain unchanged, as do the multiple exemptions and allowances. The increase in service tax, surcharge on luxury cars, and improved excise duty on some items will pinch the middle class that has already been battered by the high inflation of the last few years. There is also the provision for taxing Provident Fund withdrawals, which is already creating a considerable uproar and more clarification is now being issued.
The middle class complains for a bit but then soldiers on without going on a rampage or imposing a heavy political cost on the government.
This is where this Budget was politically astute. The rich and middle classes are not a big chunk of voters overall and are even more insignificant in states like UP and West Bengal that will be going to the polls soon. The middle class complains for a bit but then soldiers on without going on a rampage or imposing a heavy political cost on the government.
A roadmap for structural change
This NDA government clearly has a plan for the country and the 2016 budget provided ample evidence of it. It is a roadmap for far-reaching structural changes in the Indian economy and not a series of ad-hoc and knee jerk reactions to pressures and temptation, as has often been the case. There is a lot of work, beyond mere lip service to inclusive growth, which needs to be done to fix India's finances and get it on the road to prosperity.
The focus on alleviating rural distress and creating opportunities for small entrepreneurs will give the government more room to manoeuvre politically. At the same time tax reforms, infrastructure investment, ease of doing business, fiscal discipline and financial sector reforms will attract capital and set the stage for the next phase of rapid growth.
When the Finance Minister started reading the Budget speech, the Sensex tanked more than 650 points.... the day after [saw] a jump of 777 points.
The reaction of the stock markets to the budget is also quite interesting. When the Finance Minister started reading the Budget speech, the Sensex tanked more than 650 points. As the speech progressed, it started recovering some of its losses and finally settled at 152 points lower. The story played out to a completely different script the day after with a jump of 777 points. The complete impact of the budget took a while to sink in, once analysts slept over it, they were able to digest its full extent and magnitude.
While most analysts may not have seen much to cheer at, when the individual pieces are taken together Budget 2016 tells a compelling story.
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