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Budget 2016: Malware Has Been Detected

Finance Minister Arun Jaitley presented the General Budget for the nation on 29th February 2016. This is traditionally done on the last day of February every year, which is usually the 28th, but was done on the 29th as this is a leap year. No wonder then, the budget reflects a leap of faith for Mr Jaitley, from market oriented neo-liberal reforms to Keynesian macroeconomics. In a first of its kind, this budget did not mention a single city or region for any project or a goodie.

As usual, there are winners and losers. In a major attempt to shed the “suit-boot ki sarkar” image, Mr. Jaitley elected to make the rural sector the biggest winner. In this, MNREGA, the rural employment scheme got the biggest boost. Recall that NREGA was initiated during the erstwhile Congress led UPA government’s time. Two years back PM Modi had twitted that he is going to keep NREGA going , only to demonstrate to the world what a big mistake the scheme was. Now, two years later, in a Keynesian mood-swing the allocation for NREGA went up from Rs. 34,699 crores to Rs. 38,500 crore. It is expected that about five lakh farm ponds and wells and 10 lakh compost pits will be built. There is also increased allocation for rural roads, rural housing and rural toilets. A pilot scheme for fertilizer subsidy in selected districts will also be launched. Rs 2000 crore has been allocated to pay for the initial costs of an LPG connection for rural BPL households to get them to switch from wood stoves to LPG. This is expected to reduce indoor air pollution and better health for women and children even though it is doubtful if BPL households will be able to afford the 400 odd rupees per cylinder required even after subsidy.

As sectors go the next single beneficiary is the MSME sector. In particular, new start-ups have been given a boost. For units started after 1st march 2016 the government will pay the employers’ contribution at the rate of 8.33% towards all employees EPF accounts. New hubs are to be created to support SC and ST entrepreneurs. A Rs. 500 crore scheme is introduced to promote entrepreneurship among SC and ST persons.

Health and education, too, have got some boost. There are 2.2 lakh renal patients being added in India every year. To address this, the National Dialysis Service Programme is to be initiated in the PPP mode to provide dialysis at all district hospitals. Senior citizens will get additional healthcare cover of Rs 30,000. The Government will open 300 generic drug stores across the country where presumably, drugs will be available at less cost. In education, 10 public and 10 private educational institutions are to be made world class. Digital literacy scheme to be launched to cover 6 crore more rural households. Entrepreneurship training will be started in schools, colleges and online. 1 crore youth to be imparted various skill development training under PM Kaushal Vikas Yojna.

The FM has declared that he was able to keep fiscal deficit to 3.9% in the past year and targets to keep this in the current year to 3.5%. Thus Mr. Jaitley has the task of reconciling low fiscal deficit with increased government spending. In this he is helped by low international oil prices (which can change any time) but inhibited by two factors: droughts in most states in the last two years and the requirement of paying higher salaries as recommended by the Seventh Central Pay Commission. The target of fiscal deficit implies that increased government spending cannot be met with deficit financing. Thus, the compulsion to raise taxes. Possible reductions in income taxes are ruled out and tax slabs will stay as before. A new tax on dividend income is introduced where such income in excess of Rs 10 lakhs will be taxed at the rate of 10 percent. Service tax has been increased from 14.5 percent to 15 percent by introducing an agricultural cess. So dining out and going to the movies will be costlier. Expectedly, the excise duty on tobacco products have been raised from 10 to 15 percent. SUVs and luxury cars will be costlier. Companies with revenue below 5 crore will face increased corporate tax of 29% plus surcharge. The cess on coal has been increase by Rs 200 per ton making electricity more expensive.

While all this is in the range of the expected, the real shocker came when FM Jaitley announced that all 60% of deposits to the Employees Provident Fund (EPF) made after 1st April 2016 will be treated as current income and be taxed at the appropriate rate at the time of withdrawal. Since, typically such withdrawals are made at the time of retirement. There is outrage at the fact that EPF contributions are traditionally tax free and there is an implied promise by the government, run by whichever party, that they shall remain so for all time. This sudden change of rules midway through a game is causing this government much loss of credibility. Also, imposing additional tax on a person who has just retired amounts to kicking a person when he is down. Today Mr. Hasmukh Adhia, the revenue secretary has clarified that only 60% of the interest accrued on deposits made after April 2016 will be treated as income and taxed while the principal will be tax exempt. Further, PPF is to remain totally tax exempt. Even so, any additional tax burden on recently retired persons will be seen as potentially unfair.

In conclusion, this budget is seen as agriculture and rural sector friendly budget that will raise prices across the board and put additional tax burden on the middle class. One suspects that the upcoming assembly elections in five states and the BJP’s performance in Delhi and Bihar elections may have something to do with this thrust.


Gautam Gupta is a Professor of the Department of Economics, Jadavpur University.
Edited by Manisha 

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