Expectations are building that the routine vote on account may turn out to be as eventful as a regular budget.
Expectations are building that the routine vote on account may turn out to be as eventful as a regular budget. The government may roll out measures to woo the electorate. The Finance Minister may make announcements in order to please rural voters and the urban middle class. It is important to remember that the government’s commitment to fiscal prudence does not give it a significant room for pursuing an expansionary fiscal policy. The target for fiscal deficit for FY2018-19 is 3.3% of GDP, GST collections do indicate that meeting the fiscal deficit target will be tough. The government has divested Rs 35,134 crore against the target of Rs 80,000 crore during the current financial year and there could be shortfall on this account as well.
We believe that fiscal slippage will be minor, which can be managed by either expenditure control or by asking PSUs for higher dividend.
The farm sector needs structural reforms that would take time to have an impact. However, some steps to alleviate stress in the near term are highly likely. The PM has ruled out farm loan waivers. The most likely step would be a cash transfer or DBT, in lieu of subsidies. In addition, we expect some income support scheme. Certain other measures are likely, such as changes in crop insurance scheme. Also, we expect an increase in agricultural credit flow as well as increase in spending on rural infrastructure.
The comprehensive review of direct taxes is pending and may take time. The government may, however, tinker with the current slabs to please the urban middle class. The most possible scenario is raising the minimum tax slab from Rs 2.5 lakh to Rs 5 lakh. Also, there could be an increase in exemptions for senior citizens. A hike in deductions under Section 80C from Rs 1,50,000 to Rs 2,50,000 cannot be ruled out.
On the corporate tax side, the threshold for the 25% tax may be increased. Currently 25% tax is applicable to firms with revenue less than Rs 250 crore. This may be hiked to Rs 500 crore. In equity markets, currently both long term capital gains tax and STT are payable. We would like to see this anomaly being corrected either by removal of STT or providing credit for STT paid when calculating capital gains tax. The current tax policy imposes a burden in the form of double/triple taxation on dividends and some rationalization would be welcome.
The government may give an outline of the much discussed Universal Basic Income for the poor. However, given the short time, it is unlikely to be implemented this year, but may figure in the budget speech and party manifesto.
On infrastructure, we would expect allocation for the next budget to be upwards of last year’s, i.e. Rs. 5.97 tn, with focus on flagship initiatives like Bharatmala, Sagarmala, housing, sanitation and water needs. We also expect railway allocation to focus on modernization like electrification of tracks and passenger safety. Rationalization of inverted duty structure in the capital goods sector is needed to provide a level playing field to the domestic industry. While the government has recently provided some relief to start-ups from rules for Angel Tax, the industry feels it is inadequate and further relief may be granted in the budget.
Overall, we expect the vote on account to be expansionary and populist, with an attempt to win votes from farmers and the urban middle class. However, we don’t expect the government to break the bank. This will be a delicate balancing act. The government will need to raise revenues, and for this we expect a higher pace of disinvestment in the coming year.
(By Rajiv Singh, CEO-Stock Broking, Karvy)