Budget 2016: How Jaitley sticks to fiscal consolidation and does a costume change
The adviser had contended in his Economic Survey last week that "the desirability of a strategy of aggressive fiscal consolidation could be questioned" while suggesting that the time was "ripe for a review of the medium-term fiscal framework".
"We had an intense discussion over the past few weeks over whether or not to stick to the fiscal deficit road map we had set out last year," Jaitley told reporters after presenting the budget that drew praise from industry doyens for its budgetary rectitude but sparked howls of protest over the move to impose a tax on provident fund withdrawals.
However, the road map for fiscal consolidation - which aims to bring fiscal deficit down to 3 per cent by 2018 - will now be reviewed. A committee will be formed to review the tough deficit targets that have been laid out under the Fiscal Responsibility and Budget Management (FRBM) Act in the context of the uncertainty and volatility in the global economy, Jaitley said.
The budget assumes a growth of 11 per cent in nominal GDP at Rs 150.65 lakh crore, a big macro number that anchors budgetary arithmetic. The growth assumption is about half a percentage point lower than this fiscal which has seen the projected nominal GDP shrink by almost Rs 5 lakh crore from the budget estimate to Rs 135.67 lakh crore.
But the Modi government was still able to meet the 3.9 per cent fiscal deficit target for this year without having to cut overall expenditure - an achievement that was underpinned by the surge in indirect tax collections.
The government's fiscal rectitude now puts pressure on the RBI to cut interest rates. Last December, RBI governor Raghuram Rajan had said that he would wait to see signs of fiscal consolidation before further paring the repo rate that fell 125 basis points to 6.75 per cent after four cuts last year. One basis point is one hundredth of a percentage point.
Ahead of key elections in five states later this year, including in Bengal and Tamil Nadu, the Modi government has decided to woo rural voters with its resolve to raise farm sector spending by 44 per cent to Rs 35,984 crore, revamp the crop insurance scheme, double farm incomes by 2020 and shovel Rs 2.84 lakh crore to village panchayats.
While there were no changes in personal or corporate tax slabs, Jaitley sought to impose a 0.5 per cent Krishi Kalyan cess on all taxable services to fund agriculture, raise the surcharge on the "super-rich" - those with incomes of over Rs 1 crore - to 15 per cent from 12 per cent at present and increased duties on a range of products from cigarettes to aerated drinks and from jewellery to readymade garments.
The budget also proposes to impose a 1 per cent tax on purchase of cars that cost more than Rs 10 lakh. Jaitley proposed to levy a 1 per cent infrastructure cess on small petrol, LPG and CNG cars, 2.5 per cent on diesel cars and 4 per cent on cars and SUVs with a higher engine capacity.
In a small relief to small taxpayers, the tax rebate ceiling on incomes not exceeding Rs 5 lakh a year has been raised from Rs 2,000 to Rs 5,000.
The government has floated the idea of a presumptive tax on professionals, including lawyers, engineers and interior designers, with gross receipts of Rs 50 lakh a year. In 1992, Manmohan Singh had introduced a presumptive tax scheme for shopkeepers that did not eventually fly.
First-time homebuyers will get a deduction of an additional interest of Rs 50,000 per annum on a loan of up to Rs 35 lakh, provided the cost of the property does not exceed Rs 50 lakh.
After the limited success of a black money scheme last year, the government has decided to open a limited period compliance window between June 1 and September 30 to enable resident taxpayers to disclose unaccounted income and assets at an effective penalty of 45 per cent. The scheme assures errant taxpayers freedom from scrutiny and immunity from prosecution.
The budget will raise expenditure next year to Rs 19.78 lakh crore, which will be broken into plan expenditure of Rs 5.50 lakh crore and non-plan spending of Rs 14.28 lakh crore.
The distinction between plan and non-plan spending will disappear next year - a suggestion that was first made in a report on public expenditure reforms prepared by C. Rangarajan, former RBI governor and adviser to former Prime Minister Manmohan Singh, in July 2011.
The Rangarajan report had described the distinction between plan and non-plan spending as "dysfunctional", which had no basis in the Constitution and had evolved with the planning process. After winding up the Planning Commission last year, the rationale for the distinction also disappeared.
While the government has promised to recapitalise state-owned banks with a capital infusion of Rs 25,000 crore next year, it also raised the prospects for slashing the government's stake in banks. In the IDBI, the government is planning to bring its equity holding below 50 per cent, going below a critical threshold.
Jaitley said the RBI Act would soon be amended to enable a monetary policy committee to decide on interest rate cuts. Since 1934, a decision on rate cuts has always been the sole prerogative of the RBI governor.
The Modi government tweaked the rules for foreign direct investment to attract overseas investors. FDI up to 49 per cent will be allowed in pension funds and insurance companies as well as public sector units, 100 per cent in asset reconstruction firms and 15 per cent in Indian stock exchanges.
Overseas investors were also offered Permanent Resident status and a scheme to settle tax disputes.
A tax-holiday of three years was announced for start-ups set up between April 2016 and 2019, provided they do not claim any tax deductions on investment.
However, the decision to impose a tax on those who earn more than Rs 10 lakh by way of dividend income from shares and an increase in the securities transaction tax on options from 0.017 per cent to 0.05 per cent sent stock markets see-sawing in volatile trade. The Bombay Stock Exchange sensex closed lower by 152 points after crashing by over 800 points at one stage.
-The Telegraph Calcutta
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