Thursday, July 24, 2014

Budget 2014 : Continuity & Change.

Budget 2014 : Continuity & Change.

The budget presented by the Finance Minister Arun Jetley can be summed up as the budget of continuity and change.

The budget has focused on growth, inflation, employment generation and fiscal rectitude. Business, industry, financial institutions and the middle class have welcomed the budget but the market did not give it a thumbs up as it was expecting big bang reforms such as labour reforms, reducing subsidy and disinvestment. These major reforms would be taken up by the Modi government in the next few years as they have constrained the Indian economy.

Most of the opposition parties – Congress, Samajawadi Party, CPI, CPM, TMC - have critisized it as they are believers in the failed socialist policies. The budget is pragmatic, not dogmatic. The Budget is one of the several steps that the government intends to take to make Indian economy a vibrant one.

Continuity.

The change of government need not result in change in all policies and programmes.There are some imperatives which every government has to follow. One of them is the need to reduce fiscal deficit.The budget has accepted the validity of the fiscal deficit of 4.1 per cents and bringing it down to 3 per cent in the next three years as mentioned in the Interim Budget but has increased the revenue deficit by 0.1 per cent to 3 percent.The NDA government is aware that fiscal rectitude is necessary to curb inflation and attract investment, both Indian and foreign, to create employment and encourage manufacturing in the country.

The Finance Minister has also continued social welfare measures such as MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and other such programmes initiated by UPA government so that the poor are not denied support abruptly. Now the aim of the MGNREGA is not merely providing employment in the rural areas but also creating assets for the rural community. The NDA government seeks to evaluate all these programmes and make them more effective through proper supervision or through changes in the methodology of the schemes.

The change.

The NDA, as indicated in the budget, seeks to review food and petroleum subsidies so that it reaches the poor, not the non-poor, as is the case now. There would be an Expenditure Management Commission to rationalise government expenditure. There is an assurance that there is no retrospective tax regime in future while the present disputes on this issue would be resolved according to the law. The resident tax payers too can obtain advance ruling on income tax liability. IT settlement Commission would be enlarged to reduce liitgation on Rs.4,00,000 crore from income tax arrears and boost government revenue.

The government would be constituting a high-level panel to interact with with trade and industry for tax reforms. "Yes, we are pro-business", said the Finance Minister Arun Jetley, replying to the budget discussion, and added, " Only if business grows, there will be increase in tax collections, and the government will be able to increase spending on social sector. If there is no growth, what you will be doing is distributing poverty. And this is the difference in approach between the Congress and us." The government is both pro-business and pro-poor, and there is no conflict between the two, he added.

New initiatives.

The government proposes to allow 49 percent foreign equity in defense production. This will not merely bring in foreign investment but also technical know-how. India is the largest importer of armaments – from fighter planes to submarines. Foreign stake in an Indian company would bring in foreign technical know-how and technology to manufacture them in India. The Finance Minister has stated that there is a huge fund outflow now to import defense equipment, and the increase of FDI in defense sector would reduce it.

And 49 percent foreign equity in insuarnce is likely to attract more foreign insurance companies to India. This sector requires additional players to expand this sector especially in health. The general insurance sector requires a capital infusion of about Rs.7,500 – Rs.17,500 over the next five years, says Karthik Srinivasan, senior VP of ICRA.

The budget has provided for Rs. 225,707 crore subsidies for fertilizer (Rs.67, 970.3 cr.), food ( Rs.115,000.0 cr.) petroleum products ( Rs.63,427.0 cr.) interest subsidy (8,462.9 cr.) other sbsidies ( 8475 cr). Just now it reaches both poor and non-poor, and there is substantial leakage. Direct Benefit Transfer (DBT) through bank accounts to the poor will bring down the subsidy bill of the government which can be used for investment in other sectors, mainly health and education. Surjit S.Bhalla, an eminent economist, in one his articles, has shown how DBT can save almost half the subsidy bill for the government.

NDA has decided to continue with the Aadhar project and use it to transfer money to the poor. A recent report indicates that the new government is planning to provide two bank accounts to each household in the country in the next two years both in the urban and rural areas.Every family will have the facility of overdraft of Rs.5000 and accident insurance cover of Rs.One lakh. All government benefits of the central, state and local bodies would be directly sent to these accounts eliminating scope for corruption and fraud.

Infrastructure.

The budget has allotted Rs.37,800 crore for the National Highway Authority of India (NHAI) for constructing 8,500 km of highways in the current financial year. The budget seeks to promote inland transport especially in River Ganga with a outlay of Rs.4200 crore.The government is planning to build airports in smaller towns and cities on PPP model.It is proposed to have 16 new ports.An amount of Rs.7060 has been allotted for the construction of 'smart cities'. There would be 100 'smart cities' in the next few years.The railway minister has already has announced how NDA government plans to expand railway infrastructure..

The budget has provided an amount of Rs.500 crore for an institution called 3P India to promote publi-private partnership (PPP) as this model has delivered excellent projects like airports,ports and highways.

Agriculture.

It is well-known fact that the farmer gets only a small part of the price that the consumer pays for agricultural produce as it passes through many hands. Many government committees on agriculture have suggested the removal of the APMC (Agricultural Produce Maarketing Committee) Act which was expected to protect farmers from exploitation by the traders has become a fetter on the freedom of the farmer to sell his produce to the highest bidder. Now, the license holders in the mandi have a monopoly on the farmer's produce. The Finance Minister has stated that the central government would persuade state governments to amend APMC Act to testore the freedom to sell his produce to the farmers. Mobile phone has given him access to all traders and customers in the country.

NABARD has been given Rs.200 crore to promote 2000 'joint farming groups'/ 'producers organisation' of small farmers and landless farmers in the next two years. Farmers would be given a 'soil health card' to help them to produce the right crop and use the right imputs. Mobile soil testing labs would be launched in the current year. Pradhan Mantri Krishi Sinchayi Yojana , Long Term Credt Fund, Agricultural Research Centres, Agricultural and Horticultural Universities, restructuring of Food Corporation of India, Price Stabilisation Fund and many other programmes have been funded by the budget.

Employment generation.

Narendra Modi had emphsised the need for employment generation and entrepreneurship to bring properity to the country during the election campaign.

The budget has proposed a fund of Rs.10,000 crore to create ' a conducive eco-system' for the venture capital to promote small and medium industry. This is expected to catalyse private capital by way of equity and soft loans to start-ups. Another heartening feature is the funding the Village Enterpreneurship Progamme with Rs.100 crore. This is a recognition of the local innovations of the common people. Common people have uncommon intelligence. One can have a glimpse of it the Honey Bee Network and SHRISTI founded by Prof.Anil K.Gupta of the IIM, Ahmedabad. This is resource which has been grossly neglected by the governments.

The " Skill India" programme would be launched to provide training in skills such as welding, carpentry, masonry and weaving. The government seeks to transform employment exchages into career guidance centres.

The new government has plans to create employment in the country as almost 10 million young people will join the labour market every year. Housing projects, new cities, ports and airports, computer hardware and software, textile industry, food processing industry have the potential to create thousands of jobs for skilled, non-skilled, educated and technically educated youth. The country can reap the benefit of 'demographic dividend' only if the government can create employment opportunities for the youth of the country.

In order to create more employment opportunities textile clusters would be set up in UP,Gujarat,Bihar, Karnatak and Tamil Nadu with an amount of Rs.200 crore. A handicrafts academy would be set up in Delhi on PPP model. Crafts would be promoted in Jammu & Kashmir with a amount of Rs.50 crore.

Some economists have pointed out that Indian taxation system favours capital intensive industries rather than labour-intensive industries with investment allowances, depreciation on machinery etc. There is a need to provide some incentives to labour-intensive industries too in the taxation. Modi government has to look at this aspect as well.

No sector leftout.

There has been practically no increase in taxation at all in this budget.It has reduced income tax for the middle class. It has provided incentives to most of the industries. GST ( Goods & Services Tax) is also on his table. He may succeed in roping in the state governments as he believes in the federal principle and wants to take all states along with him.The budget has made substantial allotments to solar and wind energy and other non-conventional energy sources. Sports sector has received additional resources. There is an effort to give urban facilities to rural areas. New universities, IIMs and IITs are planned. Government is planning to provide total sanitation to all households by 2019, and celebrate 150th Birth Anniversary of Mahatma Gandhi with Swatch Bharat Abhiyan. No sector seems to have been leftout from attention and investment.

Modi's time starts now.

The budget has given an idea of the plan of the Modi government to make India strong and prosperous. Modi had asked for 60 months to change India's face, and his time starts now. The response for his call for good governence has crossed the barrier of caste and creed. He wants to make development a people's movement through transparency, participation and interaction. He has already enlisted the support of the bureaucrats by talking directly to them. He knows that it is the implementing agency and it requires leadership and guidance to perform. He has constituted a compact cabinet, and a strong PMO to monitor the implementation of his vision. His experience as the chief minister has given him the confidence to implement his plans through his ministers and the bureaucrats. Let's hope he succeeds in his plans.

July 24,2014.

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