Can Modi govt walk the talk?

If, perhaps, there is one philosophy underlying Union Finance Minister Arun Jaitley’s second budget, it is a reaffirmation of the Narendra Modi government’s belief that the best driver of growth is the private corporate sector (PCS), with the foreign investor having pride of place; the government and public sector have a role only in the short term.

The PCS — both Indian and foreign — had demanded much more from the budget, but enough has been given. If we ignore the irritants of minor increases in indirect taxes and the new 2% surcharge on incomes higher than Rs 1 crore, what we have is the promise to reduce the corporate tax rate from 30% to 25% over four years and a simultaneous reduction in exemptions. This will be implemented from 2016–17 onwards, but is enough to whet appetites because experience shows that exemptions never end. Like with many aspects of the now-abandoned Direct Tax Code, the PCS will be successful in having the rates reduced with a minimal removal of exemptions, and the effective rate may then rest below 25%.

For the foreign investor, there is more. The General Anti-Avoidance Rule (GAAR), meant to prevent tax avoidance, especially in the form of transfers to tax havens, announced in the 2012–13 Budget, stands further postponed. These were pushed forward to 2015 following a huge outcry by foreign companies in 2012, and intensive lobbying has pushed them further ahead to 2017. Other measures include changes in processes and rules which reduce the tax burden and offer more incentives. The Modi government has never made a secret of its desire to woo and please the foreign investor; Budget 2015 goes further in that direction.

If there is one positive feature of Budget 2015, it is the decision to relax the self-imposed constraint on the fiscal deficit and aim for a target of 3.9% of gross domestic product (GDP) in 2015–16 (as against the earlier target of 3.6% of GDP). The finance minister has accepted that corporate India, overleveraged as it is, will not be able to drive investment right now. To make up for the slack, the central plan for 2015–16 is budgeted for a massive 34% jump in outlay (mainly in railways, roads and power).

As in the past, the larger contribution (53%) will come from public sector undertakings (PSU) which will draw on their internal resources, and not from the central government. Can the PSUs — targeted for a disinvestment programme in 2015–16 and often operating without chairpersons — oversee such a large investment programme?...

So with the fiscal deficit target of 4.1% of GDP in 2014–15 sacrosanct, the Centre has chosen to choke plan spending…Budget 2015 continues in the now-established tradition of a ritual where there is no integrity in either its numbers or announcements. It announces grand new schemes even as others in the same area that were announced just last year are yet to see the light of the day. So we are to have a new Micro Units Development and Refinance Agency Bank, with a corpus of Rs 20,000 crore, but the Rs 10,000 crore entrepreneurship fund for the same sector that the finance minister announced in his first budget is nowhere to be seen.

Budget 2015 draws up a long list of ambitious legislative proposals — on the bankruptcy code, regulatory structures, black money, and many more. But can a government that has so far shown an inability to work with Parliament and has instead chosen the ordinance route, deliver in a year?