Relook At Budget 2016: Despite EPF Angst, Modi Has Addressed His Core Constituencies

All budgets have some political content, but the one Arun Jaitley presented last Monday (29 February) had Narendra Modi written all over it. This is not unknown, for Prime Ministers do have a big say in budget proposals. Barring the budgets presented by Pranab Mukherjee, where his sense of being senior to Manmohan Singh made him impervious to suggestions from the Prime Minister (hence the retrospective tax?), PMs do impact the broad thrust of budgets.

But budget 2016-17, which has been the best-accepted of the three presented by Arun Jaitley, should be read as Modi’s deep political statement of intent and content. Not least because, unusually for a Prime Minister, Modi announced to the world he was on test on budget day.

That he passed the test he set for himself is evidenced by the resounding verdict of the stock markets yesterday (1 March), when the Sensex soared 777 points, followed by another big jump on Wednesday by mid-day.

Do the stock markets know something we do not? Why was the Sensex celebrating when one of Modi’s core constituencies (the middle class) has been miffed over his proposal to tax employee provident fund (EPF) withdrawals, and big business has been glum about Jaitley reneging on his promise to cut rates? Rates were cut only for companies with a turnover below Rs 5 crore by one percent. Big business’ claps were reserved only for Jaitley’s decision to the fiscal roadmap, when they could not care less about it. They wanted something and didn’t get it.

While no one will grudge Modi his efforts to woo the estranged farm sector, which is in deep distress after two weak monsoons and slow wage growth for four years, if the bedrock of his vote base - the urban middle class - is shaken, he can kiss goodbye to 2019.

But Modi is hardly a politician to ignore his constituency, and so, despite the EPF mess-up, it is worth reading between the lines of his budget to assess if he has really given up on the constituency that voted for him and opted instead for an image boost with the rural voter.

First, let us be clear on one thing: the middle-class tends to be narrowly focused on three major tax areas: the basic exemption limit (which wasn’t raised), the 80C deductions (which didn’t happen) and deductions for home loan interest (which was indeed raised by Rs 50,000 for homes costing less than Rs 50 lakh). So, getting one out of three wishes can’t be called a middle class no-show.

Also, there is the question of which middle class we are talking about. There are many shades of middle class: Modi’s constituency is all of the urban middle classes (including the neo middle classes, which fall just below the taxable limit of Rs 2.5 lakh or evade taxes since they work in the informal sector), the middle middle classes (which earn upto Rs 5 lakh per annum, who got a small Rs 3,000 tax rebate for the year, and higher deductions of Rs 60,000 on house rent paid if they are not receiving HRA), and the upper middle classes (which got the additional EMI deduction), and the upper, upper middle classes of professionals, who actually got a huge benefit by being brought under presumptive tax, where they can pay just 8 percent tax on presumptive incomes upto Rs 50 lakh (where half of it will be taken as profit, and hence they will pay tax of just Rs 4 lakh, or even lower by claiming deductions). The doctors, lawyers, CAs, architects and consultants – mostly tax evaders, and who are often harassed by taxmen – should be stronger Modi loyalists after this.

Another core constituency, small traders and businessmen, also benefit by being allowed to get away with paying just 8 percent tax presumptive tax on turnover upto Rs 2 crore, up from the Rs 1 crore limit earlier. That 3.3 million small taxpayer households who should breathe a sigh of relief that the taxman can’t pry into their account-books. They can also pay less than Rs 8 lakh per crore of turnover by claiming other deductions.

The only constituencies that may be really miffed – apart from the middle class grouch over EPF taxation, which may still be remedied – are the business community and the super-rich. But most of them don’t vote, and their numbers don’t count. India Inc is still hurting under excessive debt and pared margins, while income earners above Rs 1 crore will have to pay a surtax of 15 percent, up from 12 percent earlier.

Of the two, big business must be unhappier. Not only has it been treated like a pariah by being kept out of Modi’s durbar, it has also been denied Jaitley’s promised corporate one percent tax cut this year, which is restricted to companies below Rs 5 crore turnover. India Inc’s margins will be squeezed by higher energy cesses (coal), and higher taxes on cars, SUVs, cigarettes, jewellery, etc, not all of which may be passable to consumers. The unkindest cut is the higher dividend tax on payments above Rs 10 lakh – which will impact promoters more than ordinary shareholders.

However, what business loses in the direct swing of the tax axe, it gains from the roundabouts of long-term ease of doing business and tax amnesty schemes, which will allow businessmen to declare black money or hidden assets by paying 45 percent tax. Then there are schemes to allow individuals and firms to settle disputed tax amounts upto Rs 10 lakh with interest, but without penalty. For amounts above that, disputes can be settled with 25 percent of the minimum penalties. What business is getting is peace of mind and less hassle if it pays up. The big question is whether it will indeed pay up and settle, especially if the amounts involved are large.

Businessmen will be clearly missing the chummy Gujarat CM they had come to love earlier, but what Modi is signalling as PM is simple: the regime of cronyism has changed, and business needs to adjust to this reality. He is willing to steadily improve ease of doing business, but if the latter still are not able to feel it, it’s because the states are taking their time to adjust to their new role of making life easier for business.

Despite Modi’s image of being close to crony businesses, the fact is neither Adani nor Ambani – two businessmen often mentioned in this context - has got any whiff of a favour from the Modi regime. Adani was denied an SBI loan for his Australian project, and Ambani has seen his gas prices shrink rather than grow, as promised by the UPA and Arvind Kejriwal. Far from getting favours, banks and enforcement agencies are going after bank loans defaulters with a vengeance, and, with the Supreme Court getting into the act, one can be sure that at least one or two major businessman will probably see the insides of jail for fraud and diddling banks, taxmen and investors.

The message from the Modi regime to business is: grow up and grow the right way, not the crony way. This is one reason why they are getting options to declare black incomes and invest it in legitimate businesses rather than favouring them in the sly, UPA way. This is also the reason why growth has been slower to pick up than one would have expected. Business is still nostalgic about being chummy with politicians in the old way.

Modi’s loss may be that big business may now be more inclined to back other parties, but that will not impact his prospects in 2019. Those whom businessmen choose to favour are usually those the voters trust less. Ask the UPA what happened after being seen as thick with cronies in 2G, Coalgate, etc.

Coming back to the budget, it may have no big idea, but it has several smaller ones that add up to a big one – if they work.

First, growth will be stimulated through public investments in railways and roads, both urban and rural – adding up to over Rs 2,18,000 crore this year.

Second, jobs will be created by spurring small entrepreneurship, including Dalit entrepreneurship, and investment in infrastructure, including farming infrastructure (irrigation, etc). Modi has offered sops to businesses to hire more, but he has cottoned on to the fact that real jobs will come in infrastructure and construction, and from the growth of entrepreneurship. This is the reality the world over, as big business is not hiring much in the age of technology and abundant capital. His Mudra Bank and Start Up India are bets made on entrepreneurship-driven job creation.

Third, the poor will be served not by handouts, but by inclusion strategies not amounting to handouts – the Jan Dhan Yojana, the promise to electrify all villages by May 2018 and connecting them by roads are little pieces that promise inclusion. So is the promise to build toilets all over. Swachch Bharat may or may not make India a cleaner place, but open defecation and privacy for women in toilets will surely be a reality. Modi has realised that bureaucracy works best in mission mode, and hence all his initiatives are missions with targets.

Fourth, the JAM trio – Jan Dhan, Aadhaar and Mobile payments - will be used to the hilt to reform subsidies, but not eliminate them. The promise to double farm incomes can be the pre-election cash gusher to marginal farmers. Instead of UPA-style loan waivers, farmers may end up with direct income support and cash in their Jan Dhan accounts. There is no other way to show their incomes will double in five years, as promised by Jaitley. Don’t be surprised if MNREGA morphs into an unemployment dole directed into bank accounts through Aadhaar IDs.

Fifth, the middle class will gain from the general turnaround in corporate profits, greater hirings, investments in cities and public transport, and the rural rebound, not to speak of direct tax benefits in the final two years of the Modi tenure.

The budget addresses all of Modi’s current and future constituencies: the 32 percent urban voter base, the additional 15-20 percent rurban wannabe urban voters, and the marginal farmer. It can be a viable coalition for 2019, if all of them feel they have gained from Modi’s first five years.

The key is implementing Modi’s vision. That could be the proverbial slip between cup and lip.