IASbaba’s Daily Current Affairs – 2nd February 2017

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ECONOMY 

TOPIC: General Studies 3

• Government Budgeting.
• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Annual Budget 2017

Introduction

The Constitution refers to the budget as the ‘annual financial statement’. In other words, the term budget has nowhere been used in the Constitution. It is the popular name for the annual financial statement that has been dealt with in Article 112 of the Constitution.

For the first time since independence budget has dovetailed the railway budget. Along with this the abolition of the distinction between Plan and Non-Plan expenditure and its early presentation, Union Budget 2017-18 marks another break from tradition.

Focus areas of this budget

In light of the government’s ban of high-value currency notes that has dampened economic activity, particularly in the informal sector, it was necessary for the government to smoothen the economy with the current budget.

The budget has provided a long term framework to prevent regeneration of black money which was the main objective of the demonetization drive.

• Keeping the welfare intent intact programmes and schemes for the vulnerable sections of society, the Finance Minister has done his best to reduce all problems faced by the people as a result of demonetization.
• The tax rate for small and medium enterprises with an annual turnover of up to ?50 crore has been slashed to 25%. This will give a boost to job creation.
• Corporate sector has not been offered much in terms of lower tax rates.
• Halving the personal income tax rate from 10% to 5% for those in the lowest tax slab of ?2.5 lakh to ?5 lakh not only puts more money in the hands of this segment, but is also a move to bring more people into the formal tax net.
• Taxpayers other than the above have been given a rebate of ?12,500 each.

Impact:

There is a redistributive element in this budget with part of the revenue loss from above relief measures being funded by a 10% surcharge on the income tax of those in the income bracket of ?50 lakh to ?1 crore.

• The government is of the opinion that the demonetization has helped transfer resources from tax-evaders to the government. Also, the income tax collections from advance personal tax have risen by 34% in the first three quarters of 2016-17, after recording single-digit growth in the previous two years.
• The note ban has created a sense of fear in people who were evading taxes. Additional steps to tighten the hold over this category of people have been taken. These steps include:
• Bar on cash transactions greater than ?3 lakh
• Pushing businesses to make all payments over ?10,000 in digital format.
• Rationalising the costs of non-cash payments.

Other measures:

• The government has tried to give a push to the infrastructure sector by categorizing affordable housing under infrastructure. A few changes in the tax treatment have also been incorporated to incentivize builders. In addition to this, interest subventions already announced for low-ticket home loans, could increase construction activity and job-creation.
• Higher allocation has been done for MGNREGA, irrigation and infrastructure projects.
• The government has not tried to alter the indirect taxes since it aims to introduce the Goods and Services Tax (GST) in July.
• N K Singh Committee which reviewed the Fiscal Responsibility and Budget Management (FRBM) Act has recommended deviations from fiscal deficit targets due to various structural reforms in the recent past.
• The government however has stuck to its fiscal consolidation road map.

Not a Populist Budget

The government has avoided the tag of populism and taken steps such as the following:

• A commitment to confiscate assets of big loan defaulters who have fled the country.
• Clean up the electoral funding by reducing the cash donation limit from any one source to political parties from ?20,000 to ?2,000. However, the government has to make sure that there is also a cap on the number of anonymous donors.

Railway Budget – Initiatives and reforms

It was first since independence that a general budget was presented without a railway budget. The proposals under the rail budget including railway safety are:

• A dedicated ?1 lakh crore for five years for a safety fund – Rashtriya Rail Sanraksha Kosh. This fund can help in implementing measures suggested by expert panels such as the Kakodkar Committee.
• Other focus areas proposed under the budget are:
• Acquisition of advanced signaling for train control
• Elimination of level crossings for smooth operations
• Replacement of carriages of old design with the better-engineered carriages.
• On the commercial side, passenger tariffs are to be calculated taking into account costs, social obligations and competition from other modes of transport.

Indian Railways should focus on using higher capacities on identified travel corridors to provide safe, comfortable and affordable travel for all. This can be done relying on a rise in revenues from integrated freight solutions that the Budget has spoken of.

Conclusion

The budget is said to be low on populism and has received an approval from different stakeholders. It is also said to possess a long term framework for the benefit of the economy with larger reforms like GST.

Connecting the dots

• The budget is a political instrument but with ideological leanings. In light of the budget of 2017 outline the initiatives which are critical for reducing inequality and hence achieving inclusive growth.

NATIONAL

TOPIC: General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The politics behind demonetisation

A background

• Demonetisation was marketed as a move to curb “black money” as well as to combat the proliferation of counterfeit currency tied to criminal and terrorist activities.
• The short-term liquidity crunch and following disruption to the economy have been profound. The immediate effects have been setback to informal economy which is cash-based and consists of 45% of GDP and 80% of the workforce, problems to farmers who received such a blow during rabi sowing season, slowdown in construction and allied industries saw migrant labourers returning to villages and the most hard hit were the rural poor who did not have access to cash due to the low penetration of bank accounts and ATM machines outside of urban centers.
• This led to even IMF downgrading its growth forecast for India’s GDP during the current fiscal by 1%.
• Economists have come out with various analytical views and possible impact on India’s economy due to demonetisation. Their views have been divided, particularly on the question of whether a one-time penalty on undeclared cash hoardings is likely to curb the future flow and accumulation of black money.
• According to some, demonetisation will permanently change the psyche of the tax evader, while other believe that more sophisticated ways (gold and foreign bank accounts) will be generated for tax evasion and black money hoarding.
• No doubt these issues will be resolved in an extended course of time. However, it is equally important to know what might have propelled the government to take such a drastic step.

Political motives

• The decision to scrap 86% of currency in circulation cannot be baseless or an arbitrary move.
• The government has been criticised for poor implementation of demonetisation which has impacted lives of many, especially poor. However, what is worth noticing is that apart from occasional hitting out at demonetisation, the move has been largely welcomed.
• This interests the one as to why would an elected government carry out such a disruptive policy, one with visible short-term costs to the public and highly uncertain long-term benefits?

Credit hungry

• Research on clientelism on poor democracies have noted that politicians are not easily able to give credible policy commitment to voters.
• This is majorly due to weak institutions of the state. They cause a breakdown between the enactment of public policy and its implementation. This erodes the voters’ confidence for a strong policy action.
• This leads to voters not able to assign credit (or blame) for the success (or failure) of a policy. Hence, politicians have little incentive to establish policy platforms on which to compete.
• This is the reason why broadly beneficial programmes such as education and health, which critically depend on the implementation capacity of local agencies, are likely to be underprovided.
• However, this does not mean that public goods are not provided in such democracies. It has been observed that in such settings of no concrete policy action, politicians deliver public goods based on their visibility.
• They enact those features of policy on which the voters can ascribe credit or blame for. For example, in Africa where there are many poor democracies, the government expands primary schooling by abolishing school fees, for which they can claim credit.
• Though the poor implementation and quality of education services largely known, the politicians seek to reap reward by expanding access to primary schooling even when system fails to deliver quality education.

State still rules

• The post demonetisation shocks were visible in long queues outside ATMs and banks. These lines across the countries were served to reinforce the image of Leviathan’s presence.
• The display of government’s seriousness about corruption was hit on target. In addition to it, the media branding of demonetisation an anti-corruption measure further suggests that visibility was an important consideration to the government.
• It is not important if the policy achieve its economic aims or not, especially in the long run but what is achieved is that the voters have been convinced of government’s earnest efforts to fight corruption.
• State action, however punitive to the public, is a sign of political effort.
• There are chances the government wins over its voters despite the hardships caused by them because they know that if public institutions don’t function well, how is the government to be blamed for it. Thus, the govenremnt may take full credit for trying to curb black money.

Some hypotheses

• While the economic rationale of the move is being contemplated upon, there can be other political motives too which must have led to such a policy decision
• First, the ruling party needs to win assembly elections in UP. The data collected by the Association of Democratic Reforms makes it clear that compared to the BJP (65%), the election funding of SP (83%) and BSP (100%) depends much more on unaccounted money. Hence this move was aimed at hurting adversaries disproportionately.
• Second, the PM needed a fillip to his image as his flagships programmes like Swachh Bharat Abhiyan, Digital India and Smart cities weren’t helping in winning elections. And the ‘Acche Din’ were still eluding the common man. Targeting black money which was promised in 2014 could provide some material in campaigning.
• Third, now BJP is trying to be less dependent on RSS which remains obsessed with old ideas of Hindu revival. The turning point was cow protection campaign, which PM vehemently criticised but RSS did not. Thus, it was a time to move beyond certain beliefs as religion and culture fuel the organisational energy, not the economic policy.

However, none of these hypotheses have been proved. Though it is sure that demonetisation was an economic move which was politically driven.

Conclusion

The demonetisation policy has its first casualty in form of diminished faith in RBI where its independence has been put into question. Frequent rules and guidelines for deposit and withdrawal of money fuelled uncertainty. The criticism by former RBI governors and current employees and evident logistical ill-preparation indicates serious reputational damage. If the private investors lower their estimates of RBI credibility, India may lose access to capital, which it needs desperately to grow the economy. Hence, RBI needs to assure its independent existence.

The tax collection department will now have an increased role to play in collecting the taxes by unearthing the tax evaders and black money launderers. Recently released data showed that only 1% of Indians paid income taxes in 2013. This pattern has resulted into India’s tax to GDP ratio being 16.6% which is much lower than 21% average for emerging economies and 34% for OECD countries. Hence, the state has to increase its ability to catch and punish tax evasion. This is possible only with reforms in tax agencies and bringing in professionalism to the operational and managerial faces.

Thus, demonetisation may be a primarily or only political move but it should not damage the Indian economy because of its weak institutional capacities.

Connecting the dots:

• In your opinion, is demonetisation an economic or a political move? Critically evaluate

MUST READ

Since most of the articles covered in newspapers today are on Union budget 2017, it is advised to read any one paper comprehensively.