For once, the Budget and the Economic Survey produced by the finance minister's chief economic advisor and presented a day earlier appeared to be in sync. The survey had tempered expectations of "big bang" changes, claiming that the need of the hour is "a persistent, encompassing, and creative incrementalism". Thus, even the loudest of the "bangs", at least for the corporate sector and investors - the cut in the corporate tax rate by from 30 per cent to 25 per cent - will not happen at one go. It is a calibrated reduction over a four-year timeframe and with a compensating reduction in exemptions. The Budget also takes another leaf out of the survey and decides to take the lead in revving up infrastructure investments. The result is a mild and eminently sensible deviation of the fiscal deficit from the path set out in the Fiscal Responsibility and Budgetary Management Act. The government sets a deficit target of 3.9 per cent of GDP for 2015-16 instead of 3.6 per cent, ostensibly to use this new fiscal space to accommodate capital spending. There are some "creative" solutions as well - a new fund (National Investment and Infrastructure Fund) that will be created to provide equity to government infrastructure companies is being floated, and this will enable them to lever their balance sheets to get substantially more funds through debt. Read our full coverage on Union Budget Although the details are yet to be clear, the minister also suggested a revamp of the existing public-private partnership (PPP) structure. Tax-free infrastructure bonds are being resurrected and although their earlier avatar had a mixed response, one needs to see whether the efforts to improve market hygiene for bonds (the Budget makes one such effort by setting up a Public Debt Management Agency) will make a difference this time. As was clear from the Railway Budget, there will be an attempt to woo a broader class of investors - global pension funds, multilateral agencies and the like. In this infrastructure push some attention has been paid to option of slowly financing this effort through greater domestic savings mobilisation. The schemes for monetising idle stocks of gold and various tax exemptions against savings given to the more vulnerable sections of the population seem to be a bid to create a local pool of investible resources for the future. The drop in the domestic savings rate (that the Central Statistical Office's revised calculations show) might have rung an alarm bell. However, an ambitious spending plan with a decision (dictated by the 14th Finance Commission) to devolve a larger (32 to 42 per cent) share of taxes to the states and a reasonably ambitious fiscal deficit target means that the government had no option but to hike some taxes. Thus, both the excise and service taxes go up a tad. While the increase might serve the immediate needs of filling the fiscal gap, it could also be justified as a natural step towards moving up to the central goods and services tax rate due to be implemented in April 2016 (whether the high revenue-neutral rates that are currently being proposed are desirable or not is a separate debate). Here's the basic hisab-kitab of the Budget. Arun Jaitley has hit the fiscal bull's eye of 4.1 per cent of GDP helped by 11.5 per cent per cent GDP growth, a hike in petro-product duties and a taper in the income tax refunds cycle resulting in an increase in gross tax collections of 9.9 per cent.
Despite this, budgetary spending under the Plan was slashed by a ruthless Rs 1 lakh crore. Surprisingly, the subsidy outgo in 2014-15 is actually a tad higher than budgeted (by close to Rs 6,000 crore) because arrears that have been built up over the years have finally been cleared. To get to the 3.9 per cent target for 2015-16, the Budget assumes a nominal GDP growth of 11.5 per cent for 2015-16 and a gross tax collection growth of 15.8 per cent. One could argue that the projections are somewhat aggressive but this is an old quibble that is best set aside for the moment. The quality of spending improves with the multiple of "bad" revenue expenditure to "good"capital expenditure dropping from 7.7 per cent last year to 6.3 per cent in 2015-16. This improvement has, of course, been supported by a lower subsidy bill for the coming financial year, both on account of better targeting (through an expansion of the direct benefits transfer scheme) as well as softer international commodity prices. The significantly higher devolution of taxes to states has crimped the fiscal space for the Centre. The Centre has tried to hold its ground by transferring much less as assistance for state Plans (26 per cent lower than the Budget estimates of last year). In a nutshell, states get more "untied" funds but the aggregate transfer from the Centre is not as spectacular as the jump in tax transfer. The emphasis on infrastructure is reflected in the increase in central Plan outlay (used crudely as a proxy) by 36 per cent or Rs 1.52 lakh crore. However, unlike, say, 2013-14, when about 44 per cent of this was funded through extra-budgetary resources, 55 per cent is expected to be funded from internal cash balances and external fundraising of PSUs in 2015-16. Mr Jaitley's Budget has the "vision thing" that the Railway Budget had in ample measure, but also has a clear eye on the near term. While his growth targets are not entirely impossible to meet, they are certainly ambitious. Plus there are the obvious risks. The Centre alone cannot push up investment to a point where it will make a difference to the long-term growth trajectory. Thus, getting the states to use their larger share of the tax pie wisely and not squander it on unnecessary revenue spending remains a challenge. Getting the vast sums of extra-budgetary resources to fund the capex boom will also remain a challenge, and potential investors have to be assured of things like the stability of the policy regime in the country. Finally, a number of things like the fate of the land acquisition ordinance hang in balance. That could be a party pooper and again raise questions about the government's ability to push reforms through.
The writer is chief economist, HDFC Bank