Friday, January 1, 2016

Finance Minister Arun Jaitley's innings in 2015: Solid start, sedate end

Like a vast majority of Indians, Finance Minister Arun Jaitley is an avid cricket follower; so it may not be out of place to describe how 2015 panned out for the finance minister through a cricket analogy. Many say it was like the Indian cricket team's batting line-up of the late 90s -- a solid start by the openers would fizzle out because of indifferent performance by the middle and lower order.

While policy watchers and the markets are more rational in their judgement than the average emotional cricket fan, there is a sense of disappointment over the performance of the government's nodal ministry led by a person who is also the Modi government’s trouble-shooter.

Jaitley got off to a solid start when in February he presented one of the most fiscally pragmatic Budgets in recent times. By delaying the fiscal consolidation roadmap and going for a 2015-16 fiscal deficit target of 3.9 per cent of the gross domestic product instead of 3.6 per cent, the minister provided an additional space of around Rs 70,000 crore for infrastructure spending. The year-on-year directtax growth projections in the Budget were also more realistic compared to previous years. It was a Budget that accepted the fiscal challenges that the government then faced.

It was also a Budget which promised to boost public-sector investment in infrastructure at a time when private corporate balance sheets were stretched. Jaitley gave assurance that low oil prices would be taken advantage of and there would be savings on the subsidy front. Jaitley also promised to streamline tax laws and dispute resolutions.

But things didn’t work out according to the plot, starting with the issue of Minimum Alternate Tax (MAT) for foreign portfolio investors. Jaitley's claim that the outstanding MAT demand from FIIs was a staggering amount of Rs 40,000 crore spooked markets. Just in the month of May, FIIs pulled out more than Rs 14,000 crore from the markets. It was left to Minister of State for Finance Jayant Sinha to clarify that notices were being sent for a cumulative outstanding demand of just Rs 608 crore.

Then the Central Board of Direct Taxes (CBDT) issued new income tax forms which ran into 14 pages and asked for bank account details and foreign trips. They were withdrawn after a backlash but the incident clearly showed a lack of coordination between the Finance Minister's office and the Revenue Department.

Meanwhile, there was no end in sight to the legacy tax dispute cases like that of British telecom major Vodafone and energy company Cairn Plc. The government and the companies concerned have appointed arbitrators and Revenue Secretary Hasmukh Adhia said earlier this month that the government was open to out-of-court settlements for legacy issues. However, this sentiment has been expressed earlier as well and a quick resolution to these cases seems unlikely.

The biggest disappointment, however, has been Jaitley's inability to form a consensus with various stakeholders in the Opposition in passing the Constitution Amendment Bill for Goods and Service Tax in the Rajya Sabha. As the Opposition parties, especially the Congress, dug in their heels, the Finance Minister had to fend off corruption allegations against his cabinet colleague and External Affairs Minister Sushma Swaraj in the Monsoon Session, and against himself in the Winter Session. The original roll-out date for GST of April 1, 2016 now looks impossible and the government is pushing for rollout in October 2016.

The logjam in Parliament also affected the passage of a number of other crucial reforms, including the bankruptcy bill.

Other disappointments include a lack of policy action on strategic stake sales of loss-making state-owned companies, a substantial paring down of the budgetary disinvestment expectations from the original target of Rs 69,500 crore for the year, an expected Rs 50,000 crore cut in direct tax receipts, and the Rs 4147 crore worth of assets declared under the three-month black money compliance window as against internal expectations of about Rs 20,000 crore. What hasn’t helped jaitley’s cause is the fact that rural consumption has still not picked up, manufacturing growth has not been broad-based, and North Block's own GDP growth forecast for the year has been slashed to 7-7.5 per cent from 8.1-8.5 per cent.

There have been some positives though, like the encouraging indirect tax collections so far this year (up nearly 35 per cent year-over-year till November end), increased capital spending (up 31 per cent year-over-year till October end) and wide-ranging banking sector reforms under Indradhanush.

Will the year ahead be easier for North Block? Unlikely, as the government faces a massive additional spending burden of nearly Rs 1 lakh crore due to One Rank One Pension and Seventh Pay Commission and the Budget needs to maintain public spending momentum. Meanwhile, Chief Economic Advisor Arvind Subramanian has said that the benefits from low commodity prices may not be as substantial next year and there is a need to reassess the fiscal consolidation roadmap.

Jaitley’s also needs to ensure that the promised tax reforms come into fruition an

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