Originally Published titled: Indian PM Modi’s Budget Highlights Mainstream Topics, but Falls Short in Some Areas
India is one of the fastest growing economies with a very young demographic and a huge potential for growth. Like any other economy, India too, focuses on controlling inflation and keeping its markets stable. Politics has been an integral part of Indian economy and the former seems to have a considerable influence on the latter. The common thread that binds the two is that of expectations. With the previous government being a part of large number of scams, the markets had slowly lost confidence leading to political instability and huge market fluctuations. The country had long been suffering from high inflation and a slow growth rate. Over a period of time the loss of faith in the Indian markets slowly started reflecting in the future economic forecasts of the country. However, it is important to note at this point that it was during the rule of the previous government that India managed to survive the 2008 global slowdown, escaping rather unharmed. There was no major Indian bank shut down and considering all that was happening across the globe, it seemed more like an achievement. However, some argue that it was not the party’s financial outlook but the strong structure of the financial system that made the survival possible for India.
By May 2014, Indian voters were able to turn the tables in favor of Mr. Narendra Modi, who spoke about bringing a change in India. With Gujarat as an example, where he had been a Chief Minister for four terms consecutively, starting 2001 to 2014, it was understood that ‘Gujarat Model’ would bring the desired results across the entire nation. With the ‘Make in India’ policy and gaining popularity of ‘Digital India’, many found this dream turning into a reality through the recent Indian Budget of 2015. With India having the world’s second largest population and the maximum number of poor people in the world, the Indian budget could have been turning point for the poor and the unemployed. While many have supported the budget, others have criticized it for being very ‘pro-corporate’.
The Indian Budget has been more or less termed as “stable” in its approach allowing more public spending through emphasis on strategic plans that could modernize India’s infrastructure. In an interview with CNBC at the Global Financial Markets Forum in Abu Dhabi, Sheila Patel, CEO of Goldman Sachs Asset Management International said, “India is probably where China was in the early 2000s. “ She further went on to add that “Modi’s reform do seem to be catching the eye of global investors and taking hold.”
But to many economists the $290 billion budget seemed far from what they had been expecting. Many say that it missed on the ‘big bang’ reforms that had been in talks. Issues related to electricity shortages and simplifications of sales tax have been left out of the budget. A few highlights of the budget are given below:
The current government has shown ‘gold’ as an important part of the financial system by introducing gold monetization. Sovereign Gold Bond, as an alternative to purchasing metal gold scheme to be developed.
2. Emphasis on Insurance and financial security
According to MG George Muthoot, chairman of The Muthoot Group: By “funding the unfunded” and with schemes that promote social security, the government is reaching out to the vast majority who remain untouched by financial security or insurance.
3. Changes in the Financial Sector
- Corporate taxes were slashed to 25 % over four years from the current 30%.
- A Public Debt Management Agency will be set up to promote investment in India. This agency will bring both India’s external borrowings and domestic debt under one roof.
- The Forwards Markets Commission will merge with SEBI.
- Amendment in Section 6 of FEMA will clearly provide control on capital flows, as Government will exercise equity in consultation with the RBI.
- Task force will establish a sector-neutral Financial Redressal Agency.
- Foreign Investments will be allowed in Alternate Investment Funds.
4. Indirect Benefits to Middle Class
The middle class has been left in dismay in this budget and with more than 25% of the country’s population belonging to this group; this issue is a cause of concern. This year the budget misses the middle class since there has been no change in the tax slabs. Nevertheless some good news from the budget for them was:
- Now one can save 1.5 Lakh in Pension fund instead of 1 lakh, since this amount will be tax-free.
- Apart from that, there will be no tax on the annual investment of Rs. 50,000 in the National pension Scheme.
- For health Insurance, exemption from tax is for those who pay a premium of Rs. 25000.
- The transport allowance has been increased from Rs. 800 to Rs. 1600.
The part that pinched the middle class was that not only were they devoid of any goodies in the budget bag but also faced the pinch of the service tax. Service tax rate has been scaled up from 12.3 % to 14 %, a raise that will make a hole in their pockets. This budget has definitely got no good news for the middle class. With plunging oil prices and now a sudden rise, an increase in service tax could worsen matters related to savings.
Indian budget gave a strong relevance to the Indian infrastructure indirectly hinting at making more investments in the tax-free bonds that will help rail, road and irrigation sector.
- Sharp increase in outlays of roads & railways. Capital expenditure of public sector units to also go up.
- National Investment & Infrastructure Fund to be established with an annual flow of 20,000 crores.
- Tax-free infrastructure bonds for projects in rail, road and irrigation sector.
- Self-Employment & Talent Utilization (SETU) to be established to support all aspects of start-ups.
- New Ultra Mega Power Projects, each of 4000 MW to be set up in Plug & Play Mode.
- Thrust for Smart Cities
- Regulatory reform law bringing cogency of approach across various sectors of infrastructure.
- “Gujarat International Finance Tec-City (GIFT) in Gujarat was envisaged as an International Finance Centre that would actually become a good international finance center as Singapore or Dubai,” Finance Minister Arun Jaitley said during the budget speech.
The current government has given some emphasis on the education by providing infrastructure to the sector. The government is investing heavily into sectors like infrastructure, energy, and manufacturing, Swachh India, Clean Ganga and Digital India.
- National skills mission to be launched soon; will consolidate skill initiatives spread across several ministries and allow standardization of procedures and outcomes.
- 1,500 cr. Set apart for Deen Dayal Upadhyay Gramin Kaushal Yojana
- Student Financial Aid Authority to be set up to administer and monitor scholarship as well as Educational Loan Schemes through Pradhan Mantri Vidya Lakshmi Karyakram
- AIIMS to be set up in Jammu & Kashmir, Punjab, Tamil Nadu Himachal and Assam.
- IITs to be set up in Karnataka and ISM Dhanbad made into full-fledged IIT.
- Post Graduate Institute of Horti-Culture Research and Education to be set up in Amritsar
- IIMs will be set up in Jammu & Kashmir and Andhra Pradesh
There have been many debates about the education part in the budget. Since the current government believes in enhancing digital infrastructure and deploying e-governance, it failed to get into the ‘Digital India’ initiative. However, reduction of the Royalty Tax (from 25% to 10%) would have a positive impact on digital and online learning companies.
There was an announcement of including 150 countries for which visa on arrival will be granted. Many argue that this would attract more foreign professors,researchers and students while some criticize it by saying that lack of women security across the nation was the real issue that had to be addressed and not the falling rate in the tourist numbers. However, Finance Minister Arun Jaitley doubled the Nirbhaya Fund to Rs 1000 crore for women’s safety and security.
7. For entrepreneurs
- Micro-units Development Refinance Agency (MUDRA) Bank with an amount of Rs. 20000 crores and credit guarantee of Rs. 3000 crores: Will refinance Micro Finance Institution.
- Atal Innovation Mission: To be established in NITI to provide innovation platform: Sum of 150 crores to be earmarked.
- 1000 crores earmarked for Self Employment and Talent Utilization (SETU) Mechanism.
- Loans to MSME Sector being brought under priority sector
- Small Finance Banks will augment supply of credit to MSMEs
- A separate 7.5% sub limit is being created under priority sector lending for MSMEs
The Indian Budget has been serious about creating job opportunities for ‘Young India’. According to former chairman, Microsoft India, and founder chairman, Social Venture Partners India, Mr. Ravi Venkatesan, many more concrete steps are needed to create a tidal wave of entrepreneurship across the country, such as funding for incubators in smaller towns, a more liberal system for raising capital globally, a source of low-cost debt for entrepreneurs, and dramatic improvement in the ease of starting and running a business.
He further makes a valid point that becoming an entrepreneur, rather than find a job, must be the ambition of young people, including those who live in smaller cities and towns. Many of these won’t be an Infosys or a Flipkart. Most will be micro-enterprises employing a handful of people. The majority of these enterprises won’t be in Bengaluru or Mumbai but in cities like Patiala, Kolhapur and Salem. But the collective impact of hundreds of thousands of such micro-entrepreneurs will be huge.
VIEWPOINT: Indian economy is at a point where a strong budget targeting growth seems more of a need than a necessity. Like India’s financial minister, Mr. Arun Jaitley, rightly said “People who urged us to undertake ‘big bang’ reforms also say the Indian economy is a super-giant, which moves slowly but surely.”
It is true that there is no budget that could possibly make everyone happy but the only issue to be kept in mind is that a budget should not hit hard on the pockets of those that are already suffering from high inflation and have little capacity to save. Usually our budgets aim too high and achieve very little but the current budget even with its few shortfalls is a bit difficult to condemn. This year’s budget should be able to put public finances to better use even though it is quite clear that it is corporate friendly and has little for the middle class that forms a huge chunk of the entire population!