1. Budget 2017: Spending on infrastructure expected to go up

Budget 2017: Spending on infrastructure expected to go up

Expected flow of money due to demonetisation, alternate ways of redistribution through direct transfers, infra spending & employment schemes are major issues

By: | Published: January 25, 2017 5:09 AM
The Budget, under normal conditions, would have evinced the usual interest with conjectures on the fiscal deficit and borrowings and so on. The Budget, under normal conditions, would have evinced the usual interest with conjectures on the fiscal deficit and borrowings and so on.

The Budget, under normal conditions, would have evinced the usual interest with conjectures on the fiscal deficit and borrowings and so on. However, as this one comes just after the demonetisation scheme, it assumes a different dimension. In the course of the demonetisation process, there were several statements made by government officials and signals provided as to how the black money crusade was going to work out. As the battle began with the objective of addressing black money residing in cash, there are several expectations on how these issues will be included and provided for in the Budget.

First, the government is expected to provide ballpark numbers of the black money that is likely to be identified. The money that is out of the system, and has not been converted to deposits, would not matter from the fiscal side, as RBI has clarified there will be no transfers due to accounting mismatches in its balance sheet. Thus, the return of old notes will not be a subject of discussion.
The amount receivable on IDS-2 will be significant, even though there is time till March 31 to reveal black money and pay the requisite tax of 50%. More important, this amount will accrue in FY18 and irrespective of how it will be used, the number will be revealing. At present, some government sources have spoken of Rs 3-4 lakh crore of black money being taxed, while economists believe it could be closer to Rs 2 lakh crore. As half of this amount, which can be between R1-2 lakh crore, will come as income, it will constitute 5-10% of the overall size of the budget.

Second, related to this amount is the deployment of these revenue streams. The PM, FM and CEA had all indicated in November-December that this black money belongs to the people, and hence will be given back to the poor. The Jan-Dhan accounts would be the medium of transfer of funds. The PM had indicated his dream of getting all black money back to the country and depositing R15 lakh into each Jan-Dhan account. With there being around 25 crore accounts, the ideal amount required will be Rs 375 lakh crore, which is around 2.25 times our GDP. While this is a dream, it may be expected that the Rs 1-2 lakh crore received as tax on black money should find its way back to the Jan-Dhan accounts, which would be between R4,000-8,000, depending on the collections. While some of the Jan-Dhan accounts will be excluded for laundering old notes, a ballpark number of 20 crore accounts can receive R10,000 each, which is a good start.

Third, it was stated that the prevalence of black money kept the number of tax assesses low, which had to change. As a corollary, it was stated that tax rates could be lowered in case the taxable base increased. Irrespective of the amount declared as black money, the fact that all cash has virtually been converted into deposits and entered the formal system means it has turned white, and will hence earn tax revenue for the government in the future.

This means the government should ideally be lowering the tax rates for individuals in particular, as this class has been paying relatively higher tax rates. The choice can be increasing the exemption level or widening the brackets of tax slabs, with possibly rates also being lowered. Corporates will expect that the tax rate will come down for sure this time, as a phased reduction is already on the agenda.

Fourth, there will be interest on how the government buffers in the GST impact, considering that unearthing black money this time would mean that a large section of small units which were hitherto not paying tax would have been forced to reveal their revenue/profit. This serves as a base for implementing GST, as this section would be under the tax net. The precise impact of more units coming under the net as well as GST will have a positive impact on revenue collections and should find mention in the Budget.

Fifth, an area which would be of interest is employment in general and here the NREGA scheme will be watched closely, as it is largely believed that employment was affected in the unorganised sector in those two months, and hence there would be some focus on this section.

Sixth, the announcement made on the new year eve on interest rate subvention should find some mention in monetary numbers. The subvention of 3-4% on home loans for the low-income groups is a major sop, given though it is still unclear whether this would be in perpetuity or a one-time measure. By providing the indicative amount involved, we would also get an idea of the total loans taken by this section of people.

Seventh, additional spending on infrastructure is expected to go up this year, which could be an alternative way of deploying funds that have been received from IDS-2. With the focus on roads and railways, the government would be well-positioned to continue spending in these two areas to ensure that productive assets are created, which will work towards enhancing the welfare of the country.

Besides these direct outcomes of the demonetisation agenda, the Budget did not clearly state the Pay Commission impact for FY17 and there were conjectures on whether the provision made was 50% or 60% of the total amount of about R1 lakh crore. It is expected that the Budget would provide these numbers for both FY17 and FY18, as the amounts will be substantial in terms of having an impact on the consumption cycle which was affected by the demonetisation process. The consumer goods industry would be keenly awaiting some signal on this number.

In short, the expected flow of money due to the act of demonetisation and the alternative ways of redistribution through direct transfers, infra spending and employment schemes are expected to be the major issues dwelt on in the Budget this time.

The author is chief economist, CARE Ratings. Views are personal

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