Union Budget 2017 not very different from that in 2016; check out how

By: | Published: February 9, 2017 4:35 AM

It does appear that the government would probably also like to watch what the final outcome of demonetisation would be in terms of revenue generation as well as the GST, as there is also a compulsion for compensating the states for loss of revenue.

The ideology is important; and the government has decided to follow the path of FRBM and move towards the 3% mark in a phased manner.The ideology is important; and the government has decided to follow the path of FRBM and move towards the 3% mark in a phased manner.

Budgets probably generate the highest amount of speculative interest as it is assumed that the FM will provide a panacea for everyone in the document. It is not surprising that once it is announced emotions are normally restricted to terms like ‘pragmatic’, which can be a euphemism for not being satisfied or a ‘game changer’, which is now a well-defined bromide. On deeper thought, budgets deal with accounts of the government where income matches expenditure and there is limited flexibility in fundamentally turning things around every time. In the past it was possible to radically change duty and tax rates. But with most rates nearing the equilibrium level, at the macro stage, it is hard to do things very differently.

The ideology is important; and the government has decided to follow the path of FRBM and move towards the 3% mark in a phased manner. One may have been happier in case an additional benchmark of say 0.5% of GDP was assumed as being incremental expenditure on infrastructure or even matching the disinvestment proceeds with this heading. But, this is a call which the FM had to take either way.

However, it has to be appreciated that there are limitations to what the government can really do for in a total outlay of R21.46 lakh crore, a substantial part is claimed by interest payment (25%), subsidies (11%) and defence (13%). The toss is really between social spending and infra development, which are both responsibilities of the state. The former takes in another 15% of the total outlays, while the amount being spent on capex is around 15% of the total (R3.09 lakh crore) of which almost 30% is for defence. The FM has drawn a balance between the two which means that things would be on the trodden path.

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The revenue generation measures have been fairly conventional—tax the rich more, while giving some benefits to those at the lower income levels so that it is palatable. Those at the bottom of the income pyramid always tend to get satisfaction when the rich are put under pressure—it was the same with demonetisation earlier. The logic transcends to the area of corporate taxation where the non-small enterprises continue to pay 30%. Normally, the corporation tax and highest marginal income tax rate for personal taxation tend to converge. But a divergence has been created to bring in the revenue.

Interestingly, there has been no attempt made to actually widen the tax net, which is surprising because the speech did talk of very few people paying taxes. Evidently, this is hard to do as we have been having an identification problem all along for black money which prompted the withdrawal of high value notes which involved the entire nation. It is much simpler to tax the existing set of tax-payers as the returns are assured and as it is the higher income levels concerned, there can be no quarrel on grounds of equality and redistributive justice. It does appear that taxing the better-off is now similar to a ‘sin tax’ which can be raised without any objection from the other side.

The targeting of disinvestment is curious. One is not quite sure of whether it is the balancing item on the receipts side or a signal that there will be a big bang flow of PSU shares in the market. There is considerable scepticism here as it has become a habit to target a higher number and then fine tune other numbers when this is not possible while sticking to the fiscal deficit number. Curiously, in FY17, there was a large draw-down of cash balances to the extent of R40,000 crore, which helped to keep the fiscal deficit at a lower level. This was also a time when the disinvestment receipts fell short. Yet, the fiscal deficit number was maintained.

But assuming that this number will be targeted, the critical factor will be the state of PSUs and their valuation. This becomes a challenge as the environment may not be conducive for most of them as conditions are not congenial and it could just be that these shares are bought up by the financial institutions, which has become a historical necessity.

The Budget has also been silent in a way on further bank capitalisation as the PSBs are still trying to get back on their feet and their lending operations would be hindered if they do not have capital. Quite certainly they will not be in a position to raise capital on their own given the losses that have built up in their quest to clean up their balance sheets. Hence, the government may have to pitch in when the need arises or go in for disinvestment which is not practical given low valuation. In fact, there is a gentle scare that NPAs could increase on demonetisation as cash-strapped SMEs have been under pressure.

The window which has been left open for interpretation concerns the IDS proceeds. This does not find mention either for FY17 or FY18. In fact, by not quite talking of the gains from demonetisation in monetary terms, the Budget has kept the issue in suspension and still open to conjecture. While IDS-2 will run till March 31, if successful, then there would be a large quantum of funds available. A ballpark number mentioned in the budget would have also given one an idea of both the adherence to the fiscal deficit target as well as a buffer that can be used for specific purposes like infrastructure.

The Budget has hence moved along the known path and provided benefits along the way, though they may not be too significant. The savings on tax for low income groups cannot really push forward the consumption cycle in a significant manner. Housing has been stressed, but there has been no attempt made to enhance the tax deduction amount to really get people interested. Corporates still have to pay 30% tax (the 80-20 rule holds here and those that get the benefits of 25% taxation do not contribute significantly to the exchequer). GST impact is an unknown quantity in terms of effect on both prices and growth and hence government finances. The expenditure laid out on capex is good though not adequate and unless private investment steps in, it is unlikely to make a major difference to growth. This has probably implicitly taken into account in the Budget by assuming a moderate growth of 11.75% in GDP which involves real growth of 6.75-7.5%.

It does appear that the government would probably also like to watch what the final outcome of demonetisation would be in terms of revenue generation as well as the GST, as there is also a compulsion for compensating the states for loss of revenue. Maybe this is why it has been conservative, though pepping up sentiment by emphasising on the high statistical increases under several heads of spending.

The author is chief economist, CARE Ratings. Views are personal

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