The Union Budget FY18 is likely to have thrust on the following core areas:
The Union Budget, as an event, has always been way too much hyped in India. This was because it was the Budget, through its reform agenda, which set the tone and exulted or depressed the mood of the nation for the year. That notion, over the past two years, has changed as businesses are increasingly getting accustomed to bold reform measures being taken outside the Union Budget. In a way, the government has been making a serious attempt to bring the Union Budget closer to what it essentially is – a mere accounting and allocation exercise – while making reforms an on-going year-long process. We thus anticipate that the Union Budget FY18 would be devoid of any major or big-bang reforms/initiatives as it is likely to focus on hand-holding the implementation of the many major initiatives already taken and assurances made by the government earlier.
Yet, the Union Budget for FY18 is expected to be unique in many aspects.
Firstly, the Union Budget has been preponed, thereby allowing capital outlays and revenue mobilisation to start right from the start of the fiscal year (April-June) instead of later in the second quarter. Secondly, the Railway and Union Budgets have been merged. And thirdly, the expenditure will be reclassified as capital and revenue spending instead of plan and non-plan – providing a clear distinction between productive and recurrent spending trends. Most important that it will be announced in the framework of demonetization-induced shock to the economy, the downturn in the pace of domestic growth especially rural economy, heightened risks to global growth recovery, firming-up of global commodity prices and the delay in implementation of GST.
Under these circumstances, the Union Budget FY18 would walk a tight rope trying to maintain fiscal prudence while providing for giveaways to boost consumption. Beyond its own push to build infrastructure assets, one can expect a fresh raft of measures to spur cashless transactions and promote financial inclusion. The most important expectation from the Union Budget FY18 would be the manner in which it focuses on reviving investments in its quest to kick-start economic acceleration and create much needed jobs. Given the uncertainty already prevailing in the economy, the budget is likely to stay away from any harsh measures that could further erode the confidence of India Inc.
Under the fiscal consolidation roadmap, even as the government remains committed to reduce fiscal deficit to 3% by FY18, any slippages in budgeted disinvestment, rise in global crude oil price, need for recapitalization of state-run banks and slowing economy could pose considerable challenge to the Central Government. The Union Budget FY18 is likely to have thrust on the following core areas:
Push for Agriculture and Rural Development
When the earlier growth projections were framed, favourable monsoon, implementation of 7th pay award and transmission of policy rate cuts to the borrowers were expected to fuel the consumption demand in FY17. However, shock posed by demonetization derailed the consumption growth story especially in rural areas. The Union Budget FY18 is likely to introduce more measures to raise agricultural output with an emphasis on irrigation. The National Agriculture Market, on the cards for some time, might get a push. Use of latest technologies, high yielding and resistant crop varieties could also get a boost to raise productivity. At a time when demonetization has eroded rural incomes, the Union Budget FY18 is expected to focus on rural and skill development through a range of measures and higher allocation. The sectors catering to the rural demand could receive additional sops/benefits.
Thrust on infrastructure
Reviving investments will remain the focus area of the Government and continuing with the trend of the previous years, a range of measures and higher allocation could be expected in the infrastructure sector. The prerogatives would be not only to increase fund allocation to various schemes/initiatives, but also to ensure effective utilization of the funds allocated and fast track the execution of the various infrastructure projects. Railways are likely to draw significant attention in this space. The focus on solar power, highways and inland waterways may continue. Increased capital expenditure in the infrastructure space will be pivotal to kick-start a virtuous cycle of employment-intensive growth.
Focus on MSMEs
The Union Budget FY18 is likely to dole out incentives to the MSME sector, in view of the disruption the sector has faced in the aftermath of demonetization drive and given the crucial role the sector plays in providing employment. This could be in the form of alleviating the challenges faced by the sector in meeting their funding requirement so as to enable them to scale up to their true potential.
Ease of doing business
Corporate India can look forward to further ease of doing business and positive changes around the corporate tax rates. While the government had already spelled out the road map for corporate tax reduction to 25% over four years beginning this year, the pace of reduction could be advanced in the upcoming Budget to stimulate private investment. The Budget is likely to put an end to all the uncertainty surrounding the Minimum Alternate Tax (MAT) regime.
Giveaways for stimulating the Indian consumer
Besides the rural segment, overall consumer sentiment needs a big push. The push to consumer demand could be given either, directly by increasing the disposable income by altering the tax exemption limits (progressively taxing the higher income groups) or indirectly by making the consumer goods segment or services more affordable.
The Union Budget FY18 is expected to pave way towards increasing disposable income and thereby bringing about a revival in demand in the economy. For the salaried middle class, relaxation in personal income tax exemptions, albeit moderate, could be on the cards to boost purchasing power. An impetus to household savings could come in the form of increasing the limit of deduction under Section 80C or changing the slab for income tax.
Increase in tax payers base
Increasing the revenue collection both from direct and indirect tax in the ensuing year would be crucial. The demonetization narrative displayed the Government’s resolve to track ‘untaxed’ income and the Budget is likely to announce more stringent measures to take this forward. Moreover, with expected increase in global oil prices likely to squeeze incremental revenue opportunities in the coming fiscal, the Government would increase its focus on widening the tax payers base so as to improve the tax to GDP ratio.
While demonetization was a push (involuntary) which forced people to declare their taxable income, combining it with a voluntary compliance mechanism for declaration of taxable income would make the entire method of increasing the tax base more robust. The government would be relying on GST for indirect tax collection. However, the near term is likely to be challenging with adjustment costs for the private sector (coping with inter-sector implications of new tax rates), and the Central Government (trying to compensate states for revenue loss).
Consumer Durables and Auto components
The consumer electronics and appliances manufacturing industry has been adversely impacted following the Government’s demonetization move. An increase in import duties would help the industry in boosting local manufacturing and discouraging imports.
The Indian auto components industry continues to face threat of cheaper imports. In line with the government’s ‘Make in India’ initiative and to make India the preferred global auto manufacturing hub, the need of the hour is to provide support for new product development and to achieve world class quality. To enable the industry to keep pace with the rapid technological developments, the government is likely to provide support to enable enhanced expenditure on research & development and create the relevant infrastructure for innovation.
While concessions on interest rates for low-cost housing loans under the Pradhan Mantri Aawas Yojana have been announced a month a back, the budget too may have some incentives for the affordable housing segment such as increase in the tax deduction limit for housing loans, especially for metropolitan cities and more clarity on the income criteria and other requirements for availing this scheme.
Moderation in the deposit rates for several banks given surge in the liquidity in the banking system after demonetization has impacted depositor particularly senior citizens as they are largely dependent on deposit income. Hence the government is expected to provide some relief to this section of the society by increasing Tax Deducted at Source (TDS) exemption limit on fixed deposits for senior citizens. Further, given government’s thrust on promoting digital transactions, Union Budget FY18 is likely to provide some tax benefits on digital payments and exempt bank correspondent’s transactions from service tax. Further, given that banks are burdened with rising bad loans, the Union Budget FY18 is expected to propose a capital infusion plan for public sector banks. All eyes is on how the Union Budget FY18 would attempt to accelerate the adoption of digital payments, particularly in rural areas. More sops and incentives for cashless transactions and the makers of hardware required to power such transaction can be expected.
By Dr Arun Singh, Lead Economist at Dun & Bradstreet