A budget for elections 2017, not the economy
Rural initiatives will not be value accretive this fiscal.
It also appears this Budget is aimed more at the upcoming state legislative elections in Uttar Pradesh and Punjab in 2017, than at reviving the slowing economy. The slogan being: "Government will, therefore, reorient its interventions in the farm and non-farm sectors to DOUBLE THE INCOME of the farmers by 2022".
A crop insurance plan; a new health insurance plan; a national agri-trading platform; new roads in villages; irrigation initiatives (including an irrigation fund); improving crop yields and soil health cards; 2.87 lakh crore in aid to Gram Panchayats and municipalities; highest ever allocation for MGNREGA; cooking gas for the BPL families…will worry all of NDA's opposition because all of that would directly help consolidate NDA's vote banks in rural India.
Weeks before finance minister Arun Jaitley rose to deliver his Budget speech, the signals emanating from the government through pre-Budget consultations were particularly disappointing for businesses: with an eye on the next assembly elections, the government was going to ignore economic growth. The stock market began accounting for a disappointing budget with fall of nearly 3000 points since January 1, 2016.
Hard as it is to find any fault with the government for focusing so heavily on the rural and the social sectors, but a majority of the measures for the rural people and the economy are please-all measures rather than being economically accretive-at least in the immediate future.
On its part, business and economy, however, will have to pick on the crumbs. A higher economic growth, if any, will be a derivative of the various measures. For, instead of attempting to create a demand-led growth (where richer Indians and positive companies would generate higher demand for new goods and services), the government is more inclined at creating a China-style supply led growth (through investments in infrastructure--which would create demand for affiliated industries such as cement, steel, etc. which will raise company revenues, which will create more jobs and lay more in the hands of the employees). The flipside of supply-led growth is the lag effect. It will be months before the government's intention to create more infrastructure translates into more orders for infrastructure and allied industries, higher income for them and jobs and income growth for employees. And so the benefits of infrastructure spending are not likely to accrue in 2016-17.
While the government waits for the effect of 2.21 lakh crore of investments in the infrastructure sector to kick start growth, in the meantime it will have to rely on the consumer sector benefiting from the 1.10 lakh crore worth of disbursals coming into the economy via the 7th pay commission recommendations and the OROP disbursals. Though it's another matter how much of that will actually flow into the economy, after taxes.
The 1-4 pc cess on cars will be a huge dampener for the passenger vehicles industry, which is among the few sectors that were still growing in an economy where sectors are slowing down one after another.
The various incentives to the real estate sector are limited to affordable housing. But with real estate companies over-burdened with debt, do they have the leeway to start new affordable projects when they don't even have the resources to either service their debt or complete their pending projects? Besides, do realty firms have the interest? Remember, margins in affordable housing are far lower.The government's intention to pay the Employee Pension Scheme contribution of 8.33% for all new employees (earning up to Rs 15,000 per month) enrolling in EPFO for the first 3 years of their employment is being seen as an attempt to encourage employment by the private sector. But with the economy crawling, at best, will private sector add to its salary burden under the circumstances? Expect the government and PSU wage bills to bloat significantly instead.
Many of the other measures for business and economy, including almost all of those for the financial sector reforms, are more statements of intent and will take a while to come into effect.
No complaints with the bold measures taken towards ease of doing business, including all the technology solutions to ease citizen dissonance such as direct benefit transfer, automation of fair price shops. The most surprising one being the elimination of tax terrorism by arbitrary I-Tax officials.
Economists, of course, are delighted that finance minister Jaitley has stuck to fiscal discipline by restricting the government's deficit to 3.5 pc as planned. That effectively means the government won't be making up for the fiscal deficit by printing more money (thereby raising inflation).
A redeeming factor, though, was the fact that the government chose NOT to raise service tax rate from 14 pc to the likely GST rate of 18 pc (though it's already at 15 pc with 0.5 pc Swachh Bharat Cess and the new 0.5 pc Krishi Kalyan Cess). But it also clearly indicates that neither the finance minister nor the prime minister expect the GST bill to go through any time soon. Definitely not in 2016-17.Clearly, finance minister Jaitley and prime minister Modi have done what they could to help BJP President Amit Shah's case in the run-up to UP and Punjab elections. Over to Shah, now.