Just another trivial Indian Budget 2016-17

Indian Union Budget 2016-17

Finance Minister Arun Jaitley. File Photo. | The Hindu

Ashok Desai Photo: Special Arrangement | Special Arrangement

The Finance Minister’s prescriptions are a classic case of being unable to see the wood for the trees, be it on the tax proposals, the rural outreach or the bank bailout.

It was a marathon achievement: 12,187 words in 111 minutes. True, there were no interruptions; the Finance Minister virtually sent the House to sleep. I have listened to many Budget speeches; and I cannot say that Dr. Manmohan Singh was a scintillating speaker. 

But Mr. Jaitley outdid him. How did he achieve it? Not by the method he chose in his last two Budgets, when he read out interminable lists of beneficiaries to whom he handed out Rs.50 crore and Rs.100 crore. He did sing his usual song about how the previous government had ruined the finances, how badly the world was doing, and how he had transformed India into a stellar economy; but that took only two minutes.

He achieved monotony by two means. He spent a third of the time describing his tax proposals, but made sure that none of them was of any consequence. He made lots of small changes in rates, rules, exemptions, etc. of customs and excise duties; although he omitted reading out most of them, he managed to give them 20 minutes. 

He spent most of his time on expenditure proposals. This is standard in India: ruling parties see the Budget as an instrument for buying votes, and distribute expenditure via numerous schemes and institutions to intermediaries who control votes. What was a pleasant surprise, however, was that he grouped these proposals under just five heads: agriculture, rural, social, education and infrastructure.

A tweak here, a tweak there

Let me first deal with taxation. The principal tax rates have reached stability. The rates of direct taxes are comparable to international rates (except for personal tax brackets, which vary across countries on account of differing price levels); and indirect taxes are in a long process of replacement by the Goods and Services Tax, which is stuck in disagreements between States.

So all that the Finance Minister can do is to make niggling changes, as he has done. Some of them are quite desirable, such as deferred payment of customs duty for reliable importers or online income tax assessment in seven cities. Some of them are unnecessarily punitive; for example, introduction of a higher tax rate if someone gets more than Rs.10 lakh from dividends. Some follow Mr. Jaitley’s hobby horses.

For instance, he is obsessed with gold and jewellery: he seems to think that Indians waste their money on such useless trinkets. He first imposed a tax on gold; but it yielded little. Gold is mostly smuggled in and escapes taxation. Learning nothing out of the experience, now he has imposed a tax on jewellery.

 It may be more effective for two reasons. First, the past two decades have seen the emergence of jewellery chains, which may be too big to try evading taxes. And second, jewellery manufacture is labour-intensive, and its cost of production is lower in India.

 It does not make sense to smuggle it into India. But because it is so differentiated, it would be extremely easy to undervalue it. So Mr. Jaitley’s dreams of raising billions out of jewellery are unlikely to be realised. 

This is what comes out of not knowing economics and not consulting the economist who sits below the Finance Minister. And it is difficult to guess why he did not talk to Arvind Subramanian, whom the government has imported all the way from America.

Elementary mistakes aplenty

Every government wants to shower favours on farmers; after all, they have so many votes. They also need help just now, because rains have failed, and agricultural production will fall drastically. 

But Mr. Jaitley does not see the urgency; he promises farmers that he will double their income in five years. Can he? He would have to raise their income by 15 per cent a year. Even if they increase output by 3 per cent a year, agricultural prices will have to rise by 12 per cent a year.

 That is a recipe for worse inflation than India has seen in five decades. And if all prices increase, what will the farmers get out of the price increase? This is elementary, Mr. FM! You are going to subsidise interest on farm loans; but when a crop fails, farmers lack money to even repay interest, let alone loans. 

And by now, most of the people in agriculture are not farmers, but workers with very little land. They are even poorer than farmers; and crop failure will deprive them of jobs altogether. 

Even the knowledge of elementary facts from the Census would make for less disastrous policies.

Mr. Jaitley has announced a subsidy for open defecation-free villages. 

How will the government determine whether a village is free of open defecation? Will there be defecation inspectors walking around the fields of half-a-million villages? Suppose an inspector finds one turd; will he disqualify the village? 

How will he determine whether it belongs to a villager or a visitor? Instead of thinking of such hare-brained punishment, the government should ask itself why anyone would want to defecate in the open. All of us townsmen could do it; none would think of doing it, because using a toilet is much more convenient. 

Now that there are supposed to be government-built toilets in most villages, it must be because they are too dirty, or they do not have water. India is extremely short of water, and there will be even less of it as groundwater is taken out. It is a crisis which will get even worse unless policymakers exercise some intelligence.

Even where groundwater is present, it has to be extracted with a pump; electricity is the best energy source for that. It will reach virtually every village in a year or two; so there should be no problem — but for the fact that the supply of power is most irregular and uncertain.

 It is high time the government started thinking about the cost and quality of power supply. But the cost cannot be met and quality cannot be improved as long as power is supplied by state electricity boards (SEBs) and politicians make sure that SEBs charge below cost. This problem has persisted for years. 

But when Mr. Jaitley talks about infrastructure, he does not have a word for it.

The Finance Minister is in charge of banks, which face a major problem of bad debts. It is not only their problem; for since their borrowers have defaulted, they cannot get credit. As I understand it, a large proportion of the loans has gone to builders; they have built houses and complexes, but they cannot find buyers. 

The problem is similar to the one in the U.S. in the last decade: the U.S. had guaranteed housing loans banks gave to poor families to enable them to own houses they lived in; they could not service the loans, and the biggest banks had to be bailed out by the government. 

The cost of prevarication can be very high: unless the government steps in, both Indian banks and the building industry will suffer, and we can prepare for a long downturn. Mr. Jaitley is avoiding the problem. 

He has talked of “recapitalising” banks. What they need is not fresh capital, but subsidy to take bad debts off their books. Mr. Jaitley’s ignorance of economics will cost India lakhs of crores of rupees.