Look closer, however, and you will find that the smile, in most cases, is a forced one and hides a disappointment. Look around and you find that the common man is not smiling at all.

Ordinarily, the budget presented by the finance minister Arun Jaitley last Saturday in the Parliament would have won plaudits from all quarters for a well-crafted growth oriented budget containing a lot of imaginative proposals. The problem is that it falls far short of expectations, and worse, of what could have been achieved. Like his first budget, it is long on intent and short on content.

All said and done, more is said than done. It is full of fresh ideas and initiatives, but these increasingly look like post-dated cheques. The additional levies and imposts, however, are here and now. In many cases, the FM goes in the right direction, but does not go far enough. The stock market, after considerable uncertainty, decided to give the budget thumbs up; whether it gets similar thumbs up from the real economy also, remains to be seen.

The disappointment becomes all the more poignant when we realize that Mr Jaitley had a lot going for him. Few finance ministers have been fortunate enough to present their budget against such a favourable backdrop. The GDP growth is estimated at 7.4 per cent this year and 8.1-8.5 next year, albeit on new calculations. Unlike recent years, neither inflation nor the current account deficit is a major concern. Further, the sharp fall in global commodity prices, especially oil, provided a big helping hand to the government’s finances. In addition, capital inflows and the beginning of a rate-cutting cycle by RBI have led to a lowering of borrowing costs for the government. It is too early to forecast the monsoon yet, but initial signs are positive.   

Economic growth was a big concern, and the budget rightly focuses on it. Accelerating growth needs fresh investment. The private sector, saddled with idle capacity, mountains of debt and sluggish demand at home and abroad, has no stomach for taking up new projects. The finance minister, therefore, decided to step in with a massive dose of additional public investment especially in areas like roads and railways which have significant multiplier effect.

While stepping up public investment, the finance minister has taken measures to remove hurdles to private investment in infrastructure projects. Tax pass-throughs were cleared for real estate investment and infrastructure investment trusts as also alternative investment funds. The FM recognized that the PPP model is in disarray and there is a need to shift more risk towards the sovereign. Quite a few projects have been stalled on account of disputes. The finance proposes to introduce a Public Contracts Resolution of Disputes Bill to streamline the institutional arrangement for their resolution. Further, he has proposed a regulatory reform law to bring about cogency of approach across various structures of infrastructure.

Banks, which have to play a major role in any revival of the economy, are bogged down with tonnes of bad loans and need massive recapitalization to be able to provide credit on the required scale. The government plans to infuse Rs. 7940 crore in public sector banks in 2015-16 by way of fresh equity. There is a move to bring large NBFCs (non banking financial companies) on a par with financial institutions will help banks clean up their balance sheets by selling stressed assets at an early stage to ARCs (asset reconstruction companies).

Till now, because of their inability to access SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), ARCs would take up NPA (non performing assets) accounts only where SARFAESI is already invoked. The finance minister has proposed a uniform bankruptcy law to close down firms and businesses beyond redemption. Apart from freeing locked up capital, such a law could be wielded by lenders against willful defaulters. There is also a proposal to form a holding company for all PSBs (public sector banks) and professionalise appointment of top brass. No wonder banks shares are booming.  

Government Finances and Tax Reform

To drive home the message that the government will do all it takes to move the economy to a higher growth trajectory, the finance minister has relaxed the fiscal deficit target to 3.9 per cent of the GDP for 2015-16, against the earlier roadmap of 3.6 per cent. The target of 3 per cent for 2016-17 has been pushed back by a year. Significantly, the rating agencies have not frowned.

The finance minister had to go easy on fiscal deficit partly because the 14th Finance Commission raised the total devolution to States to 42 per cent of federal taxes from 32 per cent earlier. While it reduced assistance to States under some other heads, the budgeted payout to States at Rs. 523958 crore is 55 per cent higher than the revised estimates for 2014-15. This has considerably reduced the fiscal space for the finance minister.

The finance minister has sought to allay apprehensions of foreign investors on a number of tax-related issues. He once again refrained (wrongly in our opinion) from withdrawing the retrospective taxation altogether, but has assured that it will be used very sparingly and clarified that global transactions with an Indian component (Vodafone-Hutch) will be exempted if the Indian portion was less than half the global transaction or if this was simply the result of global reorganization of assets (Cairn). The general anti-avoidance rule (GAAR) has been deferred by two years and will be implemented prospectively. There will be no MAT on FII investments in equity.

The much-awaited Goods and Services Tax or GST will be rolled out from April next year, the finance minister said.

Corporate tax is proposed to be cut from 30 per cent at present to 25 per cent over the next four years with rationalization of exemptions. This is a welcome move. A plethora of exemptions and provisos designed to serve numerous policy objectives have converted income tax law into a veritable jungle for taxpayers and a gold mine for corrupt babus, tax consultants and lawyers. A lower corporate tax, accompanied by the likelihood of lower interest rates, should spur industry to invest, particularly if red tape is cut to obtain clearances.

Commendable Initiatives

A major and commendable initiative in the budget is the decision to ‘fund the unfunded’ 58 million micro and small businesses in the non-formal sector which generate millions of rural and semi-urban entrepreneurs and provide 128 million jobs. Two-thirds of these units are operated by Scheduled Castes, Scheduled Tribes and Other Backward Classes. Yet, it has no access to bank credit and has to borrow at usurious rates of interest of 120 per cent and beyond. The budget has announced a new financial architecture, the Micro Units Development Refinance Agency (MUDRA), for the non-formal sector with a corpus of Rs. 20,000 crore and budgetary support of Rs. 3,000 crore for credit guarantee. MUDRA will fund millions of entrepreneurs by an innovative financial architecture that will integrate the existing private financiers of small businesses as last-mile lenders.

The second major initiative is the beginning of the process of monetisation of gold i.e. creating and circulating money based on gold. The long-standing demand to bring gold lying with Indian households (estimated at 20,000 tonnes) into circulation to reduce imports and control the current account deficit has been accepted. The Gold Monetisation Scheme will allow depositors of gold to earn interest in their metal accounts and jewellers to obtain loans in their metal accounts. Banks and other dealers will also be able to monetise this gold. Allowing dealers to monetise gold is seen as a major boost. However, unless full tax immunity is granted to gold to be lodged in bonds, the entire stock of black gold may not enter monetisation. The government also plans to issue sovereign gold bonds and mint India-made Ashok Chakra-embossed gold coins, to replace the need for import.

The third big idea is accident insurance for Rs. 2 lakh at a premium of Rs. 12 per annum; for life insurance at a premium of Rs. 330 per annum and lifelong pension on an annual premium of up to Rs. 1000, each to be contributed by the beneficiary and the government equally. This ambitious plan deserves to reach crores of poor Indians.

Misses

So why is the common man no smiling? For one, there is nothing in the whole budget to bring down the cost of living for the poor or the middle class family. In fact, his lot may become harder. The service tax rate has been increased to 14 per cent, pushing up not just the visits to the beauty parlour or restaurants but also the light bills, phone bills and reducing the mobile talk time. Excise duty has also been nudged up.

There is no relief whatsoever in the income tax; no increase in exemption limit which will put extra money in the hands of a householder to cope with higher cost of living. Various tax deductions have been increased, but where is the money to avail of them?

There was no extra push to the Make-in-India campaign with an emphasis on the defence production.

Then there is the familiar syndrome of willing to give but afraid to part with. When the finance minister goes in the right direction, he does not go far enough. There will be no cut in corporate tax in 2015-16. In fact, the rate will marginally go up due to higher surcharge. Why so? He could have cut the rate, say, by one per cent while removing some exemptions.

Then again, thousands of cases are stuck in the courts as the tax department sent tax demand to FIIs and to the private equities asking them to cough up MAT (minimum alternate tax) on profits made on trading in Indian securities. The budget proposes to exempt foreign institutional investors (FIIs) from paying it. However, as no clarity has been provided on MAT applicability to other foreign firms, the ongoing litigation will continue. As the new bill comes into force from next financial year, FIIs will either have to keep fighting all the old cases or pay the tax. What is exempted is capital gain from the levy of MAT, leaving foreign portfolio investors potentially liable to MAT on other income that they earn from investments in Indian securities.

Come to the broader issues. The Finance Commission report provided an excellent opportunity to restructure central government finances by reviewing central government schemes. These could either be closed down, or handed over to the States to be implemented at their discretion and expense, or continued as fully-funded central schemes implemented by States on behalf of the centre. No such exercise seems to have been undertaken. Cash guzzling corruption ridden rackets like rural job scheme and food security scheme have been retained on the centre’s books although they can be implemented only at State level. Mr. Jaitley even claimed credit for enhancing allocations to MNREGA.

There is no positive movement on subsidies. Fuel subsidy bill is expected to come down by half, but that is wholly due to the fall in global crude prices. No credit to NDA for it. The trinity of Jan Dhan bank accounts, Mobile phones and Aadhar cards was to be used to usher in an era of direct benefit transfer which will plug leakages and reach the subsidy to the target groups. But the budget shows no enthusiasm for it. Food and fertiliser subsidies have gone up, which means that the current faulty policies on agriculture will continue. In fact, the budget has little space for agriculture except the routine pledge to provide more credit to it.

Finally, the credibility of budget numbers. The Revised Estimates for 2014-15 show a 9.8 rise in the tax revenue of the centre. Yet Mr. Jaitley has assumed a 15.8 per cent rise in tax collections in 2015-16 over the revised estimates, assuming a nominal growth rate of 13 per cent, while also banking on the slight increases in service tax and excise duty rates. He has also pegged disinvestment revenue at Rs. 69,500 crore although the target for the current year - Rs. 41,000 crore from PSU stake sales and Rs. 28,500 crore from strategic disinvestment - is expected to fall short by nearly half. This is a tall order, despite the buoyancy in the stock market. The 2015-16 target is more than double the government's earning of Rs 26,353 crore so far and may be Rs. 5,000 crore in the remaining one month (of the current financial year). The fiscal deficit estimate is predicated on these assumptions. Given their tenuousness, the finance minister may be skating on thin ice.

Considering the massive mandate that the Narendra Modi-led BJP received for a clean and decisive break from the Nehruvian past, considering the high expectations from the first full budget of the Modi government, considering the economic tailwinds and political strength at his disposal, Mr. Jaitley’s budget must be judged inadequate and disappointing. Every budget is a mixed bag of hits and misses. But you cannot afford any miss when the passing marks are 10 out of 10.