Editor's take: There's a lot to like and admire about Budget 2015
Prosenjit Dutta February 28, 2015My initial reaction to Finance Minister Arun Jaitley's first full-year Budget is that there is a lot to like and admire about it. The infrastructure focus of the Budget will translate to tremendous benefit on all sorts of areas. I am a firm believer in the multiplier effect of infrastructure. Apart from the jobs that infrastructure projects create and the boost they give to industries such as cement and bricks, infrastructure, once built up, also makes other industries more competitive, brings down the cost of doing business, opens up markets for people in villages, and generally has a beneficial effect on everything. And the fact is that the infrastructure initiatives are not just restricted to urban improvement. There is a huge thrust on rural infrastructure as well, which is particularly important if we want to reduce the gap between India and Bharat.
The other welcome step was the focus on agriculture. The increase in target for agricultural credit, the rural infrastructure development fund, the micro irrigation and other schemes and, finally, the initiative to create a national market - though details are awaited on this one - are all designed to give a big boost to rural incomes and improve agricultural productivity. Of course, the caveat here is that much depends both on the final detailing that is done, the targets that are set and how well the implementation takes place. The UPA government was not short on ideas and good intentions in a host of areas - they used to falter because of their shoddy implementation. Hopefully, this government will be far more efficient in its implementation.
The Finance Minister's initiative to make the corporate tax structure more transparent while also announcing a roadmap to reduce the total tax over five years is a good step. The fact that he is removing exemptions is also welcome. It is likely to reduce the number of disputes that arise - one of the prime reasons investors are wary of India. Removal of the wealth tax on individuals while adding a cess of 2 per cent in the super rich will help improve tax compliance.
In taxes, in fact, there were a host of welcome steps announced, which, along with the GST regime that is expected to kick in from 2016/17, will help enormously. The increase in service tax and also in widening the service tax net marginally will also help. The big disappointment I felt was that the Finance Minister did not take this opportunity to increase the catchment area for personal income tax. Currently, it is estimated that barely 4-4.5 per cent of the Indian population pays income tax - and most of that is made up of the salaried class. It is a pity that Mr Jaitley did not do anything major to widen the personal income tax base so that more people come in the tax net.
The other huge thrust of this Budget was the focus on increasing savings - and the thrust on bringing most people under the medical insurance and pension net. The importance of this cannot be over-emphasised. India's savings rate has fallen, and a falling savings rate does not bode well for capital formation and capital investments. By giving people - even poor people - an incentive to invest in medical insurance or pension schemes, the government is setting up a social security net that is absolutely must. Of course, a lot depends on the implementation.
The one issue that I cannot resolve - and which I guess only time will settle - is whether the thrust on improving rural incomes will come in the way of manufacturing. One of the bigger complaints of many industrialists I talked to during the UPA regime was that higher rural wages showed up in increased cost of labour for industry, and that in turn made life difficult for them. A couple of economists also pointed out that an increase in agricultural income also ended up in boosting inflation. So, on the one hand, it is great that the Finance Minister is taking concrete steps to increase rural income. On the other, what will it do to cost of labour to industry is open to question.