FM Jaitley's Budget shows India aims to achieve growth milestone & global competitiveness: Swaminathan Aiyar

It’s a Budget for growth and global competitiveness. By pledging to cut India’s corporate tax rate from 30 per cent to 25 per cent within four years, in line with Asean rates, Finance Minister Arun Jaitley signalled his intention to create Competitive India. This was a bigger conceptual breakthrough than his big thrust in infrastructure, aimed at kickstarting economic growth in the country.

His proposed public investment spree sent his fiscal deficit to 3.9 per cent of GDP against the 3.6 per cent promised last year, and markets do not easily forgive finance ministers who renege within a year. But he pleaded an exceptional circumstance — the Finance Commission had increased the states’ share of central taxes from 32 per cent to 42 per cent, leaving him short of funds. Even after levying stiff additional taxes on petroleum products, coal, cigarettes and services, he thought fit to dilute his fiscal thrust to finance infrastructure, pledging to reach the ultimate fiscal deficit target of 3 per cent of GDP in three years rather than two.

He combined these with measures to reduce tax terrorism, reduce and settle tax litigation, corporatise ports, create a new infrastructure funding corporation, a new holding company for public sector banks to ease their recapitalisation, and a new PPP infrastructure model in which the government took over the bulk of project risk. The introduction of GAAR will be postponed by two years, within which a slew of confidencebuilding measures will be brought in to reduce tax disputes and expedite settlements.

Jaitley promised to slash red tape and create a taxfriendly administration, aiming to make India among the fastest-growing economies in the world. All this adds up to a formidable reforms platform if fully implemented. He carried conviction with markets: the Sensex gained 141 points.

Caveat: All the Budget projections assume that the economy will roar along at between 8.1 per cent and 8.5 per cent next year, up from 7.4 per cent this year. But actual trends in corporate profits, tax collections, job growth, exports and other indicators suggest an economy struggling to break free rather than one soaring into the stratosphere. Indeed, new orders for capital goods and construction are at dismal levels, and it is far from certain that the binding constraint lies in infrastructure finance.

Other hurdles include land acquisition, forest and environmental clearance, state-level clearances, NGO-led agitations and activist court interventions. The Budget alone cannot overcome these many hurdles, which will require action across the economic and political spectrum.

If GDP growth fails to reach the 8-8.5 per cent assumed in the Budget, all the revenue assumptions underpinning this Budget will be at risk. Second, the revenue deficit remains as high as 2.8 per cent of GDP, betraying a poor quality of deficit. It is simply not true that the fiscal deficit has been kept high just to raise investment: far too much of the deficit is going towards administrative costs.

Interest payments as a proportion of central revenue have shot up to a record 49.6 per cent, signaling an urgent need to keep the fisc under control.