It's often asked if prime minister Narendra Modi will be India's Margaret Thatcher or Ronald Reagan. The underlying presumption of these comparisons is that Modi will follow those leader's economic policies, generally understood to be tilted towards cutting government expenditure and propping up free markets. In reality of course, those presumptions are mostly mistaken, because both Thatcher and Reagan saw government spending go up during their tenures. And the same is now set to happen with Modi too.
Far from a broad plan of cutting down on subsidies, finance minister Arun Jaitley's second budget increases government spending, postpones the fiscal deficit target of 3% to 2018, defended the value of subsidies offering only the suggestions that leakages need to be plugged and, most ambitiously, a universal social security and pension scheme.
Of the announcements tilted towards the market, only the reduction of the corporate tax – a massive cut from 30% to 25% – brought a lot of cheer to investors. Jaitley also announced that he was getting rid of the wealth tax and instead adding a 2% surcharge on income of those who earn more than Rs 1 crore annually. While the budget does a lot that makes India more friendly to industry, regulatory changes and assurances that will improve the ease of doing business, what Jaitley did not do was make the case that the government needs to be smaller or that welfare must be cut.
Jaitley said several things that made it clear Modi wants to see an expansion of the government's ambit between now and 2022, when India celebrates its 75th year of independence.
*Expanding public investment
The government admitted that private investment and public-private partnership models have not done enough to improve India's infrastructure, which has hurt the rest of the economy. As a result, this budget proposes Rs 70,000 crore more in investment in infrastructure over last year's budget, with a particular focus on road and rail. The Rail Budget had already indicated this and the chief economic adviser also suggested that this should be the way ahead.
"I want to underscore that my government still remains firm on achieving the medium term target of 3% of GDP. But that journey has to take account of the need to increase public investment," Jaitley said. "The total additional public investment over and above the RE is planned to be Rs 1.25 lakh crore out of which Rs 70,000 crore would be capital expenditure from budgetary outlays. "
*Altered fiscal discipline roadmap
From the beginning Jaitley has complained about the legacy that the previous government left him on the fiscal policy front. He said that the fiscal deficit target of 4.1% that was left him was too small, but insisted that he would stick to it, and he has.
The previous government had also set out a roadmap of getting to a fiscal deficit of 3% by 2017. Jaitley has now pushed this target to 2018, and altered this year's fiscal deficit target to 3.9% instead of the 3.6% that had been set before. This will be aided by lower fuel prices, actually giving the government a fair amount of space with which to invest this year, without even going into the additional revenue that the government can hope to capture through a more buoyant economy, a wider tax base and disinvestment.
*Subsidy Regime
Jaitley made it clear that he did not see welfare or subsidies as a bad thing. Instead, he insisted that Indian needs to be known as a compassionate country that takes care of its citizens, and that all that is necessary is better implementation with fewer leakages in the system.
"This Government is committed in its resolve, as Indians, to regain our pre-eminence as a just and compassionate country. Well-intentioned schemes introduced in the past, have often been ill-targeted, riddled with leakages and delivered with inefficiency. The same is true of subsidies," Jaitley said. " Subsidies are needed for the poor and those less well off. What we need is a well targeted system of subsidy delivery. We need to cut subsidy leakages, not subsidies themselves. We are committed to the process of rationalizing subsidies based on this approach."
*Universal social security and pension scheme
Far from insisting that the government should leave the upliftment of people to private industry, Jaitley announced an ambitious new effort to provide a universal social security system, so that everyone can get a pension. Built off the financial inclusion scheme that Modi has already pushed, the Jan Dhan Yojana, Jaitley promised to expand this to Jan Suraksha, for now offering a voluntary pension scheme that will see a premium of just Rs 12 year lead to an accidental death risk of Rs 2 lakh.
"Worryingly, as our young population ages, it is also going to be pension-less. Encouraged by the success of the Pradhan Mantri Jan Dhan Yojana, I propose to work towards creating a universal social security system for all Indians, specially the poor and the under-privileged," Jaitley said.
Far from a broad plan of cutting down on subsidies, finance minister Arun Jaitley's second budget increases government spending, postpones the fiscal deficit target of 3% to 2018, defended the value of subsidies offering only the suggestions that leakages need to be plugged and, most ambitiously, a universal social security and pension scheme.
Of the announcements tilted towards the market, only the reduction of the corporate tax – a massive cut from 30% to 25% – brought a lot of cheer to investors. Jaitley also announced that he was getting rid of the wealth tax and instead adding a 2% surcharge on income of those who earn more than Rs 1 crore annually. While the budget does a lot that makes India more friendly to industry, regulatory changes and assurances that will improve the ease of doing business, what Jaitley did not do was make the case that the government needs to be smaller or that welfare must be cut.
Jaitley said several things that made it clear Modi wants to see an expansion of the government's ambit between now and 2022, when India celebrates its 75th year of independence.
*Expanding public investment
The government admitted that private investment and public-private partnership models have not done enough to improve India's infrastructure, which has hurt the rest of the economy. As a result, this budget proposes Rs 70,000 crore more in investment in infrastructure over last year's budget, with a particular focus on road and rail. The Rail Budget had already indicated this and the chief economic adviser also suggested that this should be the way ahead.
"I want to underscore that my government still remains firm on achieving the medium term target of 3% of GDP. But that journey has to take account of the need to increase public investment," Jaitley said. "The total additional public investment over and above the RE is planned to be Rs 1.25 lakh crore out of which Rs 70,000 crore would be capital expenditure from budgetary outlays. "
*Altered fiscal discipline roadmap
From the beginning Jaitley has complained about the legacy that the previous government left him on the fiscal policy front. He said that the fiscal deficit target of 4.1% that was left him was too small, but insisted that he would stick to it, and he has.
The previous government had also set out a roadmap of getting to a fiscal deficit of 3% by 2017. Jaitley has now pushed this target to 2018, and altered this year's fiscal deficit target to 3.9% instead of the 3.6% that had been set before. This will be aided by lower fuel prices, actually giving the government a fair amount of space with which to invest this year, without even going into the additional revenue that the government can hope to capture through a more buoyant economy, a wider tax base and disinvestment.
*Subsidy Regime
Jaitley made it clear that he did not see welfare or subsidies as a bad thing. Instead, he insisted that Indian needs to be known as a compassionate country that takes care of its citizens, and that all that is necessary is better implementation with fewer leakages in the system.
"This Government is committed in its resolve, as Indians, to regain our pre-eminence as a just and compassionate country. Well-intentioned schemes introduced in the past, have often been ill-targeted, riddled with leakages and delivered with inefficiency. The same is true of subsidies," Jaitley said. " Subsidies are needed for the poor and those less well off. What we need is a well targeted system of subsidy delivery. We need to cut subsidy leakages, not subsidies themselves. We are committed to the process of rationalizing subsidies based on this approach."
*Universal social security and pension scheme
Far from insisting that the government should leave the upliftment of people to private industry, Jaitley announced an ambitious new effort to provide a universal social security system, so that everyone can get a pension. Built off the financial inclusion scheme that Modi has already pushed, the Jan Dhan Yojana, Jaitley promised to expand this to Jan Suraksha, for now offering a voluntary pension scheme that will see a premium of just Rs 12 year lead to an accidental death risk of Rs 2 lakh.
"Worryingly, as our young population ages, it is also going to be pension-less. Encouraged by the success of the Pradhan Mantri Jan Dhan Yojana, I propose to work towards creating a universal social security system for all Indians, specially the poor and the under-privileged," Jaitley said.
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