The government has its task cut out. In the upcoming Union Budget 2016-17, while on one hand Finance Minister Arun Jaitley would try to spur the economy with measures to increase spending and investments, on the other hand, he would have to walk a tightrope on letting the country’s public finance slip out of its control with a rising fiscal deficit.
Here are the five outcomes the government will hope to achieve with this Budget:
- More disposable income at the hand of the taxpayer:
The government, in an order to ease the pain of the people reeling under the impact of demonetisation, would try to raise the availability of disposable income at the hand of the taxpayer, most likely with relaxation in taxes. The options available with the Finance Minister include changing tax slabs, raising the exemption limit from current Rs 2.5 lakh, and increasing the limit of deductions on investments under section 80C and other sections. Further, the government will also strive to simplify the corporate tax structure in order to provide some relief to companies, especially MSMEs (Micro, Small and Medium Enterprises).
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- Boosting the farm income:
Jaitley will seek to provide the required impetus to the agriculture sector in order to move closer to the government’s objective of boosting the farm income. Earlier last year, Prime Minister Narendra Modi had said the government would double India’s farm income by the year 2022. The government had also more than doubled the agri-budget to Rs 35,984 crore for the year from Rs 15,809 crore with an aim to boost the agriculture sector. The budget was meant for various initiatives including bringing 585 agriculture market mandis on electronic platform by the year 2018. In this budget, other such measures are expected that would aim to increase farm produce and incentivise the farmer.
- Move towards cashless economy and digitisation:
The government has sought to increase the share of digital platforms in monetary transactions, ostensibly to stem the use of unaccounted wealth and keep a better record so as to eventually increase the tax base. To this end, Jaitley may announce further sops on digital payments, or disincentives on cash transactions. He may levy a charge on cash payments and cash deposits, and bring more cash transaction under the radar of PAN (permanent account number) tracking by tightening the threshold for quoting PAN on cash transactions to Rs 30,000 from Rs 50,000. Further, the government may also announce levy of cash handling charges – money charged when making deposits, or making government-service payments in cash above a certain number of currency notes, or above a certain amount. The government has, since demonetisation, has announced incentives on using digital wallets in forms of cash-back on making payments for various utilities such as petrol and daily dairy supplies. Indian government has also built India Stack – a set of open APIs contributing towards a digital infrastructure to facilitate cashless and paperless delivery of services through electronic verification, data transfers, digital lockers and more. India stack has drawn praise as being a cutting-edge system from Microsoft’s Bill Gates and Google’s Sundar Pichai. Earlier December, a government panel had also recommended de-incentivising cash transactions, citing India’s cash-GDP ratio of 12% – the highest in the world. The panel sought to bring this ratio down to 6% in three years.
- Economy push:
The Budget has two immediate tasks cut out: assuage the shock received by private consumption from demonetisation, and bolster faltering investment demand, CRISIL Research had said in a note earlier last week. As people and businesses try to claw back to normalcy after the move to demonetise high-value currency notes, the government’s top priority is to contain its negative impact on GDP to the minimum possible. Yesterday, the government’s Economic Survey for the current financial year 2016-17 forecast a temporary dip in real GDP growth at 0.25-0.5 percentage points relative to the baseline on the back of short term pain inflicted by demonetisation. The focus will be on pushing job creation by supporting more labour intensive sectors, such as low-cost housing, roads, MSMEs, etc.
- Maintaining fiscal deficit:
The government has a tough task of walking the tightrope between maintaining fiscal discipline by sticking to the targeted limit and kick-starting the consumption-investment cycle. Short of a miracle, the government will find it difficult to achieve the target of limiting the fiscal deficit to 3% of GDP in the next financial year 2017-18, as laid out in the FRBM Act, CRISIL Research said in a note. “India will have to prune its fiscal deficit by Rs 280-350 billion from the level in the previous fiscal”, depending upon the nominal GDP growth in the year, it added. However, relaxing the upper limit to more than 3.3% of GDP would send negative signals and spin the government finances out of control. Further, the government is expected to have lesser room to earn revenue next year from duties on petroleum products and telecom spectrum sale. With rising oil prices, the window to hike excise duty could narrow, as the government might have to rescind the hike that was brought into force when oil prices were sliding, while revenue from spectrum sales in fiscal 2018 will likely shrink to Rs 550 billion. Jaitley could well look to enhance revenue target from tax and non-tax sources such as stake sale in PSUs.