The newly-elected government in India announced a pro-growth budget that is not premised on borrowing which is in marked contrast to the second budget presented by the one-year-old Nawaz Sharif government which is heavily reliant on foreign borrowing.
The Pakistani and Indian finance ministers namely Ishaq Dar and Arun Jaitley had one thing in common: over two-hour-long budget speech that raised many questions due to a lack of supporting data. Thus like his Pakistani counterpart the Indian Finance Minister did not explain how he would achieve the targeted deficit of 4.1 percent but maintained that "we cannot spend beyond our means." He also vowed to enhance the tax to Gross Domestic Product (GDP) ratio which was reminiscent of Pakistani Federal Finance Minister's budget speech. India's tax collection is less than 9 percent of GDP considered very low by international standards.
Total expenditure was earmarked at 17.9 trillion rupees or around 7 percent higher than the year before but given the rate of inflation the rise is almost negligible. Pakistan's total budget outlay also envisaged a rise of 7.9 percent and with a rate of inflation above 8 percent again the rise was budgeted to be negligible; however our budgets are no longer considered indicative targets mainly because of massive data manipulation. Be that as it may, the Indian budgeted expenditure was nearly six times more than Pakistan's total budgetary expenditure reflecting the non-comparability of the two economies due to the difference in size.
The direct tax regime remained largely unchanged though Jaitley raised the minimum income level on which tax is payable. Tax on cigarettes and soft drinks was raised - a raise that few would not support. Jaitley also announced that the government would approve goods and services tax by the end of the year which may well allow the target deficit to be achieved.
The Indian government also increased reliance on privatisation proceeds and in this year alone estimates a 13 billion dollar inflow from sale of assets - four times what was realised by the Congress (I) led government last year. Again Pakistan is a much smaller economy and the total privatisation envisaged, considered an ambitious target given the continuing law and order problems, is 198 billion rupees (a little under 2 billion dollars).
India does not have the problem with foreign direct investment that Pakistan is experiencing and in this context the budget raised ceilings on foreign investment in defence and insurance sectors to 49 percent from the earlier 26 percent thereby still barring foreign nationals from taking majority control in arms and ammunition projects. But the Indian government did not resolve a major issue that was facing foreign firms namely pending cases of retrospective taxes with Vodafone levied a hefty 2.2 billion dollars after it acquired Hutchison Whampoa's Indian mobile assets in 2007. Vodafone won the case in the India's Supreme Court but the Indian government announced a retrospective legislation to change the rules. However, Jaitley committed to getting a committee to examine all pending cases of retrospective taxes and added that the government will not ordinarily bring any change retrospectively that creates a new liability. The Pakistani budget unfortunately did not mention any move towards resolving several issues with foreign firms that have surfaced over the years including the Reko Diq deal.
Another major decision from which Pakistan would do well to draw a lesson was the intent of the Union government to launch a sales tax reform that would unify states into a common market. In Pakistan, the Federal Board of Revenue under the guidance of the Ministry of Finance also needs to bring some sort of reform that is focused on unifying the provinces into a common market.
Pro-business and self employment budgetary measures include 50 billion rupees for increasing warehousing capacity, and 100 billion rupees as private capital for start up companies. In this context the Pakistani government has been more proactive and taken numerous measures including Prime Minister Nawaz Sharif's investment scheme which envisages 100 billion rupees as start-up loans; however the loans require collateral which has been a major impediment in the scheme's success.
The Indian budget also envisages providing assistance to the poor farmers by upgrading India's food distribution infrastructure, increasing subsidies to the fertilizer sector and extending diesel subsidies. Pakistani budget extends 14 billion rupees for DAP and around 750 rupees per bag of urea. Jaitley also budgeted 80 billion rupees for rural housing schemes, a sub-sector completely ignored in the Pakistan budget and 490 billion rupees for affordable housing through national housing bank.
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