After demonetisation, Budget 2017 makes concerted effort to stimulate economic activity: ICRA’s Naresh Takkar

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Published: February 4, 2017 3:14:23 AM

In light of the slowdown in the GDP growth after the note ban, the Budget has made a concerted effort to stimulate economic activity through a combination of modest tax cuts and higher spending, while remaining committed to paring the fiscal deficit.

money, tax saving, surcharge @10% 5% union budget, budget 2017, taxpayers, arun jaitley, finance ministerThe Budget has reduced the corporate tax rate for firms with a turnover below Rs 50 crore to 25% from 30% to improve their competitiveness and level the playing field with bigger firms.

In light of the slowdown in the GDP growth after the note ban, the Budget has made a concerted effort to stimulate economic activity through a combination of modest tax cuts and higher spending, while remaining committed to paring the fiscal deficit.

The Budget has reduced the corporate tax rate for firms with a turnover below Rs 50 crore to 25% from 30% to improve their competitiveness and level the playing field with bigger firms. It has also introduced a palliative in the form of a cut in the personal income tax rate to 5% from 10% in the lowest tax slab, which would boost consumption sentiment to a small extent.

Notable spending measures include enhanced allocations on sectors such as rural infrastructure, affordable housing and transport, which would reduce supply side barriers and boost job creation. Moreover, the enhanced allocation for the MGNREGA would improve the social security net in the rural areas.

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Compared to ICRA’s estimate that PSBs require ~R45,000-50,000 crore of total Tier 1 capital in FY2018, the allocation of R10,000 crore for bank recapitalisation appears inadequate. However, this may have been necessitated by the need to display continued fiscal consolidation; the Budget has targeted reduction in the fiscal deficit from 3.5% of the GDP in the revised estimates (RE) for FY2017 to 3.2% of the GDP in the Budget estimates (BE) for FY2018. Notably, the latter is slightly higher than the recommendation of the NK Singh Committee and the rolling target of 3.0% of the GDP that had been proposed in last year’s Budget.

In terms of the fiscal math, the higher 10.7% growth in capital expenditure compared to the 5.9% rise in revenue expenditure in FY2018 BE relative to FY2017 RE would mildly improve the quality of spending. Despite rising oil prices, the fuel subsidy estimate of Rs 25,000 crore made in the BE for FY2018 appears to be adequate up to crude oil prices of $58-60 per barrel.

The Budget has factored in step down in dividends and non-tax revenues from other communication services in FY2018 BE relative to FY2017 RE. The forecasts for nominal GDP growth (11.75%) and gross tax revenue growth (12.2%) may be slightly optimistic, particularly if the introduction of the GST brings with it the complications that the Economic Survey warned about. The ability to meet the disinvestment and strategic divestment target of Rs 72,500 crore (0.4% of the GDP) would be critical to achieve the government’s fiscal consolidation plan.

The gross dated borrowings of R5.8 lakh crore in FY2018 are lower than forecast. With the drop in bank deposit rates, the government has factored in a pick-up in inflows from small savings schemes. If the latter doesn’t materialise, the market borrowing figure may need to be revised upward.

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