Daily Times

The Indian economy is on the cusp of becoming one of the world’s biggest economies with its gross domestic product growing over 7 percent per annum. Various financial institutions have even predicted that the Indian economy has the potential to outpace the Chinese economy if India is able to push for big-ticket reforms.

There were several factors that conspired in favour of this phenomenal success. For one, Modi and his party received an unprecedented mandate in the 2014 general elections where India benefitted from a steep fall in the international oil prices as well as a buoyant domestic market that acted as a cushion against the sluggish global market. In fact, Modi was in an unenvious position of the gong for big reforms that would have helped India leapfrog to one of the biggest economies of the world.

Unfortunately, at the time when India’s GDP had surpassed China’s GDP, Modi opted for a demonetization drive mainly to unearth the black money, root out corruption, and hit at the terror funding. Although the intention was laudable, unfortunately, it was ill-timed as it came at a time when the Indian economy had started looking up.

It is a fact that the demonetization drive did not achieve its desired objective of unearthing black money present in the market. According to sources, people who were holding money have now come out with ingenious ways of converting black money into white. Many people with black money have invested in gold, bullion and in the real estate to avoid detection. However, what the demonetization drive did achieve is send a stern message to all such people who had unaccounted money that the government would not spare them if they were caught with undisclosed money.

Although the government did give an opportunity to the people holding unaccounted wealth to declare their income and pay taxes, there still remained several defaulters, who have not yet reported their income.

It was, therefore, in the context of the failure of the demonetization that people were expecting a budget, which would mitigate their pain and revive their businesses. Unfortunately, the government did not avail this great opportunity to introduce big ticket reforms that would have pushed the economic growth. The biggest worry remains that the fiscal prudence shown by the government might not create jobs.

As per the Labour Bureau, only 0.5 million jobs were created during the FY 2015-2016 against the requirement of 20 million jobs, as promised by the government. As most of the citizens in India are below the age of 35 years, lack of job opportunities has the potential to lead to social unrest. The grandiose announcement made by the Indian prime minister for creating ‘Skill India’ and ‘Make in India’ has not made much headway one of the reasons behind the inability to create additional jobs is that the much-expected foreign direct investment in the manufacturing sector has been disappointing. Most of the FDI has only come in the service sector. One of the complaints of the foreign investors is that India is a difficult place to start a business, as more than 60 clearances are required before one could start the business. The government has thus abolished the Foreign Investment Promotion Board, which would help ease businesses in India. This is a bold and welcome move and hopefully, will now pave the pave the way for foreign investment.

Another positive in the budget is that the government has allocated Rs.480 billion ($8.90 billion) in Mahatma Gandhi Rural Employment Scheme, which will give a push to the rural development. The government increased the corpus for National Bank for Agriculture and Rural Development to Rs.40,000crores ($6 billion). An insurance cover to the farmers would cushion them from weather-related crop failures that saw a spate of farmer suicides. It has also announced plans to electrify all villages by 2018. The Finance Minister, ArunJaitley, has focused on the housing sector and the rural economy, which will have a multiplier effect by reviving the consumption of steel and cement, which was hit by the note ban.

In an attempt to reward the honest taxpayers, the government has announced a cut in the tax rates by five percent for those whose income is less than Rs. 500, 000 per annum ($7426). The real problem is identifying the non-salaried people, who do not file their returns. With a population of 1.2 billion, less than 3% people pay their taxes. It is not clear how the government will identify a large majority of people who evade payment of taxes. By going aggressively on digital payments, they hope to track the defaulters through data mining. The 10 percent additional surcharge levied on individual income above Rs 5 million and Rs. 10 million, the government will partly offset the loss of reduction of five percent tax.

The Goods and Services Tax (GST) Bill is expected to be implemented by July 1, 2017, and would likely lead to spurring growth, competitiveness, indirect tax simplification and greater transparency. It is expected that the GST will help boost GDP figures between 1% and 2%. While a fiscal deficit of 3.5% of the GDP was achieved in 2016–17, the expected fiscal deficit for 2017–18 is 3.2% of the GDP, which looks achievable given the expected thrust in tax collection after the implementation of GST and also greater tax compliance after demonetization.

In a significant move, the government has restricted cash donations to political parties from Rs.20, 000 to Rs.2000. This step will go a long way in bringing transparency in political funding.

The former Finance Minister, Mr P. Chidambram, in an interview called the Union Budget, was a “damp squib” and a “wasted opportunity” as it offered nothing to revive “flagging growth” and offsetting the negative consequences of demonetization, which is likely to spill over to the next two years. However, most of the economists and industry captains have praised this year’s budget as it primarily focuses on the rural development, housing and on infrastructure.

Overall, the finance minister should be complimented for presenting a pro-poor budget that focuses on rural development. Although it could be argued that the finance minister should have also considered a cut in indirect taxes that would have given a boost to the industry, however, given the present circumstances, he has done a fine job in presenting a balanced budget.

It is hoped with the bold step taken in abolishing the Foreign Investment Board; the foreign investors would find the Industrial climate more favourable to set up business in India, which will, in turn, have a multiplier effect in creating jobs in both the organised and unorganised sectors.

The author is an Independent Columnist and Political commentator