Market Maniac

Budget 2015 – A few rousing cheers
Mar 02, 2015

I was trolling antiques in Jewtown – we were in Kochi for the Biennale – when Mr. Jaitley read out his budget proposals. Thus, rather than listening seriously in air conditioned comfort, I was sweating profusely and, as a result, ended up drinking perhaps too many beers.

Nonetheless, I scrupulously read (some of) the fine print, the summaries and the opinions over the next couple of days, and I must grudgingly admit that I found the budget pretty damn good. Grudgingly because I believe that from the perspective of political funding (the number one problem in India today, in my view), the NDA is not much more than a clone of the UPA. Pretty damn good because, for the first time since I can remember, the overall thrust of the budget is long-term structural.

Of course, there’s a lot of quibbling about the revenue assumptions – there always is, and, if truth be told, everything gets revised and re-revised to hit the deficit target in any case. There’s also some concern, which I share, about the one year extension to reach a 3% deficit. However, markets don’t appear to be too upset about this, perhaps, because the spending focus is clearly on investment in infrastructure rather than the usual spending sprees.

The pluses, of course, are many and substantive. Most important, in my view, is weaving together the first threads of a social safety net – there’s no question that India needs this more than anything else and it speaks (confirms?) the government’s commitment to the poorest of this country. While some analysts are claiming that this is merely one of the results of the Delhi assembly election, the fact is that it is a wonderful policy initiative, and, hopefully, a harbinger to some genuine political change.

The other excellent structural initiative is the definitive plan to do something about monetizing gold. As regular readers will recall, I have been braying about this for years. Of course, several governments and RBI committees, too, have worked on it to no avail. Nonetheless, I believe this time will be different, if only because Mr. Modi is known as the Implementation King.

While I was surprised that there was no credit taken for lowering (non-petroleum) subsidies, my sense – certainly confirmed by the Economic Survey – is that using the Jan Dhan bank accounts, Aadhar and mobile delivery (the JAM session, as it is called) will continue to develop apace and may, in fact, provide Mr. Jaitley with a lovely surprise on the cost side. I know that Finance Ministers are prone to squeeze every credit they can at the budget stage so that they can promise more and more goodies all around – this may well be the first time that the budget gets a windfall that was not built into the numbers.

Another important structural move was the signing of an agreement between the government and the Reserve Bank of India to render monetary policy more accountable. While RBI may feel at the receiving end of this (as also the plan to finally set up the Public Debt Office to manage the government’s borrowing program), my concern is that such a move may reinforce “central bank transparency”. While transparency, in principle, is a good thing, over the past three decades in developed economies it has simply led to the central bank spoon feeding the market, which has steadily increased income disparities leading to substantially reduced demand and lowered growth. Of course, India today has different sets of problems (investment, inflation) than developed economies (demand, deflation), but RBI will need to be vigilant that this new accountability demand doesn’t inadvertently turn it into the handmaiden of the financial sector, as has happened to central banks in the richer countries.

Merging the FMC with SEBI is a long overdue reform, which will make commodity futures markets much more transparent and should ultimately provide value to the agriculture sector. Not touching agricultural income was, of course though unsurprisingly, disappointing.

On the taxation front, while I applaud the surcharge on “super-rich” individuals and companies, I feel that Mr. Jaitley could/should have gone further in unwinding the regressive nature of our tax system. First off, the bulk of new revenues are coming from indirect taxes, which are regressive since everyone pays the same rate. To my mind, the FM could/should be more aggressive in this area by, for instance, eliminating the dividend distribution tax so that dividends are taxed at each individual’s normal rate. This would increase revenues, since the bulk of dividends go to higher income earners.
 

We should, in fact, be moving in the direction of taxing unearned income at least as much as earned income – a recent study I read showed that we could be revenue neutral if we completely eliminate income and corporate (and all other) taxes and simply tax inheritance and property.

But that’s for when I become Finance Minister. Right now, I would give Mr. Jaitley at least a few rousing cheers



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