Openomics: Budget 2017

“The layers of accountability of various ministries to the Prime Minister is very high”

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Finance Minister Arun Jaitley in his first interaction with industry leaders after the Budget

NO FINANCE MINISTER can draft a Union Budget that can please everyone, considering the relatively meagre resources that are available for allocation after all the pre-committed expenditure. But there are finance ministers who can satisfy even the most demanding analyst with the direction of their budgetary proposals and focus on principles as a policy guide. If Arun Jaitley, a lawyer by professional training, is eloquent in Parliament, he is even more so speaking impromptu. This was evident at his Open House interactive session with industry leaders on February 2nd, a day after he presented the Budget for 2017-18, at the Leela Palace Hotel in Delhi, where he held everyone in rapt attention with his smile-inducing aphorisms, straight talk and exhaustive answers to questions on the Budget, offering peeks into what the Modi Government has in mind to transform governance, ensure greater transparency, and turn the economy more efficient.

In the breakfast meeting moderated by Sanjiv Goenka, chairman of the RP-Sanjiv Goenka Group, the parent company of Open, Jaitley began with a brief, yet persuasive introduction on the broad contours of his Budget of February 1st to an exclusive audience comprising some leaders of Indian industry, including Confederation of Indian Industry (CII) President Naushad Forbes, CII Director General Chandrajit Banerjee, Modi Enterprises President KK Modi, India Today Group Chairman Aroon Purie, Hero Corporate Services Chairman Sunil Munjal, DCM Shriram Chairman Ajay Shriram, Ambuja Neotia Group Chairman Harsh Neotia, Ernst & Young Chairman & Regional Managing Partner Rajiv Memani, Apollo Hospitals Executive Vice Chairperson Shobana Kamineni, Havells Chairman and MD Anil Rai Gupta, Inox Gujarat Fluorochemicals MD Vivek Jain, RPSG Group Sector Head of Retail Shashwat Goenka, and Micromax Co-Founder Rahul Sharma, among others.

With a quip on budgets of the pre-Liberalisation past—which until 1991 used to be all about “which products became dearer and which became cheaper” before they shifted emphasis to economic policy—Jaitley dwelt at length on a range of subjects, explaining the rationale of several expenditure heads (including subsidies) and other budgetary proposals of the Government.

We are caught in a dilemma between non-compliance on the one hand and harassment at the hands of the taxman on the other hand. There is no easy solution to that

Munjal, who is also president of the All India Management Association, raised a question on the intriguing possibility of converging all subsidies into a single allocation for a Universal Basic Income (UBI), an idea elaborated upon in this year’s Economic Survey. In the past decade, India’s subsidy proliferation has posed a headache by making it harder to contain the fiscal deficit within a reasonable limit (which, in turn, threatens macroeconomic stability). In response, Jaitley called the UBI “a wonderful idea”, adding that it came from India’s Chief Economic Advisor Arvind Subramanian and his team. “The Economic Survey is prepared by the CEA,” said Jaitley, “The political establishment maintains an arm’s length from this.” The UBI has been debated in Western countries for some years now, but the Union Budget for 2017-18 referred to it for the first time in India. In essence, the idea is to transfer a regular sum of money to the needy directly, instead of the state spending money on provisions and mechanisms that do not always help the intended beneficiaries. “Today you have unstructured and untargeted subsidies. Why shouldn’t the Government pool all the subsidies and then give the most vulnerable 30 per cent a cheque every month?” argued Jaitley.

It would need a political consensus, however, he added. There is another cause for caution. As the Economic Survey notes, subsidies to the rich and middle-class account for 1 per cent of India’s GDP. If one adds subsidies on social sector programmes run by the Centre, this sum rises by 2.07 per cent. Once the expenditure of state governments is added, this figure goes up by another 6.9 per cent of GDP. On paper, this is a substantial share of India’s annual output. But in a politically complex country like India, any government needs to exercise care before trying to reduce or eliminate subsidies. The Modi Government, for example, has put this tricky exercise at the end of a three- part reform plan that went into operation when it came to power. The sequence has a reason, as the Finance Minister explained. “The enactment and the coming rollout of the Goods and Services Tax (GST) is a big reform that came first. Then came demonetisation. The third in that category is the JAM trinity—the Jan Dhan accounts, Aadhaar and mobile numbers. For the first time in the last two-three years, you have rationalisation of subsidies. We are targeting subsidies now. Besides subsidies, you now have a system in place where you have done a pilot project on ending the kerosene subsidy; there is one for the fertiliser subsidy…we are doing all that now,” he said. “In a system that is complex and has spanned half a century of political and economic evolution, it is difficult to wind up all the subsidies and then hand them over to the deserving as a lumpsum amount. There is the economic problem of finding the resources to undertake a UBI—something that even at a basic level will cost the Government far in excess of its annual revenue. Then there is the political problem of opposition to UBI and a change in the regime of subsidies.” He also offered a caveat: “Indian politics has to mature. Indian politics should not compel us and say that ‘Give more’ after you are already giving something [like UBI].”

The other significant issue addressed by the Finance Minister was that of the Government’s commitment to fiscal consolidation, for which it has widely been applauded by industry representatives. Jaitley said that the Centre has maintained its fiscal discipline in spite of a global slowdown and other adverse dynamics that would have argued in favour of setting aside the Fiscal Responsibility and Budget Management (FRBM) Act targets on this count. The Government has reduced its fiscal deficit to 3.5 per cent of GDP in 2016-17, and the Budget for next year promises to cut it further to 3.2 per cent.

The enactment and the coming rollout of GST is a big reform that came first. Then came demonetisation. The third in that category is the Jam Trinity— the Jan Dhan accounts, Aadhaar and mobile numbers

In response to a question posed by Purie on disinvestment, Jaitley said the Government didn’t want to make a “song and dance” about its programme to offload its equity holdings in public sector enterprises. Comparing NDA-2’s record on this front with that of the Vajpayee-led NDA-1, which logged Rs 27,000 crore via such asset sales over its entire tenure, the Finance Minister said, “This year alone we have divested Rs 31,000 crore so far, and the figure would go up to Rs 45,000 crore.” The Centre wanted to do more and talk less about this, he said, making it plain that drawing too much attention to its efforts could risk unpopularity. Also, he said, there are multiple ways in which the exercise could make progress. As an example, he cited the case of general insurance companies, which, to enlist on stock exchanges, have to mandatorily bring down the Government’s stake to 74 per cent, which would mean the rest would have to be floated in the market just to meet the rules of the stockmarket regulator SEBI. Similar would be the story of Indian Railway Catering and Tourism Corp, an Indian Railways entity that handles catering, tourism and online ticketing that has been earmarked for public listing. Despite media scepticism, he said, disinvestment was one of the Centre’s top priorities. “It is the art of the possible,” he said, “Let no one be under the illusion that we are not aggressive enough on that front.” The target for 2017-18, he reminded everyone, was Rs 73,000 crore.

Answering a query from Goenka on the imperative of buttressing Indian manufacturing in line with a broader agenda to create jobs and uplift the poor, Jaitley said India was going through tough times in the aftermath of a global crisis that had lasted for almost a decade, and that there was no quick-fix solution—like “switching on a button”—to the problems encountered by the country. “It is going to be gradual,” he said of a recovery in the sector, “As demand picks up, I am sure the private sector will be back to its original steam.” The Finance Minister also spoke of how foreign investment was flowing into various sectors, and how, given additional government spending, it was time for the domestic private sector to chip in to make the most of an uptick. “I know that several companies have over-stretched themselves,” he said, alluding to infrastructure companies that had accumulated heaps of debt.

I was told that the number of tourists coming to India would greatly rise if we offer e-visas. There are 160 countries that are now on the e-visa scheme

In reply to a suggestion by Forbes on the Government creating innovative systems for the future of the country—referring to investment in institutions of higher learning that could serve as a base for private sector R&D—Jaitley drew attention to foreign investment and related guidelines. In his Budget speech, he had announced the abolition of the Foreign Investment Promotion Board (FIPB), the entity that was set up in the 1990s to okay FDI proposals. It had lost its relevance and was ready to be phased out, said Jaitley: “Ninety per cent of FDI now comes through the automatic route and the remaining 10 per cent can be processed by the individual ministries that consider specific proposals,” he said in response to a question.

JAITLEY, WHO HAD been Law Minister in the Vajpayee Government, reiterated the need to turn political donations transparent. He explained the logic of creating bonds as a mechanism for donors to fund political parties, an innovative measure that, he said, is expected to fight the scourge of politicians being funded in lieu of favours. This Budget speech has lowered the cap for anonymous cash donations made by individuals to parties from Rs 20,000 to Rs 2,000. The details of bond funding are yet to be worked out, but the Centre has already faced criticism that this measure is not fool-proof since parties can use their cadres to circumvent such rules. Referring to such observations at the Open House session, the Finance Minister said that misuse of provisions would be tracked by the Government, just as it has a hawk’s eye on all those who have deposited unaccounted- for money in their bank accounts following the demonetisation drive announced by the Prime Minister on November 8th.

The Government, Jaitley said, had identified 1.8 million people whose deposits deserve the taxman’s scrutiny, largely for being disproportionate to their declared sources of income. “There is a fear of harassment due to discretionary power. How will your government address that?” CII’s Banerjee asked the Finance Minister. “The problem arises in cases where the Tax Department orders a scrutiny of tax returns and where there is personal contact during a hearing,” said Jaitley, “I have spoken to the Central Board of Direct Taxes on how this can be reduced.” The broad effort, he elaborated, was to reduce the scope for personal contact between tax officers and assessees by moving towards a purely digital interface, with all communication kept on record and available for examination.

Universal Basic Income is a wonderful idea… Today you have unstructured and untargeted subsidies. Why shouldn’t the Government pool all the subsidies and then give the most vulnerable 30 per cent a cheque every month?

If the fear of harassment is one side of the story, there is another one as well: non-compliance with the country’s tax laws. In his Budget speech, Jaitley had highlighted some shocking statistics. Of the 37 million people who report their income in a country of 1.3 billion, 9.9 million claim to be earning below the Income Tax-paying threshold. Only 124,000 people report incomes above Rs 50 lakh. “I reeled out data on how tax non-compliant we are as a country,” said Jaitley, “We are caught in a dilemma between non-compliance on the one hand and harassment at the hands of the taxman on the other hand. There is no easy solution to that.”

The Finance Minister also used the occasion to hardsell the Modi Government’s commitment to efficiency. In response to a question asked by Kamineni, he said that under the current dispensation there was no question of “under spending” by any ministry, especially thanks to the close monitoring of projects and performance by the Prime Minister. “The layers of accountability of various ministries to the Prime Minister is very high, and therefore non-spending of allotted budgets by any ministry doesn’t arise.”

Jaitley took a moment to commend Memani for his suggestions on simplifying the country’s tax structure and offered to examine them closely. “The Finance Bill is with the House and so I will not comment on [this suggestion on minimum alternate tax], but I will consider your suggestions.”

Also up for easing is India’s visa regime. Touching upon a move that could aid tourism, Jaitley said, “I was told that the number of tourists coming to India would greatly rise if we offer e-visas. There are 160 countries that are now on the e-visa scheme.” In this context, he mentioned three priorities: improving connectivity from international destinations to India; strengthening the infrastructure in tourist-favoured cities; and making the country a top destination by taking measures to conserve heritage sites and other places of religious and historical interest. “That requires large investment,” he said.

The audience couldn’t seem to get enough of Jaitley, but the Finance Minister had another engagement to attend. As clear from his Open House session with industry leaders, there is much to be done.