Budget 2014: Arun Jaitley’s top challenges

For Arun Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. Photo: Hindustan Times

Live Mint  Dipti Jain 7 July 14 

The expectations from the finance minister’s maiden budget are sky high. Here are the six biggest challenges he faces

Mumbai: The expectations from finance minister Arun Jaitley’s maiden budget are sky high, as is evident from the fact that Indian stocks are scaling new highs daily. For Jaitley, there is no easy way to meet these expectations given that the budget will be presented against the backdrop of sluggish economic growth, high inflation and the precarious state of government finances. The finance minister has to attack the core problems facing the economy. Here are the six biggest challenges faced by Jaitley, along with their solutions.

1) Declare war on subsidies

Graphics: Paras Jain/Mint

The subsidy bill was allowed to balloon over the past 10 years. This was not due to benign neglect alone. Handouts were central to the political strategy of the past two United Progressive Alliance governments. Such subsidies are often captured by vocal groups such as large farmers in the case of fertilizer subsidies and the urban middle class in the case of fuel subsidies. Jaitley has to slash subsidies at a time when the National Food Security Act has to be funded.

Key reform: Keep increasing fuel prices till the subsidy is eliminated while committing to follow whatever the 14th Finance Commission, headed by Y.V. Reddy, suggests on how to insulate the pricing of public utility services from politics.

2) Increase public investment

India cannot have a sustainable economic recovery unless the investment cycle is revived, according to most economists. The private sector is still wary about funding new capacity; many corporate balance sheets are burdened by excessive debt. Public investment has been indiscriminately cut in recent years whenever the government has had to trim spending. India needs more capital spending by the government to improve its creaking infrastructure. Jaitley will have to switch his spending priorities from subsidies to asset creation.

Key reform: Revive the defunct National Investment Fund that will direct public funds into new infrastructure projects. The money available for such overdue capital spending should be ring-fenced by ensuring that all money collected from privatization and sale of telecom spectrum is sent into this investment fund rather than wasted in populist spending schemes that do not create assets for the future.

3) Sell assets to generate funds

A weak economy means that tax revenue will continue to be sluggish this year. That is why non-tax revenue from privatization will be especially important if the fiscal deficit has to be narrowed. But privatization should not be seen only as a tactical necessity. The Indian public sector is inefficient. The government has created assets that it cannot manage well. It should sell them and use the money for new projects, the way a private equity fund juggles its investment portfolio.

Key reform: Announce a credible privatization road map that will be overseen by an independent commission. The sale of state-run companies has to be done in a fair manner to avoid the sort of crony capitalist practices that have given privatization a bad name in so many countries from Russia to India.

4) Increase tax-to-GDP ratio

The government collects too few taxes to run its daily show, create quality infrastructure and build even a minimal welfare state. The tax-to-GDP ratio is low even by Asian standards—though the two decades since the 1991 reforms have seen it become more progressive thanks to the growing contribution of direct taxes and the declining contribution of indirect taxes. Increasing tax rates is a bad idea. The more useful strategy is to get more people into the tax net by having a simple and stable tax system.

Key reform: The introduction of the goods and services tax (GST) has been delayed for far too long; the constitutional settlement has to be driven by the finance minister’s boss, Prime Minister Narendra Modi.

5) Put public finances back on track

The splendid increase in the national savings rate after 2003 was because of fiscal consolidation. The sharp increase in the revenue deficit after February 2008—six months before the global financial crisis—was the biggest reason why the savings rate has declined subsequently (while deteriorating company financials also reduced corporate savings). India won’t have adequate domestic resources to fund faster growth unless public finances are repaired.

Key Reform: Move towards a new version of the landmark Fiscal Responsibility and Budget Management Act that was introduced by the previous National Democratic Alliance government led by Atal Bihari Vajpayee.

6) Shift savings into the financial system

Years of high inflation combined with negative real interest rates on financial assets have encouraged Indian households to shift money out of the financial system. Physical savings have grown in importance. India cannot fund its economic revival unless financial savings become more attractive. The likely end to the gold super-cycle may help, but the eventual solution is to contain inflation.

Key reform: Tax breaks on financial savings can be increased, but the more viable strategy is to back Reserve Bank of India governor Raghuram Rajan in his battle against high inflation.

You need to report these incomes also

Shyamal Banerjee/Mint

Live Mint 7 July 14
When it’s time to file income-tax return (ITR), most of us rely only on the Form16 that our companies give us regarding our salaries. But, we have other sources of income as well, which we forget to report. EY puts together some of these common sources and where to get the relevant information from. Make sure, you include these incomes as well.

Budget expectations and the sectors it will impact at one glance

Barclays 7 July 14

The government is likely to propose a pro-growth budget focused on long-term improvement in fiscal position ( may include measures like reducing subsidies, restructuring welfare programmes, raising divestment target); improving investment climate( liberalization of FDI norms in Defence, E-commerce and Insurance sectors, export incentives, increase in ECB borrowing limit); controlling inflation ( lower purchase of cereals for PDS, reduction in cereal inventory at FCI warehouses); and tax reforms (roadmap for the implementation of the Goods and Services Tax (GST) and abolition of retrospective amendments) Source: Barclays

BUDGET Jul 7, 2014 Budget 2014: FM sets ambitious asset-sale target to raise $12 bn as stocks enjoy Modi boom

First Biz 7 July 2014

The government will seek to raise up to a record $11.7 billion in asset sales in its maiden budget this week, a senior government source said, bolstering state finances and buying time for structural reforms to revive a weak economy.

The privatisation target could reach Rs 70,000 crore, almost equal to all proceeds over the last four years, in a budget Prime Minister Narendra Modi hopes will launch the growth and jobs agenda that in May won him India's biggest election mandate in three decades. The budget is due on Thursday.

"The finance ministry has approached different ministries to increase the divestment target," said the senior official with direct knowledge of the budget process. The previous government had pencilled in sell-off proceeds of Rs 56900 crore.

The 63-year-old premier has made a decisive start by naming a streamlined cabinet, approving a slew of infrastructure projects and embarking on what promises to be a whirlwind first year of trade diplomacy.

But his government has been plagued too by the economic ills that brought down its predecessor: weak growth and high inflation caused by spending too much and investing too little.

Despite the market reforms of 1991 that brought down the curtain on decades of socialist isolation, tracts of Asia's third-largest economy remain off limits to outside investors.

Modi wants to open up industries like defence, but selling controlling stakes in bloated state enterprises is out of the question. They are not competitive and any job cuts ordered by a foreign owner would cause an outcry.

Instead, he will whittle down state stakes in firms that have already been partly sold, like Steel Authority of India Ltd, without surrendering overall control, said the official and other sources familiar with the plans.

Stocks have enjoyed a Modi boom, rallying 23 percent this year. Listed state firms have outperformed on hopes that wider ownership would discipline managers and that their bottom line would benefit from a loosening of price controls.

Leading the pack is Indian Oil, which has gained 62 percent in 2014. ONGC, another oil firm, is up 46 percent. Coal India has risen 36 percent.

TAX, SUBSIDY REFORMS

In setting an ambitious asset-sale target, the government will face inevitable scepticism from investors who are used to seeing its predecessors miss their privatisation goals.

The Modi government will also have limited scope to put its stamp on this first budget, which has been delayed by the election and will be delivered three months into the budget year to March 2015. The deficit is already near half the annual goal inherited from the last government: 4.1 percent of GDP.

Finance Minister Arun Jaitley is expected to roll out other revenue measures in addition to the asset sales, including a General Sales Tax that would unite the 29 states into a common market.

The measure would make it easier to do business and, over time, broaden the tiny tax base, which last year was a mere 8.9 percent of India's $1.9 trillion gross domestic product - about a quarter of the average for the OECD club of developed nations.

Some of the "bitter medicine" that Modi has warned people to expect would come, the senior government official said, in the form of reductions to subsidies on fuel, fertiliser and food that cost 2.3 percent of GDP.

Jaitley in turn has warned against "mindless populism", heeding the advice of officials at the Reserve Bank of India (RBI) who have warned him that fiscal laxity would complicate their task of curbing inflation, now in the high single digits.

Fiscal consolidation, predictable taxes and low inflation are key anchors that India needs for economic and financial stability, Governor Raghuram Rajan wrote in the RBI's recent financial stability report, underlining that message.

OIL COMPANIES

The government has signalled its willingness to trim its stakes in listed companies by backing a regulatory move to gradually increase the minimum free-float requirement for stocks included in the benchmark indexes, to 25 percent from 10 percent now. State-controlled firms currently have a 16 percent weighting in the indexes.

"It is the right time to sell stakes in public sector companies as the stock market is booming," said the official, who requested anonymity as the budget process is confidential.

Jaitley plans to front-load share sales, with a 5 percent stake in Steel Authority of India, worth $340 million, on the docket for late July, say sources familiar with the deal.

That is likely to be followed by a 10 percent stake in Coal India, the world's largest coal miner that is now 90 percent state owned. A deal would, based on current market pricing, be worth around $4 billion.

A senior oil ministry official said some of the leading oil companies were contenders for the share-sale programme, but did not name any names. A final decision would be taken by the finance ministry.

Deutsche Bank Securities forecasts proceeds of Rs 60000-8,0000 crore from asset sales in this fiscal year. That would enable the government to avoid borrowing more even if it raises its deficit target to 4.3-4.4 percent of GDP.

Reuters

Black money in Swiss banks: Why even a determined PM Modi might just fail

FP Staff  Jul 7, 2014 11:45 IST

The BJP has long declared its determination to bring back 'black money' to the country.

The issue was a prominent part of the party's successful Lok Sabha campaign, and newly elected Prime Minister Narendra Modi was so keen to display the seriousness of his intent that he quickly instituted an SIT with the express purpose of hunting down and returning the black money from offshore tax havens and 'Swiss bank accounts'

However, both the SIT itself and the government's plan may have hit a brick wall  that threatens to bring all its efforts to naught.

Last month, newspaper reports announced with great confidence that Switzerland had prepared a list of Indians suspected of stashing un-taxed wealth in Swiss banks and were ready to share it with the Indian government. Today comes news in the Economic Timeshowever that such a list does not in fact exist.First up, there is no 'list' of Indians with illegal offshore accounts.

The earlier report by the PTI news agency quoted an unnamed senior Swiss government official as saying that the "names of these Indian individuals and entities have come under scanner of the Swiss authorities during an ongoing exercise to identify real beneficiary owners of funds held in various banks operating in Switzerland".

Following the publication of the report, Finance Minister Arun Jaitley said the government would write to Switzerland seeking details of these Indians. He admitted, however, that his ministry was yet to receive official communication in this regard. As it turns out now, it was for good reason.

Meanwhile Justice MB Shah, who is heading the SIT on black money, was also eager to examine the so-called list.

"It isn't a list of only black money, it is a list of those persons who are also legally vested. It is a combined list. We are asking for the list of the said persons. Then we will verify. Then action is taken. If it is legal we cannot do anything, If it is illegal or unaccounted money then we take action. It depends on which manner the amount is deposited," Shah told CNN-IBN.

However, Mario Tuor, head of communications, SIF, tells ET Magazine, "The letter from Indian authorities asks for additional information on a list prepared by the Swiss authorities. We cannot give information on a non-existing list."

ET adds that Switzerland has long been refusing to share details about the Indians named in a so-called 'HSBC list', which contains names of Indian and other foreign customers who have stashed their black money in its Swiss branch. According to the report:

"This was stolen by a bank employee and later found its way to tax authorities in various countries, including India. To this, Tuor said there is no global standard to provide assistance based on information illegally obtained"

India has amended the terms of its Double Taxation Avoidance Agreement (DTAA) with Switzerland to ensure that it receives information on banking in addition to taxes,  and  the Swiss government has asserted that it is"looking forward to working together with the new government of India in its fight against tax evasion." But the lack of progress makes clear, much of this means little in terms of actionable information.

So the 'breakthrough' that was being trumpeted has turned out to be yet another mirage.

Then there are those who argue that getting the Swiss to cough up the names of black money offenders is hardly worth the effort.  In an interview with the Times of India, Professor Arun Kumar, an expert on black money points out that while 'black money' is a reality, the bulk of it is right here in India and not overseas.

"First of all, I think going after just the foreign component of black money is a diversion. The bulk of the money is right here in the country! It is very difficult to get money out of foreign tax havens unless someone has been really stupid. Let me clarify that all Indians with foreign accounts are not criminals", he said.

Professor Kumar added that any 'list' of Indians given by the Swiss (or for that matter any other) government was also likely to be highly misleading, as it was unlikely that the accounts would be opened under the real names of the account holders.

"No amount of agreements to avoid double taxation or information sharing will yield information on real account holders. There are devious means by which money is transferred through several layers of shell companies. If you ask a Swiss bank, they might tell you the 'names' they have but these are not the real people. It will require a great deal of meticulous work here to get the right persons. This is what the US did in the case of its citizens who had stashed money in UBS. They prepared a case in US and presented it to the Swiss. That's what India should do."

That would be one step. The other would be, as Kumar points out, to start tracking and recovering the vast hoards of black money being stored closer to home -- usually in that glitzy new real estate development coming up in your neighbourhood.