The Rites of Liberation

FOR THOSE OLD enough to remember the 1970s and 1980s, the Union Budget was invariably covered in a ritual of speculation, excitement and turmoil. As the final day of February approached—it was Narendra Modi’s Government that brought the Budget calendar forward—a wave of rumours, some based on nothing in particular, gripped the country. Some items that were favourite targets of the taxman either disappeared from the shop counter—cigarette hoarding was a compulsive sport—or were greeted with short-term panic buying—filling up petrol could sometimes save a couple of hundred rupees. Rumours guided the movement of stocks. Business leaders awaited the Budget with tension and did instant back-of-the-envelope calculations of possible impact of excise duty modifications. Chambers of Commerce organised gatherings of industrialists on the Budget day to collectively digest the bad news and, on a few occasions, the unexpected, good news. There was even a glamour quotient attached to securing a visitor’s pass for the Lok Sabha galleries and the finance minister’s family was the target of media coverage.

Even the politicians reacted to the Budgets in a predictable manner. A dose of heavy taxation was accompanied by the argument that the government was promoting equity or redistribution of income, the underlying message being that the well-off and the rich deserved to be squeezed. The opposition in turn was quick to describe any Budget as anti-people, anti-growth and inflationary. As an opposition leader with little interest in economics, Atal Bihari Vajpayee had a stock answer to queries on the Budget: “Garib ke pet pe laath maar diya.”

The most informed alternative view came from outside Parliament, from the distinguished constitutional lawyer Nani Palkhivala. His annual lectures on the Budget had audiences pack the Brabourne Stadium in Mumbai and the Netaji Indoor Stadium in Kolkata for an economic vision that upheld efficiency, probity and private enterprise. As for the economists, with notable exceptions, the preoccupation was with plan and non-plan expenditure and bolstering the inefficient public sector.

The predictability, alas, didn’t extend to the government’s management of its finances. The over-regulated Indian economy kept business, trade and taxpayers on tenterhooks as successive governments toyed with schemes to spend more and more in an environment of low growth and with little concern for the quality of expenditure. Budgets were a moment of dread for India, unless of course you were lucky enough to be in the inner circle of decision-making.

Fortunately, the bad old days have long passed. There were two important milestones in the passage to liberation.

First, the process of deregulation of the economy that was initiated by the PV Narasimha Rao Government as a response to a huge balance of payments crisis that prompted India to mortgage some of its gold reserves, led to the Government attaching priority to the private corporate sector and foreign capital. Wealth creation became a priority. In effect, this meant that the non-state sector and individual taxpayers could no longer be regarded as milch cows. The sharp reduction of personal and corporate tax rates from the punitive levels they had reached during the high noon of Indira Gandhi’s socialism also meant that there were incentives for tax compliance. By implication this meant that Budget provisions couldn’t be couched in dollops of unpredictability. A stable business environment meant that revenue generation had to follow a predictable path and also be linked to the future of wealth creation. It is a matter of satisfaction that the broad parameters of this approach chalked out in 1991 have been broadly adhered to, a notable exception being the regressive retrospective tax imposed by Pranab Mukherjee under the Manmohan Singh Government.

THE SECOND MILESTONE was the enactment of the Goods and Services Tax (GST) after prolonged negotiations between the Centre and the states in 2016. The constitutional impact of GST was profound. Since this was a national tax aimed at removing a multitude of local taxes imposed by the states, it meant that both the Centre and the states had to abandon absolute sovereignty and pool their sovereign powers in a GST Council. In practical terms this meant that the power to impose new taxes or modify existing rates no longer vested in the Budget, making it more predictable. An unintended, although natural, consequence of the GST was to undermine the importance of the revenue section of the Budget. Since changes in indirect taxes, except in petroleum products and alcoholic beverages, could only be sanctioned by the GST Council, involving all the states and the Centre, the element of surprise and unpredictability was taken out of the Budget. This complemented the trend set by Vishwanath Pratap Singh’s Budget in 1985 of lowering the rates of personal taxes to levels that discouraged innovative accountancy to evade having to pay the exchequer.

Since he assumed charge in May 2014, Prime Minister Narendra Modi added his own touch to public finance.

First, while persisting with the overall philosophy of low taxes, he put greater emphasis on enhanced compliance.

Using technology to full effect, the finance ministry created the architecture that would make it difficult, if not impossible, for both individuals and businesses to make banking transactions difficult without a Personal Account Number (PAN). Consequently, and particularly after demonetisation, the numbers of individuals filing personal income tax returns and businesses filing their GST returns registered a sharp increase. The widening of the tax base negated the need to raise tax rates to cover up revenue shortfalls.

Second, the increase in India’s GDP after the opening up of the economy witnessed a simultaneous increase in both the states’ and Centre’s expenditure on welfare spending. Flushed with funds that were unimaginable during the heyday of socialism, successive governments focussed on extending a helping hand to the poor and vulnerable. The Vajpayee Government concentrated on upgrading India’s creaking infrastructure, believing, quite rightly, that this would have a trickle-down effect. The Manmohan Singh Government, influenced by Sonia Gandhi’s mother bountiful approach, sought to create handouts but without much concern for delivery.

Modi didn’t discard either approach. He accelerated the pace of infrastructure building, adding railways to the sectors that needed urgent attention. Additionally, he stepped up welfare expenditure, including direct welfare and subsidy payments to targeted beneficiaries. Having spent the first year of his administration extending the reach of banking services to the very poor through Jan Dhan accounts, he now used these accounts to cut out intermediaries and, in the process, reduce corruption exponentially. The tax department made the hitherto arduous task of filing tax returns so ridiculously simple and prone to instant verification that the tension attached to the annual Budget was reduced.

Finally, right from the outset, the Modi Government made it clear that it disavowed sops and special incentives, except in exceptional circumstances. The Government focused instead on the ease of doing business, believing that less cumbersome regulations, the absence of cronyism and the creation of an appropriate environment would promote an entrepreneurial culture. This in turn would have a cascading effect and end up promoting growth. Although this approach suffered a setback due to the Covid-19 pandemic and the ensuing disruption of normal life all over the country, the basic approach was not abandoned.

It was the special circumstances of post-pandemic recovery that created a measure of extra interest in this year’s Union Budget, presented by Finance Minister Nirmala Sitharaman. Throughout the lockdown period and after, there was a clamour among economists for the Government to abandon its policy of fiscal restraint and pour cash into the hands of people—an approach that they felt would kickstart a spluttering economy. They wanted Sitharaman to emulate the British Chancellor of the Exchequer Rishi Sunak and, in effect, pay partial salaries to prevent job losses.

The Modi Government, however, had other ideas. The Rs 20,000 crore stimulus package announced by Sitharaman—in effect an Interim Budget—focused on three things.

First, in line with its principle of very targeted relief to the most vulnerable sections, it offered cash handouts through direct benefit transfers to women, migrant labour and farmers and undertook a massive campaign to ensure food security for all. For the vocal middle classes who experienced the disruption severely, it offered some non-cash relief such as extension of tax deadlines and reduction in the Tax Deducted at Source rates.

Second, it used the pandemic to enhance capacity-building in the crucial health sector, building the necessary infrastructure that has been so useful in rolling out the gigantic anti-Covid vaccine programme across the country with a measure of spectacular efficiency. Finally, it used the pandemic and the lockdown to foster the notion of self-reliance (not to be mistaken for self-sufficiency) in Atmanirbhar Bharat, a variant of the Make in India programme announced in 2014.

In effect, what the Modi Government successfully did was hold its nerve and not be bamboozled into short-term remedies that would make the long-term recovery less enduring and sustainable. The political test of this approach was the Bihar Assembly election that was narrowly won, defeating a sustained populist challenge based on a reckless expansion of the government sector.

Sitharaman’s Budget has, in effect, enlarged the approach spelt out last year to a larger sphere. The massive increase in expenditure on health was quite easily digested by public opinion, not least on account of the encouraging progress of the vaccine programme. The programme to upgrade India’s infrastructure, particularly in roads and railways, always had a ready audience since such investments have a big and visible multiplier effect. Finally, the sops to farmers in the form of enhanced procurement prices and relief to plantation workers was a response to the agitation in northern India which will help offset an impression that the Government wants to turn a way of life upside down.

However, public perceptions of the Budget are also disproportionately shaped by the middle classes. Sitharaman won the hearts of this section by avoiding any extra tax burden and, indeed, making tax compliance that much easier for corporates. Particularly appealing to businesses were the provisions to decriminalise technical violations of the law. Like Manmohan Singh in 1991, Sitharaman used an acknowledged crisis to push through changes that in more normal times would have invited fierce criticism from the remnants of India’s socialist bloc—a bloc that exists in all parties. Small wonder that the criticism of the Budget was limited to tired slogans about selling the family silver.

For Finance Minister Sitharaman this Budget was a coming-of-age party. Ever since she assumed charge, she had operated under the shadow of her redoubtable predecessor who combined his nominal job in North Block with responsibilities as the Government’s foremost crisis manager. Sitharaman isn’t likely to be another Arun Jaitley but in presenting a Budget that is based on the premise of optimism, she has boosted national sentiment enormously. The challenge of reversing degrowth with a double-digit expansion of the economy is undeniably daunting, even though the International Monetary Fund suggests India is on target. However, the mere fact that the Government’s budgetary calculations are based on a spectacular recovery has enhanced India’s faith in itself and, by implication, its faith in a finance minister who can think big.

BJPideologyNarendra ModiOpenomics 2021Union Budget 2021