ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Onwards to the Neo-Economy

Concession to capital and financial jugglery mark the new government's first budget.

The National Democratic Alliance (NDA) government has managed in its first budget to appease its core support groups of business (foreign and Indian) as also what Prime Minister Narendra Modi loves to refer to as the “neo-middle class”. There are no major flourishes in Finance Minister Arun Jaitley’s exercise for 2014-15, but the bits and pieces add up to a substantial shift from the past, favouring business-led growth while further reducing the role of the state in driving the economy. Budget 2014 pays a politically cautious lip service commitment to welfare spending, though the threat of a major pruning in the future has been held out. There does remain a degree of continuity with the past as with the United Progressive Alliance (UPA) government’s late adherence to fiscal fundamentalism. Yet, Jaitley has actually been fiscally irresponsible by making grand assumptions on revenue buoyancy and capital receipts which will surely turn out to be pie-in-the-sky numbers. There was a need perhaps to be more careful in what will almost certainly turn out to be a year of a major drought, but the anxiety to grab the headlines and spread a “feel good factor” in the markets has got the better of the finance minister.

Foreign and domestic capital may not have got the “big bang” announcements they had hoped for, but there are many goodies for them in Budget 2014. For foreign capital there is the decision to further open up the defence production and insurance sectors, and relax norms for real estate investment. For foreign institutional investors based in the country there is the decision to treat business income as capital gains. For all foreign companies operating in India there is the promise to be much more careful in applying Indian laws on retrospective taxation. For domestic capital there is the major shift to public-private partnerships in infrastructure which will continue to shower private gain at public cost. These will be accompanied by new and in some cases, extended tax breaks (in power, real estate, roads and the new-fangled but mysterious idea of “smart cities”). It will become easier for domestic companies to raise capital abroad. A major disinvestment programme gives Indian capital an opportunity to increase its stakes in what will soon become the former public sector. And a major decision on advance tax rulings will make the conduct of business easier. All in all this is a major boost to private business which will be far from neutralised by the tweaks to the tax structure to reduce arbitrage in investments in mutual funds.

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