Relook At Budget 2016: Despite EPF Angst, Modi Has Addressed His Core Constituencies
Modi has passed the budget test he set for himself is evidenced by the resounding verdict of the stock markets yesterday (1 March), when the Sensex soared 777 points.
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.
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.
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
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
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.
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.
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
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.
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.
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