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Budget 2017: 9 things to look out for

Prachi Patil by Prachi Patil
29 January 2017
in Economy
union budget 2017-18

Image Courtesy: AsianPost24.com

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Indian economy is still trying to regain its balance post-demonetisation. Though the economic impact of demonetization is still unfolding, it is expected that Demonetisation will end up triggering a sharp slow-down in economic activity in the short run. While the agricultural and rural sector was poised for a good year due to a good monsoon, demonetisation has hit a blow to the expected recovery that was underway in these sectors. Also, as a result of the sudden liquidity crunch, consumption sectors such as auto, real estate, building materials, consumer durables, etc. and also the service sector have taken a severe beating because of their higher cash intensity. Rural consumption, service sectors comprising of trade, real estate and hotels & restaurants, construction and transport have been particularly hard hit. This slowdown, mainly in the small scale businesses, has been resulting in job losses.

No wonder Union Budget, scheduled to be presented on February 1,Wednesday, has already assumed greater importance than ever. The whole economy is expecting remedial action through this budget. Also, given the substantial political calendar ahead, upcoming budget announcement has more significance than usual as it will precede the Assembly Elections in India’s largest state, i.e. Uttar Pradesh along with the Elections in 20 States and Union Territories that are scheduled over the next 24 months followed by the National Elections.

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There are lot of expectations from this budget and one of the key expectation is that it will be an expansionary budget and more accommodative for the Government spending particularly in the rural, agricultural and micro small and medium enterprise (MSME) sector as a way to revive the effects of demonetisation. Government is most likely to focus on the sections of society which have been adversely impacted by demonetisation.

A number of measures were announced when Prime Minister, Narendra Modi addressed the nation on 31 December 2016. And some of these measures seem intended to ease the demonetisation pain; for example budget rural housing schemes, interest waiver for sowing loans, social welfare schemes and improving the ‘ease of doing business’ for traders/MSMEs. At the backdrop of this, I have tried to summarise the expectations from the Union Budget FY 2018.

Key Budget expectations:

1. A boost in infrastructure spending:
The Government is most likely to focus on the priority sectors such as Railways, Highways, Power Transmission, Rural Infrastructure and Housing in order to provide some push to the economy impacted by demonetization. Higher budgetary allocation towards Roads, Railways, Metro, Defense and Urban Infra (AMRUT) projects are likely to be seen.

In last year’s budget, amount of Rs 2,180bn were allocated to Roads and Railways combined. In upcoming budget, the Government may announce new public-private partnership models to attract private investment into the infrastructure sector, although bulk of the spending will have to be funded by the Government.

Also, higher allocation to the healthcare and education sectors is quite likely, as these are areas where India’s Government spending remains low. According to World Bank data, India spends about 1.4% of GDP on healthcare, compared to a world average of close to 6% of GDP. According to media reports, Niti Aayog has recommended a three-fold increase in public spending on healthcare and education.

In general focus in labour intensive sectors might be aimed at resolving the problem of weak investments which has hurt job growth significantly in the past.

2. Increased outlay on rural infrastructure and agriculture:
In a recent speech on 31 December 2016, Prime Minister Mr. Narendra Modi announced a mini-farm loan waiver. Farmers who have taken loans for the rabi (winter) crop from district cooperative banks and primary societies will not have to pay interest on such loans for a period of 60 days, while those who have paid will be reimbursed via their bank accounts. Though any further waivers are not anticipated, the Government may incentivise agricultural lending and investment including supply chain and logistics, and support investment in irrigation and rural roads. This will result in increased agricultural and rural productivity which in the end will generate higher employment.

It is also expected that the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), might come back into focus due to relocation of many people to villages who were employed in the construction and unorganised MSME sectors due to job losses inflicted by demonetisation. Jobs created under MGNREGA might be able to absorb such unemployed population in rural areas, which also will improve productivity in the long run.

3. MSMEs (micro small and medium enterprises) in focus:
Post-demonetisation MSME sector has witnessed a 50% fall in revenues and 35% cut on their employee force as per the study conducted by All India Manufacturers’ Organisation (AIMO). Apart from this, MSME sector is facing a challenge of the imminent implementation of Goods and Services Tax or GST. In light of these facts, it is expected that Government is liked to introduce support measures to incentivise lending to the sector and to encourage job creation and exports by the sector.

4. Ease of doing business and attracting foreign investment to remain priorities:
Since the day Modi Government came into ruling, easing foreign investment restrictions and improving the ease of doing business in India were topmost priorities. Foreign investment restrictions in sectors ranging from defence to railways were already eased and steps taken to improve the process of starting a business, access to electricity, insolvency and bankruptcy and dispute resolution. As a result, foreign direct investment or FDI have increased from US$21.5bn in FY14 to US$36bn in FY16. Being said that, to maintain this momentum Government might introduce support measures in order to sustain the FDI flows. Private equity investments have witnessed a significant slowdown of about 20% YoY in 2016 as compared to the record private equity investments in India of about US$16.8bn in 2015. Also some of the announcements for foreign investments after the ‘Make in India’ programme are yet to translate into investments. Measures such as fast track clearances, speedy dispute resolution and so on are likely to be introduced in the budget. Apart from this, there will be higher focus on tax transparency to attract foreign investment at both portfolio and direct level.

5. Promoting Cashless transactions:
Measures to incentivise enterprises and consumers for digital transactions are likely to be announced in the budget in the Government’s quest to push Indian economy towards less-cash dependency. Public sector banks will be pushed to encourage cashless transactions and digital modes of payment. There is a possibility of introducing Tax on cash withdrawal beyond a limit.

6. Affordable housing:
The Government is likely to announce measures to support the low-cost affordable housing sector in order to housing and boost investment. It might be in the form of increased outlay on its rural housing scheme (Pradhan Mantri Gramin Awas Yojana) and the likely inclusion of low-cost housing in the definition of infrastructure, which in turn would reduce the cost for developers.

7. A cut in the corporate tax rate:
Corporate tax accounts for more than 25% of the Government’s gross revenues. At present, effective tax rate for Corporate India is around 23% as against the peak tax rate of 34% (including surcharge & cess) considering the impact of loss making companies who pay lower taxes as compared to profit making companies. The Government may focus on enhanced tax compliance and a cut in the corporate tax rate. However, there is also a possibility of withdrawal of various exemptions along with the rate cut. In my opinion, Government should hold on to any changes in terms of corporate tax rate until the implementation of GST as it will give more clear picture about tax structure for corporate India.

8. Upward revision in personal income tax slabs:
Contribution of personal income tax in the Government’s gross revenue is about 18%. There might be alteration to personal income tax slabs with enhanced deductions for interest and principal repayment on mortgages. The Government could use some portion of the additional resources it has collected, by way of various amnesty tax disclosure schemes and demonetisation exercise, to provide relief to Individual assesses. In addition to that, by reducing tax liability for individuals, Government may provide a much-needed boost to the consumer-related sector.

Being said that, as increasing income tax slabs contradicts the objective of raising public revenue and the Government would want to keep the deficit target of 3% of GDP for FY18 to uphold its credibility in the market and among the ratings agencies; there is possibility that we won’t see much of alterations in personal Income Tax area.

9. Indirect taxes:
14th finance commission and GST have already reduced Government’s discretion to tweak Indirect taxes much. As a result, it is unlikely to see Indirect taxes undergo major changes, given impending implementation of the Goods and Services Tax (GST) – now scheduled for July. Service tax could however be raised to align with GST. Some luxury / sin products could also see higher taxes.

If one want to summarise these expectations from the Union Budget in short, it is safe to say that economy is looking at the revival of spending activity of the Government both in terms of capital and revenue accounts. But there is an imminent question which comes after that – from where the Government will finance this almost impossible wish list.

Where will the money come from?

1. A pause on fiscal consolidation – The Government seems headstrong to maintain its self -imposed fiscal deficit target of 3% of GDP for FY18. However, it may decide to support economic growth at the cost of relaxing this target by 2% to 3%. But this scenario looks highly unlikely as Government is expected to stick to fiscal prudence and continue its efforts to reduce the deficit.

2. Additional resources collected and expected in future – The Government has collected additional resources of about INR 730 bn in FY18 till date. There resources can be utilised for providing relief to tax payers and to under-invested areas mainly rural infrastructure and agriculture.

Also, it is expected that the Individual Tax base has widened and will keep on growing due to voluntary and involuntary declarations after the amnesty schemes and demonetization exercise. Though it is not possible to project the amount, it is certain that demonetization could help the authorities to collect additional taxes in FY18 onwards.

Overall, the general expectation from the upcoming Union budget is that it will be able to push the economic growth in FY18E and offer relief to the demonetization impact. Here is what I feel the way Union Budget will affect economy.

Likely effect:

Union Budget 2017-18 unlikely to add much to FY18 GDP growth…

As mentioned earlier, it is expected that the Government will stick to its fiscal deficit target of 3% of GDP for FY18. The focus might be on the redistribution of wealth rather than a fiscal stimulus. And such redistribution may not impact FY18 GDP growth much. On the contrary, there is a risk of investments/savings getting converted into consumption, which is not exactly a desirable outcome.

However, it may help boost GDP growth in subsequent years –

In the end the whole game depends on how Government decides to use the additional resources. If it chooses to use additional resources on capital spending, it may affect GDP growth positively in subsequent years but not immediately in FY18. However, as per the popular expectation from the Government, the additional resources are expected to utilise for compensating Individual and/or corporate tax payers for the pain incurred due to demonetization. Hence, it is highly possible that the revenue spending will be higher leaving only a small portion for capital spending. In such scenario, we won’t be able to see a substantial impact on GDP growth for FY18 or any subsequent years.

Conclusion: All said and done, it all depends on whether the Government is willing to take a strong stand and present a ‘reformist’ budget introducing steady reforms and prudent fiscal and monetary policy or whether the Government will give into the pressure of upcoming imminent elections and introduce a ‘populist’ budget.

In my opinion, the best case scenario will be to strike a balance in order to meet both economic and political needs; though it doesn’t seem to be an easy task at all.

Tags: demonetisationModiUnion Budget 2017-18
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