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What works and what does not in Arun Jaitley's vision [DNA : Daily News & Analysis (India)]
[July 12, 2014]

What works and what does not in Arun Jaitley's vision [DNA : Daily News & Analysis (India)]

(DNA : Daily News & Analysis (India) Via Acquire Media NewsEdge) "The market, though not euphoric, is celebrating the Budget which is 350 points up. If you have not been paying attention, it would be difficult in many cases to differentiate this first budget of the Narendra Modi government from the last budget of the UPA government. First, we will list out the key announcements that we think really matter in this budget. And then we will tell you how it still dampens our spirit.

Key announcements: 1. Income Tax: There was some good news in store for tax payers. As much anticipated, the income tax slabs and exemptions were changed for good. Jaitley on Thursday hiked the exemption limit for investments by individuals in financial instruments to Rs 1.5 lakh. Presently the investments and expenditures up to a combined limit of Rs 1 lakh get exemptions. He also increased the tax slabs from Rs 2 lakh to Rs 2.5 lakh for normal citizens, and from Rs 2.5 lakh to Rs 3 lakh for senior citizens. This, apart from boosting the savings rate in the country, will give much needed relief to the cash-strapped middle class already reeling under high inflation. Public Provident Fund (PPF) limits were raised to Rs 1.5 lakh.

2. FDI: The major announcements for the budget came in the field of FDI in defence and insurance. The limit for budget FDI was set at 49% and that for insurance sector was increased to 49% from the existing 26%. Jaitley said he would go for FDI selectively, and was introducing it to the insurance sector as it was facing severe shortage of funds. This would be controlled by Foreign Investment Promotion Board. The government also said it would take up the Insurance Amendment Bill as soon as possible in the Parliament. The need to introduce FDI in defence sector was justified by the fact that the government presently has to import most of its defence requirements from abroad at the cost of heavy outflow of foreign exchange.

3. PPP model: Privatisation has been a key mantra of the BJP, and not just in the near past. So, like the Rail Budget, the Union Budget also focused on privatisation to a large degree. The private capital, in the mode of the PPP model has been welcomed in the building of 15,000 km of pipelines in India, building of additional airports in Tier 1 and Tier 2 cities, turn science and technology institutions into research centres, provision of solid waste management, safe drinking water etc. Metro planning for all Tier 2 cities will also begin via the PPP route. The message is clear: the government wants to provide services but is incapable to do so. It wants private players to come and fulfill the role. But what might give rise to controversies is the calling of India Inc for slum development, which is now under the category of Corporate Social Responsibility (CSR).

4. Northeast, Jammu & Kashmir: There was a clear focus on the backward regions of Jammu and Kashmir and the Northeast. Jaitley has promised a sports fund of Rs 200 crore for J&K, and Rs 500 crore for Kashmiri immigrants and their rehabilitation. Out of Rs 37,000 crore fund for highways, he has allocated Rs 3,000 crore in the Northeast. Rs 100 crore was provided for organic farming development in the Northeast. A fund of Rs 10,000 crore was separated to build railways in the Northeast.

5. Foreign Investment and capital market: Apart from calling for FDI, the government has made it clear that it will open arms for the foreign investors, whether in the stock market or by way of simpler taxation policies. Jaitley said that the government will not go for retrospective taxation policies. There will be no tax arbitrage between debt mutual funds and bank deposits. Debt mutual fund investors will be able to apply for NIL long term capital gain tax, but would have to hold their fund for 3 years instead of 1. Long term gains will now be taxed at 20% up from 10%.

What works: 1. Focus on backward areas: Northeast and Jaamu and Kashmir. It is both a development and security oriented policy for the government.

2. Income tax relief for individual tax payers.

3. FDI in Insurance and defence: It is not about whether the move is prudent or not, but the announcement was long due.

4. Special fund for girl child education.

5. Focus on sports: lot of funds for institutes and players for Asian Games and Commonwealth.

6. Rs 4,000 crore for National Housing Bank to provide low cost housing in developing urban centres.

7. Rs 26,000 crore set aside for toilets and drinking water in all girls' school.

8. Instead of loan waivers, giving farmers 3% interest relief for paying on time.

What does not work: 1. Too little focus and fund for agriculture: Rs 5,000 crore to build irrigation and infrastructure is too little. Rs 500 crore for price stabilisation, which is one of the main concerns in India, almost sounds like a joke. Also restructuring of APMCs and restructuring of Food Corporation of India (FCI) seems high on rhetoric in a country where hoarder and trading lobby is far too strong.

2. No impetus for crucial sectors like power: No major reforms other than 10 year tax holiday of new beginners were announced. Coal import duty has been reduced to give some relief to existing power producers. There is word on how to improve mining and energy sector in the short and long term.

3. No promise of universal healthcare, again: Though the government is set to build more government medical colleges and AIIMS, there came no promise of making healthcare more accessible to all. Even the fund set for four AIIMS is just Rs 500 crore, again falling short of actual requirement. Perhaps more funds could follow in subsequent years, but the fact that no focus was placed on training institutes, like for nurses or other schemes to make healthcare available to a larger population is sad.

4. Similarly there was no special announcement on primary education: The money spent on promoting online education caters to a middle class that has access to both power and internet access. Rural education has not been taken up seriously in the Budget. In a situation where India stands at a rank of 136 in human development, such low focus on primary healthcare and education betrays the nation's hope for change.

5. Retaining fiscal deficit and other targets from UPA regime: The finance minister has agreed that the targets are daunting, but he would stick to them. The numbers already seem quite unachievable, and Jaitley would have maintained better credibility if he had changed the outlook to numbers which would have been achievable. He could have turned around and told the UPA from the beginning, that this government was about more credibility in forecasts and better stability.


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