Budget 2015: Arun Jaitley has taken the right steps to boost private sector, says Saumitra Chaudhuri

By Saumitra Chaudhuri, Former Member, Planning Commission

What in this Budget has a chance to improve the investment climate and, thereby, boost growth, employment and general well-being? Governments can, at best, play a facilitating or incentivising role. Or, if one were to see it from the other side, a greater or less obstructive and disincentivising role.

At the end of the day, it is the individual citizen—entrepreneurs small, medium and big—whose efforts and initiatives impel an economy forward. Government can get it right by creating policy and administrative conditions that maximise these energies. By sticking with fiscal consolidation, not raising direct taxes, pruning the corporation profit tax in steps towards 25% and abolishing wealth tax, a relic of the past, Arun Jaitley has taken the right steps to fashion such a framework.

Deferring GAAR by two years and making it prospective, raising the threshold for transfer pricing, clearer taxation for collective investment pools and improvements in the withholding tax system—these are steps that will all be seen as positive. Higher level of disinvestment which "will include both disinvestment in lossmaking units, and some strategic disinvestment" will be welcomed.

As will many of the stated intentions on promulgating laws governing financial regulation and deepening the bond market. Modifying the medium-term fiscal plan ( MTFP) and lowering the bar to 3.9% of GDP in 2015-16 may not be viewed well. Doing that from a 3.6% level (for 2016-17) is one thing and from where it is (at present) at 4.1% is different.

The fiscal targets—whatever may be the validity of the logic—are seen as iconic of the government’s commitment to discipline. Departing from it is likely to generate adverse inferences. GST is scheduled for 2016-17 and the possible impact of related compensation and that of the Pay Commission (including arrears) would be felt in that year.

A relaxation, if necessary, from the MTFP would have been easier to understand if done for that year onwards. Investment will pick up when private investment takes courage and moves ahead. The capital expenditure numbers for Budget 2015-16 looks like an increase. But basically they have been more or less restored to what the Budget Estimate (BE) was for 2014-15, as their Revised Estimate (RE) levels are lower.

The constraint for once was not in subsidies, where the bonanza from lower oil prices sees this Budget through with a provision for petroleum subsidies, which is lower by Rs 30,000 crore in 2015-16 compared to RE for 2014-15 and aggregate of subsidies lower by Rs 23,000 crore. What seems to have happened is that the needs of core government—defence, police, pensions etc— have been assessed to be higher than they were previously.

Hence, the provision for non-Plan, noninterest, non-subsidy and excluding non-Plan grants and loans to states/UTs in 2015-16 shows an increase of Rs 48,000 crore while the RE for 2014-15 was only a little lower than the BE. Of this, Rs 24,000 crore is increase in defence. To close, a word on government capital spending and it's presumed power to move the economy. One can vouchsafe that government capital spending in highways and the like in recent years was primarily hostage to inter- and intradepartmental disputation, delays in environmental clearance and/or land acquisition and litigation. Not because of paucity of funds.

The capacity of government agencies to spend funds efficiently is also not unlimited. Total investment in fixed assets in 2014-15 is estimated at `36 lakh crore, 75% of which is by the private sector—from farmers to mega-corporates— and the balance by public sector enterprises, central, state and local governments.

The central government's direct spending accounts for only 5%. It is basically the private sector that is the loco which pulls the train faster (or slower) and needs to be fired up, and the government more the driver and control room. Direct government capital expenditure can, and will, play only a limited role.