The big bang really came on Tuesday when prime minister Narendra Modi announced that the central government had accepted the YV Reddy-chaired 14th Finance Commission’s recommendations. By that he meant the Centre had agreed to share 42% of all taxes collected in the country with states compared to less than a third until now. Finance Minister Arun Jaitley on Saturday said it would be Rs 5.24 lakh crore in 2015-'16 compared to Rs 3.38 lakh crore this year. States will also get another Rs 3.04 lakh crore as grants and plan transfers. Combined, they will constitute 62% of all taxes.
On Thursday, Railway Minister Suresh Prabhu had presented a sensible plan for the biggest transport network in the world, the Indian Railways. Announcing a 50% increase in investment in the railways, Prabhu outlined ways of improving the rail infrastructure in the country that could boost economic efficiencies such as faster transport of goods, create jobs and spawn entrepreneurial opportunities.
Oil bonanza
Two days later, Jaitley carried forward the thought that the big ticket spending would have to come from the government, both in building infrastructure and improving the economic security of citizens. Jaitley has also announced measures that, if implemented well, would improve efficiencies in the delivery of government services and help enterprise.
The swiftly changing dynamics of the global economy, especially low oil prices, have presented India with a bit of headroom. If there was a time to keep the purse strings a bit loose now was it and the finance minister grabbed the opportunity with both hands. He decided he could afford to postpone achieving the fiscal deficit target of 3% of GDP the next year to 2017-'18. He would now target a fiscal deficit of 3.9% in 2015-'16 and 3.5% in 2016-'17. This is also likely to coincide with the period when oil prices would remain low before they start rising again. The fall in oil prices have helped boost the government finances by about a lakh crore, including subsidy savings and better tax revenues.
While that window remains open, the Modi government hopes to spend big on social security schemes such as expanding healthcare, education, insurance and financial inclusion to as many Indians as possible. That is to be coupled with a massive expansion in rural and urban infrastructure, housing (the minister estimates a demand for 2 crore houses in urban areas and 4 crore houses in rural India by 2022) and irrigation support for agriculture.
Three proposals
There are three proposals, apart from the reduction in corporate tax from 30% to 25% that could contribute to improving the business climate for both big and small businesses. The first is the ability to shut down businesses. Jaitley said the government is working on a new bankruptcy law that will meet global standards. That could mean entrepreneurs would not have to disappear into the bureaucratic depths of the Bureau for Industrial and Financial Reconstruction for years; instead exit from unviable businesses and pursue new ideas.
The second is the creation of an electronic trade receivables discounting system. Such a facility would immensely help small and medium enterprises who are constantly at the mercy of customers (typically other businesses) who typically enforce long periods of credit. An electronic receivables discounting exchange will help small businesses, especially fledgling ones, to quickly realise payments, reducing pressure on working capital needs. It would help these businesses to manage their cash better and reduce cost of funds. Jaitley estimates 5.77 crore businesses would benefit.
The third is the Micro Units Development Refinance Agency Bank with a corpus of Rs 20,000 crore, and credit guarantee corpus of Rs 3,000 crore. This agency has the potential to rejuvenate the micro-finance sector that has remained moribund for several years now.
Climate change
Many measures in the budget such as the cheap insurance and pension plans could be called populist. But by clearly articulating how these would be done and not making them completely free, the minister has brought an element of fiscal credibility to them.
The three economic policy announcements this week together have laid a clear road-map that could lay the foundation for the 8%-8.5% growth that the finance minister is hoping for in this and coming years.
Yet, Jaitley skipped one of the biggest issues plaguing all modern economies – climate change. It is India’s stated position at international climate change negotiations that it will have to pollute more to pull its multitudes out of grinding poverty. And as the country embarks on a massive manufacturing and construction drive, it will likely poison its air and pull water from its depleting aquifers more than ever. Except cursory references to solar power and electric vehicles, the minister has practically ignored the issue. Hopefully, states, which now have more financial autonomy, will do something about toxic air and dying rivers.
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On Thursday, Railway Minister Suresh Prabhu had presented a sensible plan for the biggest transport network in the world, the Indian Railways. Announcing a 50% increase in investment in the railways, Prabhu outlined ways of improving the rail infrastructure in the country that could boost economic efficiencies such as faster transport of goods, create jobs and spawn entrepreneurial opportunities.
Oil bonanza
Two days later, Jaitley carried forward the thought that the big ticket spending would have to come from the government, both in building infrastructure and improving the economic security of citizens. Jaitley has also announced measures that, if implemented well, would improve efficiencies in the delivery of government services and help enterprise.
The swiftly changing dynamics of the global economy, especially low oil prices, have presented India with a bit of headroom. If there was a time to keep the purse strings a bit loose now was it and the finance minister grabbed the opportunity with both hands. He decided he could afford to postpone achieving the fiscal deficit target of 3% of GDP the next year to 2017-'18. He would now target a fiscal deficit of 3.9% in 2015-'16 and 3.5% in 2016-'17. This is also likely to coincide with the period when oil prices would remain low before they start rising again. The fall in oil prices have helped boost the government finances by about a lakh crore, including subsidy savings and better tax revenues.
While that window remains open, the Modi government hopes to spend big on social security schemes such as expanding healthcare, education, insurance and financial inclusion to as many Indians as possible. That is to be coupled with a massive expansion in rural and urban infrastructure, housing (the minister estimates a demand for 2 crore houses in urban areas and 4 crore houses in rural India by 2022) and irrigation support for agriculture.
Three proposals
There are three proposals, apart from the reduction in corporate tax from 30% to 25% that could contribute to improving the business climate for both big and small businesses. The first is the ability to shut down businesses. Jaitley said the government is working on a new bankruptcy law that will meet global standards. That could mean entrepreneurs would not have to disappear into the bureaucratic depths of the Bureau for Industrial and Financial Reconstruction for years; instead exit from unviable businesses and pursue new ideas.
The second is the creation of an electronic trade receivables discounting system. Such a facility would immensely help small and medium enterprises who are constantly at the mercy of customers (typically other businesses) who typically enforce long periods of credit. An electronic receivables discounting exchange will help small businesses, especially fledgling ones, to quickly realise payments, reducing pressure on working capital needs. It would help these businesses to manage their cash better and reduce cost of funds. Jaitley estimates 5.77 crore businesses would benefit.
The third is the Micro Units Development Refinance Agency Bank with a corpus of Rs 20,000 crore, and credit guarantee corpus of Rs 3,000 crore. This agency has the potential to rejuvenate the micro-finance sector that has remained moribund for several years now.
Climate change
Many measures in the budget such as the cheap insurance and pension plans could be called populist. But by clearly articulating how these would be done and not making them completely free, the minister has brought an element of fiscal credibility to them.
The three economic policy announcements this week together have laid a clear road-map that could lay the foundation for the 8%-8.5% growth that the finance minister is hoping for in this and coming years.
Yet, Jaitley skipped one of the biggest issues plaguing all modern economies – climate change. It is India’s stated position at international climate change negotiations that it will have to pollute more to pull its multitudes out of grinding poverty. And as the country embarks on a massive manufacturing and construction drive, it will likely poison its air and pull water from its depleting aquifers more than ever. Except cursory references to solar power and electric vehicles, the minister has practically ignored the issue. Hopefully, states, which now have more financial autonomy, will do something about toxic air and dying rivers.