The Budget for 2015-16 is the first that is drafted entirely by Finance Minister Arun Jaitley, and much was expected from it. Many will have been disappointed by the lack of big-bang reforms, though there were many ways in which the FM worked to restart the investment cycle and rationalise taxation. Balancing populism for the middle class, the poor, and the corporate sector, the FM announced higher personal income-tax exemptions, a comprehensive safety net, and a roadmap to reduced corporate taxes.
Hit by the Fourteenth Finance Commission’s increased award to the states, the Budget increased the fiscal deficit target to 3.9 per cent for 2015-16 from the originally targeted 3.6 per cent -- but kept to the target of 4.1 per cent for 2014-15, on the back of heroic efforts at expenditure control. And smarting from the near wipeout of the ruling Bharatiya Janata Party in the recent Delhi elections, the Budget also introduced several policies that might be seen as “pro-poor”, such as an expanded insurance net.
The FM recommitted the government to a three per cent target for the fiscal deficit in the medium term, but said the path there would take longer than planned by a year. The delay allows Jaitley to absorb an increase in the states’ share of tax revenue – which increased by about nine percentage points – and also gave himself some room to push public investment in roads, railways and infrastructure.Read our full coverage on Union Budget
Making a virtue out of the necessity of implementing the FFC recommendations, the finance minister suggested in an interview on Doordarshan after the Budget that federalism was a major theme of the Budget. This is in spite of the fact that much of the savings in expenditure in the past financial year came from reducing Central assistance to state Plans. However, the other major push was to infrastructure. The Plan allocation for the ministries of road transport and railways was dramatically increased. An additional Rs 70,000 crore is to pumped into infrastructure, said Jaitley.
In addressing implementation problems for private-public partnerships, Jaitley gave into demands from the sector and agreed that the government would take a greater part of the risk in such projects. The Budget also proposed a "plug and play" model, where all clearances will be put in place before a project is auctioned. Industry has long argued that clearances delay project implementation in roads, railways and infrastructure.
In a major announcement Jaitley showed an intention to formally codify the proposed inflation-targeting regime which will require amending the Reserve Bank of India (RBI) Act. The aim, he said, was to keep inflation stable. This is seen as a major step, as a formal inflation-targeting regime requiring a buy-in from the government will reduce pressure and interference from the government in the central bank’s stance and monetary policy direction.
The next theme in the Budget was the expansion of the social-sector net. Jaitley announced a universal security system, covering pensions, accident and medical insurance, and so on. In the Atal Pension Yojana, the government will pay 50 per cent of the premium; the Prime Minister Jeevan Jyoti Bima Yojana will provide an insurance cover of Rs 3 lakh with a premium of just Rs 330 per year; and the Pradhan Mantri Suraksha Bima Yojna will cover accidental death risk with a payout of Rs 2 lakh for a premium of just Rs 1 a month. It has been implied all these will use the Aadhaar system and Jan Dhan Yojana bank accounts; Prime Minister Narendra Modi tweeted that the government was shifting from “Jan Dhan” to “Jan Kalyan”.
The Aadhaar focus carried over to subsidies, where the Budget sought to target them more effectively. In line with the thinking articulated by the Economic Survey, the Budget said leakages in the system would be plugged using the “JAM” trinity – Jan Dhan, Adhaar and mobile – to plug the leakages in the system and make the current subsidy regime more targeted. To increase the depth of the existing financial system, he asked the postal network, which has over 100,000 touch points, to apply for the payment bank license. The targeting of subsidies could eventually save the government thousands of crores; however, the only significant Budgeted decrease in subsidies was to petroleum subsidies, for Rs 30,000 crore less than the Revised Estimates for 2014-15.
The financial sector was promised a raft of big laws. Foremost among them was the promise that the Forward Markets commission (FMC) would be merged with the Securities and Exchange board of India (Sebi). "This would reduce the speculation in the markets," the finance minister stated. This would require amendments in the Sebi Act, Securities Contract Regulation act (SCRA) and forwards act (FCRA), FEMA (foreign exchange management act). GIFT city in Ahmedabad, an initiative of the PM when CM of the state, has been languishing, and the Budget promised to give it a push with new rules.
Initiatives under the FSLRC recommendations by Justice Srikrishna that include setting up agencies such as an appellate body, redressal agency have also been announced.
The public debt management agency has finally been given the go-ahead; the Reserve Bank of India has never been happy with the idea. While there was no clarity on where this agency will be housed, but as the budget is also giving a go ahead to the FSLRC framework, this is likely to be on the lines of the recommendations of the committee.
The indirect tax set-up has seen only minor tweaks to its structure, mainly to remove inverted duty structures. Service tax has been raised to 14 per cent, which will hit the middle class. However, major changes have perhaps been held in abeyance in expectation of the rollout of the Goods and Services Tax, which the FM promised would happen in April 2016.
In direct taxes, the headline news was the increase in exemptions for personal income-tax payers. Also, there will be a reduction in corporate income tax to 25 per cent from 30 per cent over four years. This would be revenue neutral because it would be accompanied with an end to exemptions. Importantly for foreign investors, minimum alternative tax will no longer apply to FIIS; and a tax pass-through has been announced for Category I and II alternative investment funds. The benchmark indices reacted initially with joy to the news of the corporate tax reduction – but went back down again subsequently.