By Richard Rossow –
Finance Minister Arun Jaitley released the Indian central government’s budget on February 29, 2016, for the coming fiscal year, and delivered the annual budget speech, which highlights key budget provisions as well as other planned reforms. The budget and accompanying reform plan contain some good ideas that should be net positive for economic growth. But overall, this process once again highlights the reduced capacity of the budget to be the economic policymaking tool that it had been back in the 1990’s. As the Indian market reduces federal regulation, there are fewer dramatic steps to be taken, and the focus turns to the important, though less sensational, details.
In the budget and accompanying budget speech, the government promised more funding for infrastructure, a focus on the rural economy and agriculture, restated commitments to finish key reforms like the Goods and Services Tax (GST) and bankruptcy law, and the government suggested new ideas to combat the “tax terrorism” sentiments, and more. Overall, these provisions were warmly greeted by industries. Investors were lukewarm, registering small drops in the key stock exchange indexes.
There was a time, not so long ago, when budget provisions could have had a dramatic impact on the economy. The taxation system was set in slabs, both for domestic taxes and for customs duties. Moving swathes of products between these slabs could make, or break, the year in these sectors. Moving a slab up or down, or combining slabs, would impact a wide range of sectors. Wholesale changes in the tax treatment of these slabs was major news.
Reforms announced in the budget speech were often the first time the government indicated an interest in moving in a direction, such as allowing private industry into a sector that had been reserved for public sector units (PSU’s), or deregulating price controls in a sector. While not every reform that made it into the budget speech was carried out, it was the singular marker for the government’s intentions.
The last BJP government, in office from 1998 to 2004, made a more concerted effort to reduce the budget’s significance by announcing key foreign direct investment (FDI) reforms in the months ahead of the budget speech. As a reminder of this process, you can review Press Note 1 of 1999 (roads, ports, bridges), Press Note 2 of 2000 (shifts most FDI approvals to “automatic route”), Press Note 1 of 2001 (allows investment by firms with existing JV’s), Press Note 4 of 2002 (advertising, films), Press Note 1 of 2004 (newspapers, petroleum marketing, pipelines). The Congress governments continued this tradition, issuing FDI reforms in January 2005 (further allows investment by firms with existing JV’s), January-February 2006 (television, single brand retail, power trading, airports, cash & carry, alcohol), and January 2007 (telecommunications).
In the last 10 or 15 years, the budget’s positive provisions tend to be far less significant, and the budget’s more important provisions need time to judge. The budget could include changes to the taxation of a handful of products that are in a thrust industry. This year, the government announced its intention to further reduce customs duties on input goods, in order to boost domestic manufacturing. Or the government could announce outlays in spending for infrastructure, as it did this year, but which may take more than a single fiscal year to carry out.
The biggest budget news in recent years has tended to be things derided by the corporate sector. Most poignantly, in 2012, the Finance Ministry amended its Income Tax Act to make domestic tax law override international tax treaties, and made this change retrospective. Also, the 2005 introduction of the Fringe Benefits Tax (FBT) brought fringe benefits provided by employers to their staff under the tax net.
The 2016-17 Union Budget contains some worthwhile changes. Prominent among the budget provisions:
- A solid boost to infrastructure spending;
- Maintaining the fiscal deficit;
- Establishing 1,500 skills training institutes.
The bigger reform announcements were included in the budget speech, though they were not part of the budget itself and will need to move separately. Furthermore, most do not qualify as “news,” since they had been widely discussed earlier. These include:
- Passing the GST;
- Establishing a statutory basis for distributing benefits using the Aadhar platform;
- Creating a new process for resolving international taxation disputes;
- Allowing 100 percent FDI into grocery;
- Establishing a system for dispute resolution involving public-private partnerships (PPP’s);
- Creating a favorable regulatory regime to encourage greater oil and gas exploration.
As with many things in life, only time will tell if the spending changes outlined in the budget, and the other reform initiatives referenced in the budget speech, will come to fruition. But overall, the days of the budget’s domination of the year’s reform headlines has passed.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.