In a country whose media exists in a perpetual fever-pitch of excitement, a consensus has formed around the first full-year budget of the Narendra Modi government presented on February 28, 2015: No big bang reforms. For those who have not been following this closely, here are the highlights, along with links to primary sources for further reading.
After months of speculation about the budget, we now can state with greater certainty Modi’s approach to economic governance: cautious but resolute. The budget, and its related pieces—the Railway Budget and the Economic Survey—should be read together as a roadmap of Modi’s intentions. Based on this budget, this government’s top priorities are infrastructure and capital investment; empowerment of states through fiscal devolution; and greater financial inclusion of India’s poor. Other areas of focus include tourism, sanitation and skills training.
Two days earlier, in a vestige of the British Raj, Railway Minister Suresh Prabhu presented a separate budget to parliament. Prabhu did not disappoint. He shed the populism of most of his predecessors and focused on structural improvements instead of announcing headline-grabbing new rail lines. Infrastructure investment was the big news, with an eye-popping $137 billion set aside for modernization over the next five years. The railways will look to increase passenger as well as freight capacity, especially important for developing a faster and more integrated export-focused economy. The railway budget also contained Modi-style flourishes, such as yoga training for staff, and a pledge to install solar panels on railway land and buildings.
Back to the main course: Finance Minister Arun Jaitley introduced his budget to parliament by reciting a couplet that took a swipe at the previous government: “Kuch to phool khilaye humne, aur kuch phool khilane hai / Mushkil yeh hai bag me ab tak, kaante kai purane hai” (We tended some flowers to bloom, and more are left to go / The difficulty so far in this garden is the old thorns remaining). It’s an image that works well—of this government picking its way through the brambles left behind by its predecessor. Jaitley painted a picture of an economy returning back to health: inflation is down, growth has picked up to 7.4% this year and is predicted to surge above 8% in the fiscal year starting April 1. (Both of these figures are based on revised estimates that some call dubious.) Foreign exchange reserves are up to $340 billion, the rupee has strengthened and the stock market has been performing well—“second-best…amongst the major economies,” as Jaitley stated.
Perhaps the most significant feature of the budget lies in its smaller financial base—not because of a bad year, but because of the government’s decision to shift more revenue out to the states. This was a recommendation of the Fourteenth Finance Commission. Beginning with this budget, 42% of collected revenue will go back to the states (allocated using a complex formula), up from 32% in previous years and the “largest ever change” in fiscal devolution. Shrinking the central pot and pushing funds for the states to use themselves in implementing social and welfare schemes is a step toward stronger governance and accountability.
Jaitley’s budget prioritized infrastructure investment, increasing outlays by $11 billion, a new national infrastructure fund, new tax-free infrastructure bonds and “revitalized” public-private partnership funding models that will shift the risk burden toward the government and away from the private sector.
Jaitley also flagged a timeline for one of the government’s legislative priorities: the new goods and services tax, which would unify the country’s patchwork of tax codes under one national VAT-like umbrella, to begin by April 2016. This will require a constitutional amendment, so will not be easy to achieve. Not only will it need to pass both houses of parliament by a two-thirds majority, but will also need to be ratified by at least half of India’s states. Jaitley also merged foreign institutional and foreign direct investment limitations into one cap, which presumably will be easier to manage. The corporate tax rate will be cut from 30% to 25% over four years, but with fewer exemptions.
As emphasized by the prime minister in his independence day speech, and highlighted by the chief economic advisor a day earlier in the Economic Survey, the government is intent on using technology to bring financial services to the bottom of the pyramid. The new “JAM” acronym stands for Jan Dhan Yojana (the bank-account-for-all program announced back in August), combined with Aadhar (the unique biometric ID program launched by the previous government), and enhanced by mobile phones. Having a way to get benefits directly to the individual will cut down on fraud.
Jaitley also announced an expanded pension system for the poor, and a new ministry of skills development for rural youth. India lacks a universal social security system since the vast majority of the population is employed in the informal sector. We’ll have to see how this program unfolds. But the rural skills development focus may have immediate impact, given the training required to get young people coming of workforce age ready for the type of jobs in demand.
Yoga got its due in the budget, too—it will be included as a “charitable purpose” in the Indian tax code. Tourism made its appearance with an announcement that the new visa on arrival system would be expanded from 43 to 150 countries. There was a nod to sanitation as well—toilets and clean India, now with 100% deductible contributions.
As might be expected, Indian and U.S. business groups have welcomed the budget. The infrastructure outlay is an immediate boost to the economy as well as welcome focus on investing in the basics to deliver higher growth down the line. The private sector has naturally lauded tax rationalization, and the corporate tax reduction, though the opposition has called it a give-back to corporations that supported Modi in last year’s general election.
Finally, one last note: apropos a social-media savvy government, Jaitley sat down for a “Talkathon” on YouTube with India’s leading youth generation novelist, Chetan Bhagat. Bhagat, a celebrity in his own right, appeared starry-eyed next to Jaitley, asking first about how he “visualized that kind of money” to manage the budget. You can watch the fifty-minute conversation online.