Subscribe to PRO at just Rs.33 per month. Use code SUPERPRO
Last Updated : Feb 28, 2015 03:23 PM IST | Source: Firstpost.com

Union Budget 2015: Jaitley has lived up to expectation

While the big ticket investments needed to revive growth have been limited by the need to keep the fiscal deficit roadmap on course, there are major changes in taxation and other areas that are truly reformist.

R Jagannathan

Has Jaitley's second budget lived up to expectations? The answer should be a cautious yes.

While the big ticket investments needed to revive growth have been limited by the need to keep the fiscal deficit roadmap on course, there are major changes in taxation and other areas that are truly reformist.


The FM has focused on showering small benefits to the aam aadmi and the rural poor - which will be seen as populist. The income-tax exemption limit remains as before at Rs 2.5 lakh, but deductions for medical spends, pension savings and travel have been increased to provide relief.

The big changes are for business: not only has Jaitley promised a reduction in the top tax rate to 25 percent in four years, but he has simultaneously promised to reduce the major tax breaks. This means, next year's budget will also be watched with anxiety, and the reduction in the Minimum Alternate Tax will have to wait till then.

The abolition of wealth tax makes a lot of sense, but an inheritance tax - to ensure inter-generational equity - has not been contemplated. The tax on the super-rich, those earning more than Rs 1 crore of taxable income, is good for optics, since it soaks some of the rich.

The law changes to penalise holders of domestic and foreign black money are a political necessity. How it works depends on what kind of stick Jaitley ultimately tries to wield.

The shift in the fiscal deficit roadmap over the next three years gives Jaitley space to invest in infrastructure.

Net-net: Jaitley has not let us down. This is a budget worth remembering.

The middle class and aam aadmi tax relief

12.30pm: Medical reimbursement/Mediclaim deductions under section 80D raised from Rs 15,000 to Rs 25,000; and Rs 30,000 for senior citizens. Disabled and very senior citizens to get higher deductions.

Additional deductions of Rs 50,000 per annum will be available for contributions to pension schemes.

Tax-free travel allowances raised from Rs 800 pm to Rs 1,600.

Individual taxpayers can effectively have a tax-free income of Rs 4,44,200 if they use all deduction options.

Negative list in service tax reduced, to raise service taxes.

Tax on super rich, shift of cess on IT

12.15 pm: Jaitley abolishes wealth tax, imposes an additional 2 percent surcharge on those in the Rs 1 crore plus tax bracket.

The education and secondary education cess on income-tax is going, and the Central Excise Duty raised from 12.36 percent to 12.5 percent. This will marginally reduce individual and corporate income taxes.

Clean energy cess on coal raised from Rs 100 a tonne to Rs 200. Coal prices will go up.

Tax proposals, attack on black money

12.00 noon: Jaitley begins the meat of his speech, what everyone is waiting for. Goods and services tax (GST) timeline is for next year. Bill introduced in winter session.

Here comes the sting: FM says he will reduce the regime of business tax exemptions. Corporate tax to be reduce 25 percent in four years from current 30 percent. The tax exemption reductions will however come only from next year, ie 2016-17. The sting is coming later.

Exemptions to individual taxpayers will continue. Not clear if personal tax exemption limit will be later. Maybe it will come abroad.

Black money reduction efforts to be accelerated. 300 percent penalties for concealment of taxes. Tax returns will need to declare operation of foreign accounts. Assets located abroad, if located, can results in confiscation of assets at home. This should put the fear of god in Swiss account holders. Jail terms also proposed.

Benami property laws to be strengthened, including jail.

PAN to be quoted for any purchases above Rs 1 lakh. Reporting of cash transactions to be tightened.

New General Anti-Avoidance Rules (GAAR) to be implemented from 1 April 2017.

Special Auxiliary Duty (an import duty) abolished on all items.

More AIIMS hospitals, IITs

11.46am: Jaitley announces an All India Institutes of Medical Sciences in Tamil Nadu, J&K, Punjab, Himachal and Assam. An existing engineering school in Dhanbad will be upgraded to an IIT. IIMs to be set up in J&K and Assam. In the former, the BJP will join a coalition government, and in the latter, the BJP hopes to win the next assembly elections.

Attacking black money and by disincentivising cash use

11.45am: Jaitley has not announced anything specific, but says that he will make schemes to disincentivise cash payments. He wants to make India a cashless society, which means more debit card usage. Not clear if he intends to offer incentives for card usage. P Chidambaram had introuced and abolished the Banking Cash Transaction Tax.

A new direct tax regime planned, gold scheme on anvil

11.40am: Jaitley promised a new tax regime at par with the rest of the world. He will also be fewer deductions. This means tax breaks for business will be reduced.

The distinction between FII and FDI investment to be abandoned.

To wean the public away from gold imports, government will issue its own gold coins, with the Ashok Chakra mark.

Govt to create a debt management cell - job to be taken away from RBI

11.35am: To create a vibrant corporate bond market, government to take new initiatives. This will include the takeover of debt management by the government - both external and domestic. The RBI will then be left to handle only monetary policy and regulatory supervision. The Forward Markets Commission will be merged with Sebi. Thus RBI powers will be reduced, and Sebi strengthened.

A new regulatory reform law will be introduced, probably on the lines suggested by Srikrishna committee

MNREGA allocations to be increased

A revamped MNREGA scheme will get Rs 5,000 crore more. It will be geared to establishing more useful assets.

Investments in infrastructure to be boosted

11.30am: Jaitley sets up National Investment and Infrastructure Fund with Rs 20,000 crore govt contribution. Budget provides additional funds for investment in infrastructure, Rs 70,000 crore more in 2015-16 over previous year. Rail and road companies can also issue tax-free infrastructure bonds to raise funds for investment.

Government to established five ultra mega power projects, but this will given to private entrepreneurs only after all clearances are obtained. This will catalyse investments of Rs 1 lakh crore.

Bond markets will be deepened.

Small ports may be corporatised to raise funds and grow.

Start-ups to also get a boost, especially in IT. Government establishes incubation and facilitation programme for start-ups in technology. Rs 1,000 crore allotted. What happened to last year's Rs 10,000 crore fund?

Jaitley promises a comprehensive bankruptcy code

11.20am: India will get its own equivalent of the US Chapter 11 bankruptcy code.The Board for Financial and Industrial Reconstruction and the Sick Industrial Companies Act - both failures - will be scrapped and a new bankruptcy code will be brought in. This will help banks recover dues if promoters default. We will not see the kind of endless wrangling over
collateral in Kingfisher's case.

Small enterprices run by entrepreneurs at the bottom of the pyramid, will now get a refinance agencies called Mudra Bank. This will help Dalit entrepreneurship, among others.

Accident and pension schemes for the poor proposed. Senior citizens to get assisted living aids.

Plans to sell of sick PSU firms, and strategic disinvestment in some PSUs

11.25 am: Here comes the first small bang reform comes. Jaitley says he will sell sick PSUs, and make strategic disinvestment in some public sector units. Does this mean some units will be privatised? Has Jaitley uttered the P word inadvertently for the first time in Narendra Modi's government?

Jaitley says 62 percent of national tax resources with states now, fiscal deficit roadmap eased

11.20am: After the 14th finance commission, 62 percent of the national tax base will be with states, including central transfers. But despite this, he will stick to fiscal consolidation, and key schemes like NREGA.

After announcing that the fiscal deficit target of 4.1 percent will be met in 2014-15, but he will ease it for the next three years in order to speed up public investment. The 3 percent target will thus be met in three years instead of two.

Jaitley says the time is not for incremental changes, but big bang

11.15 am: Jaitley is listing the social agenda ahead, including housing for all and eliminating absolute poverty. 24-hours power, and rural road connectivity. Medical facilities in each village. Primary and middle schools to be upgraded by the thousands. Big social sector ramp-up could be the softening of political opposition so that stronger reforms can be
announced in the second half of budget.

Keeping the land bill blow in mind, Jaitley talks of move to relieve agricultural stress. Also wants to make India a global manufacturing hub - a difficult goal, given China's massive lead.

Three achievements of the NDA - and two more ahead (GST and direct cash transfers)

11.10am: Jaitley lists three achievements of the NDA government. One is the Jan Dhan financial inclusion bank. The other is coal auctions, which has ensured transparency in auctions without cronyism. And third, the launch of Swachh Bharat. The two major reforms ahead are the goods and services tax (GST) JAM - the Jan Dhan- Aadhaar- Mobile triad that will make subsidy transfers transparent and without leakages.

RBI Act to be amended to set up a monetary policy committee. It was recommended by the Srikrishna Financial Sector Legislative Reforms Committee.

Arun Jaitley says climate of doom and gloom has ended

11.05am: Jaitley says that states are being given more resources as per the 14th Finance Commission report. Jaitley says the credibility of the Indian economy has been established. Says he wants to grow more flowers in the garden, but there are still thorns - a reference to opposition disruptions?

Jaitley outlines the improvements in the US on inflation, and revival of growth. "We inherited a sentiment of doom and gloom", he says. Current Account deficit is down. and India is the fastest-growing large economy in the world

Arun Jaitley starts his second budget speech

11.00am: And Arun Jaitley has gotten up to deliver his second budget speech. All hearts are beating faster. Antenna ready to register small and big bangs.

10.57am: Just five minutes to go for the finance minister to start his speech. Market volumes have been thin despite prices holding up. It could be because this is a Saturday, and the FIIs are away on the weekend. What a day to announce what one hopes is a path-breaking budget.

10.50am: The channels have dubbed it a Make in India budget, but that is a long-term goal. Making in India will be the result of a continuous easing of the rules and regulations for business, and shifts in India's competitive capabilities. A lot of it has to be done in the states, which this budget is not about. So it is unfair to expect this budget to do anything beyond easing taxes, and promising freedom from tax terrorism. Some FDI easing can also be announced, but the major ones like insurance need legislation.

Defence is likely to be a key driver of Make in India. Textiles and pharma, where too India has some competitive advantage, can also drive this trend and teh budget could do something for these industries. But the rest of the budget is unlikely to be about Make in India.

10.40am: The markets are showing a sharp spike in banking shares (Bank Nifty up more than 1 percent). What this means is that the markets expects public sector banks to recapitalise quickly and put their bad loans memories behind them. It is also a play on the economic prospects of India in 2015-16. If the economy grows 8-8.5 percent next year, banks are likely to grow twice as fast - the private sector banks even faster. This is what the markets are reflecting (growth hopes), and not just hopes about big bang reforms. This means Arun Jaitley's main challenge is to convince the markets that the economy
will grow faster in the coming years. The markets know that reforms through legislation will take time to pass, especially with the Rajya Sabha playing spoilsport.

10.35am: Given the expectations, what will satisfy industry, the middle class, the poor, and the markets, which were still bullish at the time of writing?

In my view, this is what one can reasonably expect from Budget 2015.

#1: A higher plan allocation for driving public investment. A gameplan to ask cash-rich public sector companies to start investing.

#2: A moderation of the fiscal deficit roadmap - whereby the reduction in 2015-16 will be halved. Instead of the 2015-16 target of 3.6 percent, Jaitley could settle for 3.9 percent, and promise an acceleration in the deficit reduction when tax revenues improve in future years.

#3: Increase investment allowance to spur corporate investment, and a reduction in the minimum alternate tax (MAT).

#4: A general increase in the personal IT exemption - say to Rs 3 lakh of tax-free income - and a more liberal 80C deduction limits, maybe to Rs 2 lakh from the current Rs 1.5 lakh.

#5: A new method of financing infrastructure. Last year he announced that banks would be able to raise long-term infra bonds without the burden of SLR, etc. This time he will need to find a way to expand the tap.

#6: Announce a grand vision for where customs duties will be relative to the rest of Asia.

#7: Clarify the goods and services tax (GST) time line so that there is no ambiguity over it.

#8: Accelerate public sector disinvestment, announcing a plan for year-round share sales through a new vehicle. This will include sale of shares held by SUUTI (L&T, Axis Bank, ITC), and the balance shares in already privatised HZL and Balco. The last two alone can raise over Rs 60,000 crore. Public sector and banking reforms will also be key.

#9: Privatisation of loss-making public sector units, and a golden share for other units that will allow the government to disinvest more in public sector banks without losing the ability to issue policy directives.

10.00 am: In an hour from now, we will know whether Arun Jaitley has missed his second chance with budgets or has grabbed it with both hands. The Union budget for 2015-16 has high expectations built into it primarily because he muffed his first chance with an average budget in July last year.

If the tone and tenor of the Economic Survey 2014-15 was chirpy, Jaitley has a tough task in ensuring that the chirping continues post the presentation of his budget today. The markets are certainly expecting the moon from this budget, with the Sensex and the Nifty up both on Friday and in pre-budget trades today. Advances in shares outgunned declines by a huge factor.

The writer is editor-in-chief, digital and publishing, Network18 Group

First Published on Feb 28, 2015 03:09 pm