If you go by the words of finance minister Arun Jaitley, India has a clear binary choice ahead of it: mindless populism or fiscal prudence. The government hasn’t exactly been clear about which of these paths it intends to take yet – having partially rolled back an intended fare hike, extended sugar subsidies and postponed a review of gas prices – but it is early days still.
Modi sarkar will get its first chance to send out clear policy signals in the next week, through its very first union budget, which it is due to present on July 10.
Although many have sought to temper hopes of a massive shift in India’s approach to fiscal policy – there simply isn’t enough time for a new government to do the planning, math and build consensus on such ideas – the budget still offers plenty of opportunities for a government to send signals about how it intends to approach the economy.
Here are the five areas that will tell us most about how Prime Minister Narendra Modi’s government sees its fiscal and economic tasks.
Taxes
Taxes are blamed for all sorts of things. Indirect taxes hurt the rich and poor alike. Direct taxes affect business sentiments. Retrospective taxes keep investors away. A complex tax code leaves plenty of loopholes for those who can afford to look for them.
Two broad changes will be looked at very closely, both policy measures that have been in the works for some time. The Direct Tax Code, which is aimed at replacing the Income Tax Act, widening the tax net and plugging some loopholes, has been kicked back and forth in parliamentary circles for some time now.
But pre-Budget talk has suggested the BJP might either want to start from scratch with the DTC or bin it in favour of incremental changes to the tax code. Either decision would be significant.
The Goods and Services Tax – an all-inclusive national tax on manufacturing, sale and consumption of goods aimed at replacing the mix of central and state taxes that we currently pay – is expected to feature high on Jaitley’s agenda. The Bharatiya Janata Party had opposed it while the United Progressive Alliance was in power, but it has now promised to implement the reform that should simplify the tax structure, boost revenue and even make exports more competitive.
Beyond this, any tinkering with the individual tax slabs, investment exemptions or customs duties will give some indication of which direction the government is hoping to head towards.
Spending
One of the ways to improve the GDP growth rate, which is a crucial aim of this government, is to increase state spending. This applies particularly in capital-intensive industries where private players rarely want to put their money into starting something that might balloon in terms of cost without an assured return.
But Arun Jaitley does not have a tremendous amount of leeway on this, considering the size of the fiscal deficit and the interest-payment pressures that the government is already dealing with.
This might prompt Jaitley to attempt using the Gujarat Model for infrastructure, by outsourcing the tasks to private players while relying on assistance packages to get them to invest in projects that might otherwise be considered too risky. However it happens, though, it is quite likely that there will also be plenty of infrastructure spending on roads, ports, urban upgradation and so on.
But if infra is a given, how much money will be left around for education, skill-building, agriculture and healthcare? Each of those other sectors have also been touted as pet projects of Modi’s at various times, but only if significant amount of expenditure is sent their way – such as taking education spending from 3.4 per cent to 6 per cent.
Modi might indeed prefer to open up more industries to foreign direct investment, and the exact mix of FDI and government spending that is announced will be crucial to growth expectations.
No more planning
The government has already made it clear that the Planning Commission will not be around in the way that it used to be. Modi has yet to name someone to head the Commission and has taken away the task of charting the union government’s capital expenditure, giving it to the finance ministry instead.
Meanwhile, the Independent Evaluation Office has recommended abolishing the Commission altogether and turning it into a reforms think tank.
Modi might well decide to shutter the Planning Commission, but there’s also the matter of the 12th Five-Year Plan, which is in place until 2016-17. While it is unlikely that this Budget will decouple from the 12th Plan right away, the Budget is expected by many to signal the intention to eventually chart a separate path. The distinction between plan and non-plan expenditure is also expected to be junked.
Leftovers
The United Progressive Alliance’s flagship programmes – the National Rural Employment Guarantee Act, the Land Acquisition Act and the Food Security Act – are still in place. Over the years, the BJP has variously criticised these bills but also refused to prevent their passage in Parliament.
The party blames the NREGA for causing food prices to shoot up and the Land Acquisition Act for making life difficult for business. They are unlikely to bin any of these, or even announce a move to do so, but the schemes might be substantially altered such as by linking NREGA to asset creation or by diluting some of the provisions under the Land Bill.
Bitter pills
The fiscal deficit has already hit 45.6% of the yearly target. Last year at this time the number was only at 33.3%, and both the prime minister and the finance minister have promised tough measures.
To improve this situation the government will have to keep rationalising diesel prices in incremental bits as it has been doing, curtail fertilizer subsidies and then focus on reducing the LPG and kerosene sops.
Having already rolled back the railway hikes, presumably because of impending elections in Maharashtra, the government will actually have to walk its talk on making life difficult for citizens in the short-run so that the deficit can look healthier over time.
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Modi sarkar will get its first chance to send out clear policy signals in the next week, through its very first union budget, which it is due to present on July 10.
Although many have sought to temper hopes of a massive shift in India’s approach to fiscal policy – there simply isn’t enough time for a new government to do the planning, math and build consensus on such ideas – the budget still offers plenty of opportunities for a government to send signals about how it intends to approach the economy.
Here are the five areas that will tell us most about how Prime Minister Narendra Modi’s government sees its fiscal and economic tasks.
Taxes
Taxes are blamed for all sorts of things. Indirect taxes hurt the rich and poor alike. Direct taxes affect business sentiments. Retrospective taxes keep investors away. A complex tax code leaves plenty of loopholes for those who can afford to look for them.
Two broad changes will be looked at very closely, both policy measures that have been in the works for some time. The Direct Tax Code, which is aimed at replacing the Income Tax Act, widening the tax net and plugging some loopholes, has been kicked back and forth in parliamentary circles for some time now.
But pre-Budget talk has suggested the BJP might either want to start from scratch with the DTC or bin it in favour of incremental changes to the tax code. Either decision would be significant.
The Goods and Services Tax – an all-inclusive national tax on manufacturing, sale and consumption of goods aimed at replacing the mix of central and state taxes that we currently pay – is expected to feature high on Jaitley’s agenda. The Bharatiya Janata Party had opposed it while the United Progressive Alliance was in power, but it has now promised to implement the reform that should simplify the tax structure, boost revenue and even make exports more competitive.
Beyond this, any tinkering with the individual tax slabs, investment exemptions or customs duties will give some indication of which direction the government is hoping to head towards.
Spending
One of the ways to improve the GDP growth rate, which is a crucial aim of this government, is to increase state spending. This applies particularly in capital-intensive industries where private players rarely want to put their money into starting something that might balloon in terms of cost without an assured return.
But Arun Jaitley does not have a tremendous amount of leeway on this, considering the size of the fiscal deficit and the interest-payment pressures that the government is already dealing with.
This might prompt Jaitley to attempt using the Gujarat Model for infrastructure, by outsourcing the tasks to private players while relying on assistance packages to get them to invest in projects that might otherwise be considered too risky. However it happens, though, it is quite likely that there will also be plenty of infrastructure spending on roads, ports, urban upgradation and so on.
But if infra is a given, how much money will be left around for education, skill-building, agriculture and healthcare? Each of those other sectors have also been touted as pet projects of Modi’s at various times, but only if significant amount of expenditure is sent their way – such as taking education spending from 3.4 per cent to 6 per cent.
Modi might indeed prefer to open up more industries to foreign direct investment, and the exact mix of FDI and government spending that is announced will be crucial to growth expectations.
No more planning
The government has already made it clear that the Planning Commission will not be around in the way that it used to be. Modi has yet to name someone to head the Commission and has taken away the task of charting the union government’s capital expenditure, giving it to the finance ministry instead.
Meanwhile, the Independent Evaluation Office has recommended abolishing the Commission altogether and turning it into a reforms think tank.
Modi might well decide to shutter the Planning Commission, but there’s also the matter of the 12th Five-Year Plan, which is in place until 2016-17. While it is unlikely that this Budget will decouple from the 12th Plan right away, the Budget is expected by many to signal the intention to eventually chart a separate path. The distinction between plan and non-plan expenditure is also expected to be junked.
Leftovers
The United Progressive Alliance’s flagship programmes – the National Rural Employment Guarantee Act, the Land Acquisition Act and the Food Security Act – are still in place. Over the years, the BJP has variously criticised these bills but also refused to prevent their passage in Parliament.
The party blames the NREGA for causing food prices to shoot up and the Land Acquisition Act for making life difficult for business. They are unlikely to bin any of these, or even announce a move to do so, but the schemes might be substantially altered such as by linking NREGA to asset creation or by diluting some of the provisions under the Land Bill.
Bitter pills
The fiscal deficit has already hit 45.6% of the yearly target. Last year at this time the number was only at 33.3%, and both the prime minister and the finance minister have promised tough measures.
To improve this situation the government will have to keep rationalising diesel prices in incremental bits as it has been doing, curtail fertilizer subsidies and then focus on reducing the LPG and kerosene sops.
Having already rolled back the railway hikes, presumably because of impending elections in Maharashtra, the government will actually have to walk its talk on making life difficult for citizens in the short-run so that the deficit can look healthier over time.
