Finance minister Arun Jaitley put up an eloquent defence of demonetisation, calling it a tectonic policy step akin to the goods and services tax and flagging its potential to boost tax compliance, but projected a rather modest 12.3% increase in tax receipts in 2017-18 and a very economical 6.6% rise in the Budget size.
While many analysts expected the Budget to give a big impetus to consumption and crowd in private investments with elevated capex, Jaitley chose to settle for a slow recovery of the economy and stick to fiscal prudence. He met the 3.5% fiscal deficit target for the current year, despite big shortfalls in disinvestment and spectrum receipts, pegged the 2017-18 fiscal deficit at 3.2% of GDP and vowed to achieve a recommended 3% in the following year.
The wariness was despite the entire windfall from the note ban in the form of higher taxes under the new income disclosure scheme Pradhan Mantri Garib Kalyan Yojana has been budgeted for the next year, with a projected nominal GDP growth of 11.75%. Obviously, the minister has reckoned that a tax revenue jump of 17% each in 2015-16 and 2016-17 has come from transient rate hikes, rather than buoyancy. Also, tax dividends from demonetisation could be much lower than anticipated.
The minister did not invoke the escape clause of a 0.5% digression from the 3% deficit limit proffered by an FRBM review committee (it also said the focus must shift to debt-GDP ratio, a suggestion the minister endorsed). While the Budget in relation to GDP is slated to shrink to 12.7% in 2017-18 from 13.4% in 2016-17, the quality of consolidation saw improvement, with the revenue deficit reducing by 0.2 percentage point each in both 2016-17 and 2017-18.
The Budget estimates will require the government to borrow a net Rs 4.23 lakh crore from the market for 2017-18 — a net supply of Rs 3.48 lakh crore and a buyback of Rs 75,000 crore. The government’s borrowing plan for 2017-18 did not upset the demand-supply dynamics and so the benchmark 10-year bold yields moved little. With fears of an increase in capital gains tax on equity removed, the Sensex zoomed 486 points or 1.8%.
Allocations for the farm and rural economy saw a significant increase — though not as much as the government would have us believe — and a part of this could have a multiplier effect, but the Budget outlays for infrastructure sectors like railways and roads were less impressive. Capex via the Budget is estimated to rise just 10.7% in 2017-18, exactly at the same rate as in the current year — in relation to nominal GDP, it is hovering around 1.85% in the three years through 2017-18. Revenue spending, which grew 13% this year thanks primarily to the Seventh Pay Commission award, will, however, be squeezed — the increase for 2017-18 is just 6%. This could also mean that disbursal of housing allowances — 30% of the spending obligation from the pay panel or about Rs 35,000 crore — might be deferred. The railways’ operating ratio in 2017-18 is projected at 94.5%, hardly any improvement from the current year, when it slipped from the Budget target. Its capex, largely outsourced, would increase marginally from Rs 1.21 lakh crore this year to Rs 1.31 lakh crore.
Despite the halving of the tax rate to 5% to income up to Rs 5 lakh (with other measures, the net give-away on direct taxes will be Rs 15,500 crore), personal income tax is expected to yield Rs 88,000 crore or 25% more than the current year in 2017-18, thanks primarily to PMGKY. But the bonanza from the Reserve Bank of India ceasing its liabilities on the demonetised currency notes that haven’t returned to the banking system is not accounted for. With GST being ushered in from July, indirect taxes haven’t been tinkered with. Given that GST compensation to states could be a potential Rs 30,000 crore liability on the Centre in 2017-18 and that assorted cesses (which don’t need to shared with the states at present) will have to subsumed in GST and become shareable, indirect tax growth is pegged at just 8.8%.
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When it comes to strategic sales of PSUs or the market-based tariffs for the railways, the Budget hasn’t been particularly aggressive, nor has it gone to the other end by launching the much-talked-about universal basic income scheme. While time-bound listing of central PSUs is promised, disinvestment proceeds, including strategic sales and listing of general insurers, is projected at Rs 72,500 crore next year, up from a revised estimate of Rs 45,500 crore in the current year. The estimate for strategic sales in 2017-18 is Rs 15,000 crore (against a drastically cut Rs 5,500 crore this year). The Budget, however, sought to send some strong signals to the investor community of India’s openness by proposing to disband the Foreign Investment Promotion Board in 2017-18 and rescinding a potential tax on investors in India-registered foreign portfolio investors on redemption of units.
Presented ahead of elections to five state assemblies, including the politically paramount Uttar Pradesh, the Modi government’s fourth Budget provided a glimpse of redistributive resource transfer policy by imposing a new surcharge of 10% on incomes between Rs 50 lakh and Rs 1 crore (the current 15% surcharge on income above Rs 1 crore will stay) and limiting a 5-percentage-point cut in corporate income tax rate to companies with turnover up to Rs 50 crore. Given that small companies are relatively more employment-intensive and their effective tax rate is much higher than that of the larger ones that utilise assorted tax incentives, the differential rate could help in broad-basing economic growth. More incentives — including the infrastructure tag — were given to affordable housing, a focus area of the government, eyeing electoral dividends and multiplier effect on the economy stuttering with below-potential growth.
A modest start was made in bringing transparency to political funding — parties can now receive only up to Rs 2000 in cash donations per source, against Rs 20,000 earlier; also, they can receive donations by cheque or digital mode and issuance of electoral bonds will be initiated to mobilise public funds for political spending.
On the sticky twin balance sheet problem that is bogging down corporates and banks, the Budget did not provide any new solution. Tuesday’s Economic Survey had proposed the creation of a public sector asset rehabilitation agency to take charge of the “largest, most difficult cases, and make politically tough decisions to reduce debt”. In a significant initiative that could help free up capital held up in public-private partnership (PPP) projects mired in disputes, Jaitley promised to set up a institutional mechanism under the Arbitration and Conciliation Act to resolve disputes in the PPP sector.