july 12, 2014

Economic & Political Weekly EPW july 12, 2014 vol xlix no 28
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Onwards to the Neo-Economy
Concession to capital and nancial jugglery mark the new governments rst budget.
T
he National Democratic Alliance (NDA) government has
managed in its rst budget to appease its core support
groups of business (foreign and Indian) as also what
Prime Minister Narendra Modi loves to refer to as the neo-middle
class. There are no major ourishes in Finance Minister Arun
Jaitleys exercise for 2014-15, but the bits and pieces add up to a
substantial shift from the past, favouring business-led growth
while further reducing the role of the state in driving the econo-
my. Budget 2014 pays a politically cautious lip service commit-
ment to welfare spending, though the threat of a major pruning
in the future has been held out. There does remain a degree of con-
tinuity with the past as with the United Progressive Alliance
(UPA) governments late adherence to scal fundamentalism.
Yet, Jaitley has actually been scally irresponsible by making
grand assumptions on revenue buoyancy and capital receipts
which will surely turn out to be pie-in-the-sky numbers. There
was a need perhaps to be more careful in what will almost
certainly turn out to be a year of a major drought, but the anxiety
to grab the headlines and spread a feel good factor in the
markets has got the better of the nance minister.
Foreign and domestic capital may not have got the big bang
announcements they had hoped for, but there are many goodies
for them in Budget 2014. For foreign capital there is the decision
to further open up the defence production and insurance sectors,
and relax norms for real estate investment. For foreign institu-
tional investors based in the country there is the decision to
treat business income as capital gains. For all foreign companies
operating in India there is the promise to be much more careful
in applying Indian laws on retrospective taxation. For domestic
capital there is the major shift to public-private partnerships in
infrastructure which will continue to shower private gain at public
cost. These will be accompanied by new and in some cases, ex-
tended tax breaks (in power, real estate, roads and the new-
fangled but mysterious idea of smart cities). It will become
easier for domestic companies to raise capital abroad. A major
disinvestment programme gives Indian capital an opportunity
to increase its stakes in what will soon become the former public
sector. And a major decision on advance tax rulings will make the
conduct of business easier. All in all this is a major boost to private
business which will be far from neutralised by the tweaks to the
tax structure to reduce arbitrage in investments in mutual funds.
Budget 2014 has not, of course, forgotten the most visible sup-
porters of Modi in the electorate the middle class. In a speech
sprinkled with references to the interests of the neo-middle class,
there are substantial concessions in income tax, which has always
been a core agenda of the Bharatiya Janata Party (BJP) from the
time it was a party of only the salaried and traders. The tax ex-
emption limit has been hiked, the ceiling for savings enjoying tax
concessions has been raised by 50%, the upper limit for deposits in
the middle class-favoured Public Provident Fund (PPF) has been
increased by 50% and, for the relatively better off among them,
there is the increase in tax exempt interest payments on housing
loans. One cannot fault the initiative to establish a Rs 10,000-crore
fund to encourage entrepreneurship by the middle class, but as
we know from decades of observation it is one thing to make an
announcement, another to establish the fund and yet another to
actually operationalise it.
The nance minister has not forgotten to leave an NDA/BJP
imprint on Budget 2014: he has announced so many new
schemes/programmes that one loses count. There are many more
than used to be announced even in the budgets presented during
the heydays of so-called socialism. The schemes (some of which
naturally had to be named after the stalwarts of the Rashtriya
Swayamsevak Sangh and Jan Sangh rather than after Jawahar-
lal Nehru/Indira Gandhi/Rajiv Gandhi as under the UPA) range
from protection of the Pashmina craft to providing broadband
services in rural India. All of them have been provided token
Rs 100-500 crore allocations, continuing the long-established
practice of trying to appear different and then spreading
resources so thinly that they end up having little impact.
If there is a macroeconomic framework for Budget 2014 it is
that private investment in infrastructure and housing will boost
growth to a nominal rate of 13.4%, and revenue will be buoyant
on this growth. This income will be supplemented by receipts
from selling off parts or all of public sector infrastructure
companies and from retail sale of equity in public sector banks,
altogether enabling Jaitley, or so he claims, to continue with the
UPA governments scal decit target of 4.1% of GDP in 2014-15.
A positive development is the budgeted 26.9% jump in plan
(revenue and capital) outlay in both the central plan and addi-
tional central assistance to state plans. This is all ne on paper
but as in most budgets there are some heroic assumptions on
EDITORIALS
july 12, 2014 vol xlix no 28 EPW Economic & Political Weekly
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receipts and this time there is a selective discarding of many
principles of public nance.
Tax revenue, according to the Medium-Term Fiscal Policy State-
ment, is expected to grow by 19.8% over the actuals of 2013-14, the
same order of magnitude as the 21.3% annual growth during the
boom years of 2003-08. This is an impossibly high target which
neither Pranab Mukherjee nor P Chidambaram could meet after
2008, nor will Jaitley be able to in 2014-15. Non-tax revenue is
budgeted to grow by a more modest 6.7%, but this includes a
record Rs 46,000 crore payment of dividends by the Reserve
Bank of India and, not noticed by many commentators, an
unlocking, for the rst time ever of Rs 12,252 crore lying as
unspent balances in the Public Account of India. If these payments
do fructify they are one-off transfers while the largest ever disin-
vestment programme Rs 63,425 crore is an unrealistic (not to
mention unwelcome) target to be met in eight months. The promise
to adhere to scal targets has not prevented Jaitley from tinkering
with specic rates in excise (which is against the principles of
non-distortionary indirect taxation) and from playing around with
savings instruments (while for years governments have struggled
with lowering the tax-free interest income on PPF deposits).
One can be pretty certain that as the end of 2014-15 approach-
es, it will require some statistical jugglery to present a healthy
picture of government nances. One need not complain if the
nance minister is unable to meet scal decit targets that are
demanded by the international rating agencies. One should
fault though the fresh set of concessions to domestic and foreign
capital, the opening of more doors to foreign investors and the
wooing of the neo-middle class with tax breaks. If this is the
neo-economy that the Modi government wants to construct,
then one can forget all about accelerating employment creation
and, of course, the achche din.