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The big bag of surprises.
THE TEST

The easiest way to rate Arun Jaitley’s budget: Just look for these five things

Ritesh Kumar Singh
By Ritesh Kumar Singh

Corporate economic advisor

The union budget to be presented by India’s finance minister Arun Jaitley today (Feb. 01) is likely to be our next big obsession for quite some time. We all want to know whether the budget will be good or bad. Will it provide tax relief to the salaried class or corporate sector? Will it be popular, populist or sensible? Nobody knows what Jaitley has in store.

Yet, most of us would want the budget to push the  reforms agenda forward, aim for faster (preferably double digit) economic growth, and create new jobs for youths. But how to assess whether Jaitley’s budget passes these key tests or not? Here are five simple things to look for. Even if you’re not an economist, you can judge and rate the upcoming budget without being biased or getting carried away by media headlines.

1. Does it incentivise investment, which in a free-fall mode?

Investment as measured by gross fixed capital formation fell (yes, you heard it right) by 1.9%, 3.1%, and 5.6% in the last three quarters. India can’t keep growing at 7% for long unless investment, especially by the private sector, picks up. Well, the private sector’s moves are guided by profit expectations. Indian corporates—big or small—are sitting on capital expenditure plans, more so after demonetisation that has killed sales in the last three months and has led to piling up of inventories.

India suffers because of its high corporate tax rates at 35% compared to 25% in the ASEAN region. It is also one of the major reasons why India is still not the top choice of investors despite its high growth, relatively cheap labour, and rapidly rising purchasing power. India also has many tax exemptions that give discretionary power to netas (politicians) and babus (officials), and in turn breed corruption.

In his last budget, Jaitely promised to bring the corporate tax down to 25%. Now with US president Donald Trump promising to bring it down to between 15% and 20%, any move by Jaitely to reduce it from 35% will improve the relative attractiveness of India as an investment destination, and that in turn will boost FDI inflows.

2. Does Jaitley’s budget try to reward honest taxpayers?

To boost household consumption and check tax evasion, direct tax rates (income tax or capital gains tax, for instance) need to be brought down. At the moment, some 1.5% of Indians (mostly salaried class professionals) are paying income tax. Those who can avoid paying it, like doctors, lawyers, or rich farmers—who also appropriate most of the subsidised fertilisers, seeds, power, and irrigation—are doing so. When 98.5% of citizens are out of the income tax net, it imposes limits on the government’s ability to spend on education, health, and creation of basic infrastructural facilities.

Thus, any measures to bring “the effective income tax rates” down and more people into the direct tax net will be a big positive. It’s like rewarding honest taxpayers. Thus, it would be interesting to see if Jaitely delivers on this key parameter.

3. Has the proportion of capital expenditure in the total budgeted expenditure increased?

Capital expenditure creates productive assets and aids economic growth while revenue expenditure (for instance, on salaries and allowances of bureaucrats, subsidies on consumables, and interest payments) is mostly wasteful expenses and often aids inflation or crowds out investment by private sector.

According to the estimation by National Institute of Public Finance and Policy (NIPFP), the fiscal multiplier for capital expenditure is 2.5 while that for revenue expenditure, it’s less than one. Thus, if the government spends Re1 on capital goods, it will increase the national income while an extra rupee on revenue expenditure will add less than Re1 to the national income.

In last year’s budget, the share of revenue expenditure was a whopping 88% while that of capital expenditure was 12%. To make it worse, in the last three fiscals, on average, capital expenditure has grown by 2.6% compared to revenue expenditure, which increased by 6.6% or so. The higher the share of capital expenditure in the total budgeted expenditure, the better it would be for the growth of national income.

4. Whether the budget gives a big push to India’s economic growth prospects

There are many sectors, such as automobile, electronics & telecom, housing, infrastructure, textile, and tourism, that have high backward and forward linkages with other sectors of the economy and, as a result, have high multiplier effects. If these sectors grow fast, they will pull many other industrial sectors together with them, and propel the economy for a higher growth trajectory.

So, I would like to see whether Jaitley’s next budget incentivises them with lower taxes and supportive policies. For example, the removal of inverted duties in electronics and textiles that discourage value addition within India and encourage exports of low-value raw materials and intermediates.

Worse, such policies encourage the import of high value items such as mobile phones and apparel. Removal of inverted duties is one surgical strike that’s urgently needed, but the question is, will Jaitley deliver?

5. Will it help in a credit rating upgrade for India?

What will Jaitely do to stick to India’s long-term fiscal path and keep fiscal deficit low? Here, the devil lies in the details. So please check how the fiscal math has been worked out—is it by cutting the revenue deficit or the capital expenditure? If fiscal deficit is somehow managed by compromising with capital expenditure at a time private investment is simply not happening, it will jeopardise India’s growth prospects. And it may not help India’s credit rating or at least will mar any hope of an upgrade.

Each of the above criteria carries 20 points. For adverse movement, the points turn negative. Thus, if the share of capital expenditure in the budgeted spending decreases, you can give -20 to 0, depending upon the extent of decrease. In the end, you can add all your points and arrive at your rating for budget 2017 and can share your rating with whomever you feel like offline or online. Till then, have fun.

This post first appeared on LinkedIn.