Union Budget 2017; most brilliant document since 1991 Budget: Surjit Bhalla

Union Budget 2017 is probably most brilliant document since the 1991 Budget

By: Surjit Bhalla

The Union Budget has been extra-careful and conservative about the impact of DeMo on the economy. It is very likely that GDP growth for FY17 will close in on a number above 7%. It is probably the most brilliant economic and political document since the path-breaking 1991 Budget.

A detached, unhurried reading of Union Budget 2017 does lead one to conclude that it was not a run of the mill Budget. It was different, both in what it did, and what it did not do. It was a state-of-the-art workmanlike Budget with one flaw—it hesitated to go the full, logical distance in tax reforms. Why? Likely because it is waiting for a near-optimal political and economic moment February next year.

Union BudgetIn several articles preceding this Budget, and ever since the demonetisation (DeMo) policy announced on November 8, I have argued that the key post-DeMo goal of the government should be to create a political and economic environment conducive to considerably less creation of black money. I had identified three key areas for policy. First, individual income tax compliance must be made to increase, and as jointly argued with Arvind Virmani, this would not happen unless incentives (carrots) were given to taxpayers for them to come into the tax net and for them to declare a larger fraction of their income. Second, the real estate sector needed to be cleaned up, for it was a major sink for black money. Third, election-funding policies needed to be urgently reformed—this politician-dominated sector is one of the largest black sinks.

On the latter two policy objectives, the Budget has been extraordinarily innovative—especially on election funding.

In addition to black money, the other problem plaguing the Indian economy has been the low rate of growth of capital formation (investment) by the private sector. This, I had emphasised, was very likely due to the extraordinarily high rates of taxation of profits in India. The corporate sector, in aggregate, was paying more than 60% of its profits as taxes to the government (corporate tax, dividend tax, pension payments, insurance payments, indirect taxes, surcharges, cesses—need one go on?). FM Jaitley has decided to fire the first salvo in cutting tax rates of a bygone socialist era in which profits were considered “evil” and something bhadralok shunned with pride.

For 96% of firms (all those with turnover less than R50 crore), the corporate tax rate has been reduced by 5 percentage points—from 30% to 25%. This is just not enough, and possibly a major clean-up will be presented in next year’s Budget when (hopefully) a no-exemption corporate tax rate of 18-20% will be implemented for all firms, big and small.

Personal income tax (PIT) rates: Modi-Jaitley have taken a significant step forward by halving the tax rate (from 10% to 5%) for the lower middle-class of taxpayers (earning between R2.5 lakh and R5 lakh). Even taxpayers earning between R5 lakh and R50 lakh will have their tax outgo reduced by R12,500. For those earning between R50 lakh and R1 crore there is a tax surcharge of 10%, and the surcharge for incomes above R1 crore is retained at 15%.

There are important state elections (especially UP) days after the Budget presentation on February 1. It is well recognised (and perhaps, inevitably, should be) that a Budget is both an economic and a political document. Jaitley goes to considerable length in the Budget to emphasise that we are not a PIT compliant society. To coin a phrase, when it comes to PIT, Indians are pits. This was also emphasised by PM Modi on December 31, and this is a very welcome innovation for leading policymakers to publicly, and loudly, admit to the plague of tax non-compliance.

Comparing the tax compliance data offered by Jaitley on page 28 of the Budget speech and our synthetic or estimated income distribution for 2011 to 2016/17 (the one used by Virmani and myself), one gets the following result: For 2015-16, those earning between R10 lakh and R50 lakh (individuals with no tax surcharge), only 13% of individuals paid taxes, while for those with incomes above R50 lakh, tax compliance is 26%, i.e., the super-rich who are paying a 10-15% surcharge are twice as tax compliant as the near-rich! So, the policy of not cutting taxes for all is an opportunity missed; next year, maybe?

However, in the main, the Budget is workmanlike, and brilliant, in being focused on the Big Picture, and ignoring all advice to do the wrong things—e.g., instituting long-term capital gains tax, or bringing in inheritance tax, or providing doles instead of infrastructure, rejecting universal basic income, and indirectly hinting (through the Economic Survey) that the days of cash transfers for the poor were near (bye-bye, PDS). The best commentary on NREGA was by the FM when he declared that this favourite of Sonia Gandhi and the Congress-Left had received the maximum ever allocation of R48,000 crore. What Jaitley did not emphasise was that this was the lowest in real terms since the programme was initiated in 2008-09; the real allocation to NREGA is now less than two-thirds of the R37,400 made available in 2008-09. Further, and more importantly, NREGA has been converted into a programme for providing infrastructure for irrigation.

The Budget has been extra-careful and conservative about the impact of DeMo on the economy. It is very likely that GDP growth for FY17 will close in on a number above 7%. Somewhat surprisingly, DeMo has not had that big a negative impact on the economy. The jury is still out, but all (conservative) official estimates peg GDP growth at no less than 6.7%. This is obtained with a GDP for agriculture at 4.1%. Kharif acreage, unaffected by DeMo, had an expansion of 3.5%. Add a minuscule productivity growth of 0.6%, and one obtains the CSO estimate of 4.1% agricultural growth for FY17.

The CSO was honest about not extrapolating beyond October 2016. But the rabi acreage, advertised by many anti-DeMo experts as doomed, has expanded by at least 5.9% (all data as of January 13, 2016, Economic Survey, pg. 156); wheat acreage is up by 7.1%. This implies that a minimum level of agricultural growth for FY17 will likely be close to 5.5%, and the likely level being 6-7%. Assuming agricultural growth of 6.5% (versus the 4.1% CSO estimate) yields a GDP growth level of 7.1%, well above that of the (deliberately conservative) ministry of finance and near identical to the estimates of both CSO and RBI.

The BJP, especially PM Modi, is a long-distance runner, a Test player, rather than gimmicky T20s (or even less gimmicky ODI). This longer vision has been apparent for some time, and I believe comes out strongly in the Budget in its estimate of the fiscal deficit for FY18. Remember, the Budget is (ultimately) about fiscal-ism, revenues and expenditures, i.e., the fiscal deficit.

The Budget has not only under-estimated GDP growth, but also the addition to tax revenue this year, and in the future, from increased PIT tax compliance. The fiscal deficit for next year is very likely to be less than 3.2% target for FY18, and likely less than 3%. If both tax revenues and GDP growth are understated, the fiscal deficit is doubly overstated! What a great idea, Sirji.

Large state elections are only in November 2018; and 2019 are the national elections. Flush with higher than expected tax revenue and GDP growth, the Modi government will likely complete tax reform for individuals, and corporates, in February next year. What exquisite timing—set a conservative base this year, so you can be radical next year.

The author is contributing editor, The Financial Express, and senior India analyst at Observatory Group, a New York-based macro policy advisory group
Views are personal
Twitter: @surjitbhalla


Demonetisation is a Big Bang reform: Surjit Bhalla

Demonetisation is a Big Bang reform

By: Surjit Bhalla

One of the more endearing, and enlightening, acronym that the Indian upper class has come up with is PLUs—People Like Us. Both the Indian, and Western PLUs have been clamouring for Big Bang reforms for the last two and a half years. The demand had a lot of merit—for the first time in 25 years, there was a government with a clear majority in the Lok Sabha. While several economic reforms were initiated since May 2014, and by my calculation more than the cumulative set of reforms since (but not including 1991), the PLUs were not satisfied and bayed for more—yeh “liberal” maange more. Finally, when PM Modi delivered the Big Bang, the PLUs were so deafened that they refused to see the writing on the reform wall.

DemonetisationBut why did the intelligentsia and mainstream media (domestic and especially foreign) did not see that demonetisation was (obviously) part of a BIG Bang reform? For one simple reason—the battle is ideological, and has precious little to do with the content of reform. And PLUs ideology dictates that whatever any non-Congress government does, has to be wrong, immoral, and illiberal. Soon after the May 2014 election, I suggested that the big story of the election was the forthcoming battle between the old elite, and the new, yet to be formed, elite. A battle between the established middle class, and the new middle class. A battle between the amoral naam-ke-waste liberal policies of the last 70 years, and a vision, and accompanying policies, for a transformed India.

Demonetisation 2016 only confirms that the battle of the elites is the one forecast I did get right. The old elite keeps stating three arguments in support of their defense that demonetisation has been a failure. The first, Rottweiler like, that demonetisation has failed because most of the old banned notes have been deposited in banks. The purpose of demonetisation, according to PLUs and their voting outlet, the Congress, was that a large chunk (possibly R2-4 lakh crore) of banned notes would not return to the system. The fact that money not returned is likely to be lower than the lowest estimate means that D-policy has failed. But who said that this was even a minor goal of demonetisation? The old elite, of course.

The second focus of the ideological view that D-policy has been a failure is the botched-up implementation. To repeat this as the reason to reject D-policy is myopia of the worst kind. Of course, implementation has been bad; even the government (and RBI) admits to it, as revealed by the much noted fact that the government has changed policy on a daily basis. Having noted this dog bites man fact, let us proceed. If the government had all the time in the world, of course the implementation would have been as perfect as the Kumbh Mela or the annual Republic Day parade. Secrecy was required, and there is a near certain likelihood that D-day was preponed because the secret was getting out. So, can one really call it a botch-up? If you are the old elite, then what other weapon have you got to disagree, complain, and question?

But there is a third option. Document and rightfully complain about the fact that people, especially poor people, have been inconvenienced—they have to stand in queues with no return (all puns intended). This is not surprising, even though it is revolting. The Left-liberal apologists for the rich have always shot-off the backs of the bottom half. This half has been hurt by D-policy in terms of jobs lost, and income not received. What is remarkable is that not only have they not complained about this genuine loss, but they have verbally, actively, and in the poll booth supported the Big Bang initiative.

The bottom 90% realises that those hurt by D-policy are the old elite, amongst whom are a large proportion of those gaming the system by laundering their black money via the other 90 %. A truly shocking fact just revealed by the government is that 6 million units (individuals, small firms and NGOs) have deposited a total of R7 lakh crore of the banned notes. That is an average of R11 lakh (or $15,000) per unit.

I would like to hear from the PLUs—how many elites do they know in the Western world who keep an average of $15,000 of cash at home? These very same elites had opposed demonetisation on the grounds that there was very little black cash in the economy because the bad rich were too smart to have any black cash. The fact that there was a lot of extra cash in the economy has two immediate implications. The government must continue with its policy of limiting cash withdrawals after December 30—no more than R1 lakh per individual and no more than R5 lakh per firm. Second, that no more than say R11 lakh crore of new cash (a comfortable excess of what is really required) of the banned R15.4 lakh crore should be printed. These are important steps to foil any attempts to keep the old order, and to encourage the ringing of the new.

India 2016 is very likely to go down in history as comparable to China 1978. Fifty days later after D-day is too soon to pass judgement. One hundred and fifty days later the transformative power of D will (hopefully) become obvious.

Courtesy: financialexpress.com,  December 31, 2016