T N Ninan: Bottom-line - Budget provides re-assurance

Arun Jaitley's proposals convey a message of stability and predictability in times of uncertainty

After the disruption caused by demonetisation, what the economy needed most of all from the Budget was an absence of further shocks. This was not a year for ambitious budgeting. This, the finance minister realised, and he has delivered what the situation demanded. The result is the relief rally on the stock market. At a time of uncertainty, domestically as well as internationally, the Budget conveys a message of stability and predictability. For the sixth year in a row, the fiscal deficit is being reduced. To investors and financial players at home and abroad, this will be a strong message about the system’s seriousness in pursuing a key macro-economic objective. At some point, the pay-off will come in the form of better credit ratings for the country, and easier access to capital on better terms.

Mr Jaitley’s fourth Budget is also notable for the conservatism that marks his revenue projections, and the tight control that he has maintained on expenditure—marked by barely 6.6 per cent growth in a year when tax revenue is to grow by more than 12 per cent, and GDP by almost as much. This cautious approach to the task of budgeting must be caused by the uncertainty that will unavoidably come with the introduction of a major, new system of taxation mid-year. Two consequences have followed from this: the giveaways on income tax and corporation tax have been selective and strictly limited, and the individual outlays show modest increases for the most part. On the revenue side, what is worth noting is that, in the two years from 2015-16 to 2017-18, income tax collection is expected to grow by a handsome 53 per cent. Although Mr Jaitley has made a point of outlining how tax evasion is manifestly rampant, it is encouraging that tax coverage is improving—helped in part by the demonetisation gambit.

However, the decision to split companies into two categories for the purpose of corporate taxation invites the problems that marked small-scale reservation: companies are being given an incentive to stay small, or to be split into multiple entities so as to enjoy a lower tax rate. This is retrograde. Among the policy measures, what need to be welcomed are the announcements on new laws governing labour and contract farming. While the abolition of the Foreign Investment Promotion Board has been generally welcomed, one must wait to see what system replaces it. Similarly, the creation of an oil mega-corporation by merging existing government-owned companies could end up being a mixed blessing. There is logic to merging upstream and downstream operations, but corporate cultures differ and could pose challenges. Also, one needs to learn from the troubles and scandals that have engulfed Petrobras in Brazil. On the attempt to clean up political funding, the proof of the pudding will be in the eating.

The bottom line is that the Budget has been re-assuring in its basic message, and has much to commend it in the detail.