From saffron to pink: Political economy of the budget
by Punarvasu Parekh on 11 Feb 2017 2 Comments

One waited for the applause of the faithful and audible sighs of relief from the sceptics to die down before writing about the budget. A week after the presentation of the much-hyped annual statement of accounts and intent, this is the right time to decipher the message emanating from the budget 2017-18, rather than its specific proposals which have been dissected threadbare in the media.


Arun Jaitley knew as well as anybody else that his fourth and penultimate budget was his last chance to bring about structural changes and radical reforms to recast the economy. The next budget will be overshadowed by the Lok Sabha elections looming on the horizon and in February 2019, he will be permitted to present only a vote-on-account which precludes any major policy changes. Jaitley has used the occasion to address the various constituencies his government regards as important and sent appropriate messages to all of them.         


The foremost message emanating from the budget is that BJP is consciously shifting away from its traditional support base so as to occupy the central position (in every sense) on the political stage. It wants to shed its image of a party of trade and industry, championing economic freedom and a smaller role for government in the economy. The budget is full of all-too-familiar rhetoric about villages, farmers, women, youth and poor. It is old wine in a new bottle.


The budget promises more credit to farmers but skirts the main challenge of making agriculture a commercially sound enterprise once again. For that it is critical to address the cost of production in agriculture. A conscious and decisive turn to organic farming is the way to go. Greater credit to farmers for so-called scientific farming based on hybrid or GM seeds, pesticides and chemical fertilisers would only drive them even deeper into debt, leading to more suicides for fear of default and its consequences.


The Modi government is claiming credit for highest allocation for rural job guarantee scheme. While in opposition, Modi rightly lambasted it as a loud admission of UPA government’s failure to create proper jobs in the countryside. Almost since its inception, the scheme has been tainted by organised corruption, wastage and perverse incentives. While it may not have done enough to provide jobs to the needy, it has contributed to the decline of agriculture by artificially pushing up rural wages. And now there is talk of raising wages under the scheme.


Almost as a corollary, BJP is trying to downplay if not shed its image of a pro-business party. The budget seeks to keep a safe distance from traders, income tax payers and big companies.


Jaitley praised honest income tax payers, of whom the salaried middle class forms a large part, but the relief offered to them is measly. The finance minster could have increased the exemption limit to Rs. 3.5 lakh straightaway, benefiting everyone. But he could not resist the temptation of charging Rs. 2500 per year from those earning between Rs. 3 and Rs. 3.5 lakh! 


There is a scheme of presumptive income tax for small and medium trades and businesses whose turnover is up to Rs. 2 crores.  At present, 8 per cent of their turnover is presumed to be taxable income and taxed. Now, it is proposed to make this 6 per cent in respect of turnover which is received by non-cash means. This benefit will be applicable for transactions undertaken in the current year also. But why not reduce the overall rate to say 6 or 7 per cent instead of bifurcating the turnover into cash and non-cash?


Even the emphasis on checking tax evasion, digitisation, discouraging cash transactions beyond Rs. 3 lakh, and bringing the non-salaried into the tax net leaves little doubt about the changing priorities of the party. Traders and small businesses will be the worst hit with the inspector raj that all these will unleash.


The surcharge on income above Rs. 50 lakh is intended to prove the pro-poor (socialist?) credentials of the government and ward off the charge of being suit-boot-ki sarkar.


A similar mindset is visible in his treatment of corporate tax. Right from the first budget, Jaitley has been promising to cut corporate tax rate while removing outdated exemptions. The businesses are prepared to go along. However, in his fourth budget he cuts corporate tax from 30 per cent to 25 per cent only for companies with a turnover of Rs. 50 crore. While this will benefit 96 per cent of the companies as claimed by FM, it is the remaining larger companies that pay bulk of the taxes and were looking forward to the promised reform.


The idea behind reducing corporate tax was to enable Indian companies to compete with their Asian peers. However, the companies that would benefit from corporate tax reduction are not typically the ones that compete with Asian companies. Another objective was removal of politically inspired tax breaks for select capital expenditure. That would facilitate reduction of tax rate and also help unclutter the IT Act which has become a veritable jungle of convoluted sections, provisos, and exemptions.


It is a telling commentary that that exercise has not even begun although the Modi government is past the halfway mark of its tenure. Remarkably, BJP seems terrified of being accused of being pro-business. It is tight-fisted in giving anything to the middle classes.


The special preference shown to small companies also ignores the lessons from the past. For decades, Indian state has favoured small industrial units with reservation of items, relaxed regulations and many other ways. This has created a perverse incentive for them to remain small and forgo growth, modernization, economies of scale, cost efficiency and competitiveness in preference for official largesse.


Major economic reforms are played down. There is no word about corporatisation of railways or port trusts. While the target for disinvestment revenue has been increased, the money is raised by selling small bits of shareholdings from public sector undertakings, and not by privatization (euphemistically called strategic sale), of even chronically loss-making ones.


Often state-owned companies are forced to buy one another’s shares; LIC is asked to support PSU stake sales when the market response is weak. While this transfers their surplus funds (meant for capital expenditure) to the government coffers, it does nothing to further the original objectives of the disinvestment: withdrawal of state from areas and activities better left to private sector and better utilization of national resources by putting them under more competent management. Niti Ayog has prepared a list of dud PSUs to be sold off.


The Modi government talks about promoting investment including FDI, ease of doing business etc. but it is unable to break out of the povertarian rhetoric. It seeks respectability by following the idiom and policies it was expected to transform. As on ‘secularism’, so also on economic policies, BJP seeks certificates of good character from those whom it was elected to fight. This does not bode well either for the economy or the society.  


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