A budget that is more than the sum of its parts delivers some significant changes
28-Feb-2015 •Dhirendra Kumar
The big picture in Arun Jaitley's first full budget is one of simplicity. The overarching themes are self-evident: infrastructure, and a new social safety net while maintaining reasonable fiscal discipline. No one can argue with that, except those who wanted a 'Big Bang' of some sort. This search for a Big Bang didn't turn up much, especially because there was no preset definition for what kind of a bang would be big enough. Big Bang now joins inclusive, pro-poor and other such terms that can be claimed to apply or not apply regardless of evidence. In any case, the hunt for the Big Bang appears to have been little more than the hunt for headlines. As the Economic Survey pointed out, a sustained gradual approach would certainly work better under almost any circumstances.
I would say that the biggest bang will come in the future, from the usage of what the Economic survey calls JAM. There's the announcement of the mass insurance scheme and the pension plan in combination with the JDY and the shift of subsidies to direct transfers in Aadhar-linked bank accounts. This points to the creation of a social safety net that would have looked all but impossible some time ago. If this can be executed as it has been planned, it would certainly be a big bang whose effects will accumulate over years.
From a savings and investment perspective, the budget starts a shift that should have happened years ago, which is the move from EPF to the National Pension System. So far, we have heard an absurd situation since the launch of the NPS. Government employees' pensions have been managed in a modern system by private investment managers (NPS), while private employees' retirement savings have been managed by the execrable EPFO, which, to use Mr Jaitley's own description, doesn't have customers. Instead it has hostages.
Now, private employees will have the option of using the NPS instead of the EPFO. While there may be some devil in the details (e.g. can existing EPFO balances be moved to NPS?), the bringing of NPS centerstage has the potential to improve and enlarge the retirement savings of a huge number of Indians. Coupled with this, the enhancement of the tax saving limits for the NPS means that a whole new deal for retirement savings for all employees of private companies. Firstly, the limit on deduction on account of contribution to a pension fund and the new pension scheme increased from ₹1 lakh to ₹1.5 lakh. Additionally, there is an enhanced deduction of ₹50,000 for contribution to the new pension scheme under section 80CCD. This means a higher tax free limit, including that on the employers' contribution to the NPS. More important than the tax saving itself is the facilitation of the shift from the EPFO to the NPS. Along with the attendant shift from the ESI to any other health insurance, these changes show a new, welcome thinking on allowing more efficient solutions.