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    March 2016

Budget 2016: A mixed bag


The third Budget of the NDA Government unveiled by Finance Minister Arun Jaitley in the Lok Sabha on Monday was a mixed bag – good for farming and rural India, and a bit harsh on the middle class and salary earners.

The agrarian and social sectors of India will definitely benefit from increased budgetary allocations of funds which will usher in some prosperity in villages if the schemes proposed are implemented both in letter and in spirit. Also on the positive side, the Government decided to stick to the fiscal consolidation roadmap brushing aside the suggestion that amid the global slowdown it would be proper to sacrifice fiscal prudence and focus single-mindedly on growth by significantly stepping up public expenditure. The Keynesians lost out and Jaitley opted to keep the fiscal deficit at 3.5 per cent of the Gross Domestic Product (GDP), down from 3.9 per cent estimated in the current financial year. Global rating agencies should now have no reason to complain.
However, as they say devil is in the detail, the Finance Minister’s proposal to subject 60 percent of the Employees’ Provident Fund withdrawals to the EET (exempt, exempt and tax) model of taxation evoked a sharp reaction from people, especially the lower and upper middle classes and trade unions. Unnerved by the sharp reaction, the Finance Ministry went into a fire-fighting mode to contain the fallout. It is reportedly contemplating rolling back the proposal for which there is little justification in the absence of a credible social security scheme which could take care of the needs of the aged in India.
What is also a bit disturbing is that Jaitley has made an extra effort to raise additional resources from indirect taxation, while giving small concessions on the direct taxes side. There would be a revenue sacrifice of Rs 1,060 crore in direct taxes, while indirect tax proposals are expected to yield Rs 20,670 crore, resulting in a net revenue gain of Rs 19,610 crores. This would mean a greater burden on the common man of India, which may prove inflationary had the global oil prices not been low.

Good economics cannot be divorced from good politics. The focus of the government policy ought to be on India’s growth and wealth generation and not on a redistribution of its wealth. The Government’s effort should be to encourage savings by Indians and accelerate investment to achieve the potential growth rate of 8-10 per cent as quickly as possible.


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