An NDA or a UPA Budget?

Finance minister Arun Jaitley’s maiden Budget clearly indicates that there is little or nothing to differentiate between the economic policies of the Bharatiya Janata Party and the Congress.

The only difference is that the BJP government has a clear majority in the Lok Sabha whereas the Congress led a coalition government and was, therefore, unable to go in for large-scale divestment of shares in public sector undertakings. The UPA government was also unable to increase the cap on foreign direct investment in insurance and defence manufacturing because of internal opposition. All these measures have now been pushed through by the Narendra Modi government.

The economic ideology of the BJP is hardly different from that of a large section of the Congress. Within the Congress, there was a section that opposed the neo-liberal policies espoused by Manmohan Singh and P. Chidambaram. But this section was usually at the losing end. Former defence minister A.K. Antony, for instance, was far from enamoured of foreign direct investment in companies manufacturing defence equipment. Within the BJP too, there would have been resistance if the finance minister had brazenly downsized the welfare programmes of the previous government.

Thus, the overall subsidy bill of the government will go up slightly, from Rs 2,55,516 crore (revised estimates for 2013-14) to Rs 2,60,658 (Budget estimates for 2014-15), which, when adjusted for inflation, will imply a reduction. Mr Jaitley has assumed that subsidies on petroleum products will come down by around Rs 22,000 crore which would largely offset the rise in food subsidies to the extent of roughly Rs 23,000 crore and fertiliser subsidies by Rs 5,000 crore.

The reason why Mr Jaitley seems confident of containing the fiscal deficit at 4.1 per cent of gross domestic product during the current financial year — a target set by his predecessor — despite foregoing direct taxes worth Rs 22,200 crore and garnering additional indirect taxes worth only Rs 7,525 crore, is his expectation that substantial revenues would accrue by divesting the government’s shareholdings in government-owned enterprises and other corporate entities that were once in the public sector.

The budget receipts indicates that during 2014-15, the government hopes to earn Rs 43,425 crore from sales of shares held in public sector undertakings over and above Rs 15,000 crore from sales of shares held by the government in corporate entities other than PSUs, companies such as Maruti Udyog and Bharat Aluminium. Surely Mr Jaitley is aware of the problem with depending on divestment to bridge the deficit. These are one-time earnings for the government and cannot be repeated each year the government is in power. In other words, divestment can never be a sustainable source of raising revenues.

This Budget has assumed that the country’s GDP will grow by 13.4 per cent in nominal terms during 2014-15. The government has also assumed that the real growth of GDP this financial year will vary between 5.4 per cent and 5.9 per cent. This means that the government is implicitly assuming that average annual inflation will vary between 7.5 per cent and 8 per cent. Since the GDP deflator is closely aligned with the wholesale price index, contrary to what is being claimed publicly and contrary to the promises that were made in pre-election speeches, the government does not realistically expect inflation to come down in the foreseeable future — at least, that’s what its own Budget numbers seem to signify.

Many were expecting Mr Jaitley to reverse the decision taken by former finance minister Pranab Mukherjee in 2012 to retrospectively amend the Income-Tax Act with effect from 1962 to nullify the impact of the Supreme Court judgment in the Vodafone tax case. But this has not happened. The court had not allowed the income-tax department to levy capital gains tax on the telecommunications multinational because it indirectly acquired substantial assets in India through the transfer of a single share in the tax haven of Cayman Islands. Subsequently, the law was amended retrospectively by Mr Mukherjee.

What Mr Jaitley has said is that while the government continues to retain its sovereign right to undertake retrospective legislation, it will exercise this right “with extreme caution and judiciousness” and will not “ordinarily” bring about tax changes retrospectively “which create a fresh liability”. As for cases like the one involving Vodafone — on which the disputed tax demand is currently in the region of Rs 18,000 crore or $3 billion — the finance minister has stated that these cases “are at different stages of pendency and will naturally reach their logical conclusion”.

Seeking to assuage the apprehensions of investors at home and abroad, Mr Jaitley has proposed that “all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers (of capital assets in India) and coming to the notice of the assessing officers (of the income-tax department) will be scrutinised by a high level committee” that will be constituted by the Central Board of Direct Taxes “before any action is initiated in such cases”. The lawyer in the finance minister surely knows what he is talking about. In other words, if Vodafone was expecting an early resolution of its tax dispute or some relief in the Budget, it will surely be disappointed.

There is another noteworthy aspect of the Budget: Mr Jaitley has expended considerable effort in offering something or the other — mainly in small doses — to virtually each and every section of Indian society. There is a problem in trying to please everybody by spreading the happiness somewhat thinly. One could end up pleasing nobody. That is what may well happen, especially if the economic situation deteriorates sharply because of an unfavourable monsoon and if international prices of crude oil spike on account of the turmoil in West Asia.

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