The annual financial statement, popularly known as the national budget, will be presented by finance minister Arun Jaitley on February 1, 2017. By preponing the budget from the last working day of February, the government wants to give a clear signal that the wastage of time in delaying the budgetary processes should be rectified, and expects to start spending from the new budget from April 1 itself.
Also, the categorisation of plan and non-plan expenditure will not be there in the upcoming budget, because of the abolition of five-year plans in the country. Everyone is eagerly waiting for the fiscal policy response of the government in the backdrop of the much-affected demonetization drive.
A well-directed fiscal stimulus is needed to compensate the decline in demand due to the withdrawal of 86 percent of currency from the market and the restrictions imposed on cash transactions. Since more than 90 percent of the transactions in the country were based on cash, the withdrawal has led to a wide range of demand deficit in the economy. Therefore, the prime focus of this year’s national budget would be to expand rural consumption of the economy and thereby, bridge the demand deficit created because of demonetization.
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Along with rural consumption, the government would try to boost spending on infrastructure and promote growth of medium and small enterprises, wherein employment opportunities have been affected due to demonetisation.
Strengths, challenges and expectations
The greatest strength of the present day Indian economy is the power to withstanding external and internal economic troubles on the one hand and achieve a consistent growth rate of over seven percent, on the other. When most of the prominent countries are still reeling under the impact of a global financial crisis, a resilient Indian economy stands tall as the sixth largest economy in nominal terms and the third largest one in purchasing parity terms among the world countries. With a rich resource of young human population, the country is expecting to overcome all economic vagaries caused by demonetization. A good monsoon and an inflation below five percent would help meet the fiscal deficit target of the government - 3.5 percent of GDP for FY17-18. The unprecedented increase in revenue due to the inflow after the introduction of Garib Kalyan Yojana and the increase in direct and indirect taxes in the kitty of the government will definitely help them keep the fiscal deficit under control. Despite the problems on growth from demonetisation, fiscal discipline will remain the top priority of the government through budget FY17-18. An SBI internal research report, Ecowrap, has pegged in a 'fiscal deficit target of Rs.5.75 lakh crore for the financial year 2017-18, at 3.4 percent of the GDP.' The report also says that higher revenues from duties on oil (0.3 percentage points higher than budgeted) should help the government achieve its fiscal target for the current financial year.
The government is likely to set the fiscal deficit target in the range of 3.3-3.4 percent of GDP for the financial year 2017-18 in the upcoming Union Budget, according to multiple research reports. For keeping the inflation under present level and to reap the benefits of demonetization policy, the government has to set the limits of fiscal discipline based on the revised FRBM act. But at the same time, for mitigating the negative impacts of demonetization, it is imminent to introduce an expansionary fiscal policy through pump priming. Thus, the government is facing a great challenge of keeping the delicate balance between achieving the fiscal discipline and expansionary fiscal policy. The political compulsions that stem from the elections of five states may force the government to let loose the fiscal discipline through and expansionary fiscal policy.
The element of uncertainty created through the postponement of GST to July 2017 and its unpredictable implications will restrict the government to prescribe appropriate policy for not only in taxation but also in general fiscal policy in India. Also, the possible reduction of revenue through the introduction GST and its sharing with state governments will reduce the size of exchequer of the government.
Since 1924, the railway budget has been separated from the main budget as it was more than 84 percent of the general budget. Now, the railway budget is only four percent of national budget, even lower than that of certain other ministries. The major challenge is the merger will lead to the transfer of huge railway revenue deficit to national budget. Also the Railways will stop the payment of the annual dividend they have to pay for gross budgetary support from the government every year.
The global slowdown started from the year 2007 is still continuing and is posing a challenge to the government in pushing its star program ‘Make in India.' Infrastructure spending should get more push through the new budget. But considering the present situation, boosting infrastructure spending should be done through spending more on labour intensive sectors, such as roads, affordable housing, agri-infrastructure, rural development, small scale industries etc. While doing that, it is very important to restrict the ‘crowding out’ effects of public spending by reciprocating a right approach in monetary policy. Investment in infrastructure is expected to increase from 2.21 lakh crore in BE16-17 to 3.2 lakh crore in BE 17-18.
In continuation with the demonetization policy, more measures and policy announcements are expected to control the black money and a push for a cashless society. Withdrawal of high-denomination currencies will not completely serve the purpose of controlling black money. Effective implementation of policies like real estate policy, binami act and FERA regulations are essential to control complete black money in the country. Aggressive push for specific policy measures are expected to initiate through the upcoming budget.
Tax sops expected
For boosting the consumption demand of the middle class, there are wide expectations about significant changes in customs duties. But considering the approach of government’s intention to restrict the inflation under targeted level, I don’t expect any major sops in direct taxes. Income tax limit of general category may enhance from the present 2.5 lakhs to 3 lakhs. If the government decides to increase the limit to 3.5 or 4 lakhs as widely expected, it is certain that the extra benefit will give only those people who are ready to invest their income in government investment. In this way, the government can please the salaried class by allowing extra one to one and a half lakhs worth of non-taxable income. But at the same time, the government can ensure that the money is not coming to the economy openly in the form of consumption demand. Moreover, this action will help the government to mobilize cheap capital for its welfare policies.
The government is set to implement the most debated tax code of the decade, General Anti-Avoidance Rules (GAAR), from FY2017-18. The current MAT rate is very high in the country and it adversely impacts the cash flow of companies. It is expected that the MAT will get reduced from 18.5 to 17.5 percent.
On the indirect tax front, no major changes in rates are expected because of the upcoming GST regime. But I expect a reduction in taxes of petroleum products, which is not under the GST. Since the elections of five states are due, the government might reduce the taxes of retail POL by 0.5 to 1 percent level. More incentives are expected to use the gadgets, which facilitate cashless transactions. Because of the huge problems in the construction sector after demonetization, tax incentives are expected to the materials used for housing sector. An indirect tax collection as a percentage of total tax revenues is likely to exceed direct receipts this year. It is widely expected that the government will impose a charge for the withdrawal of cash over and above Rs.20,000. It is also expected that the government will introduce the Bank Transaction Tax (BTT).
It is expected that actions and policies in the budget will aim to boost non-tax revenue of the central government. More importantly, greater attention to non-tax revenue is needed because of the likely decrease in the ability of governments to tap important tax bases in the wake of liberalization and globalization. Moreover, India’s pursuit to Goods and Services Taxation (GST) to rationalize the indirect tax structure involves subsuming various central and state level taxes into a single harmonized tax system for the entire country.
Agriculture and rural development
To revive the rural economy from the impacts of demonetization, more money is expected to push through agriculture and rural sector. It is expected that farmers who were hit by note ban would get some benefits in the budget to compensate for the pain. Measures to provide greater access to cashless transaction modes in rural areas and farmers are also expected. This will make the purchase of seeds, fertilizers, and other agricultural essentials easy. Allocation for agriculture and farmers’ welfare is expected to increase by Rs.20,000 to Rs.56,000 crore. Allocation of rural sector is expected to get a significant gain from 87,765 to 1.2 lakhs crores. The allocation for MGNREGS is expected to increase by Rs.15,000 crore more. Special emphasis is expected in ensuring remunerative price to farmers and enhancing marketing mechanism of the country. As we know, the financial position of the primary agriculture credit societies is in trouble after demonetisation and therefore, more measures are expected in the budget for providing adequate cheap credit to farmers. Emphasis will also be there to ensure the quality of inputs to agriculture farming.
Education, skill and social sectors
Human resource and social capital are the two important components to achieve the status of a developed country by 2030. India is the youngest country of the world in terms of its enviable demographic advantage. Sixty five percent of India’s population is below 35 years of age and it poses a great challenge to the country. Concerted efforts are needed to convert the advantage of population into human resources. It is expected that the allocations for social sectors will enhance significantly. Education and skill development are the two core areas that the government should give much focus on this budget. This is very important for moving to cashless economy and enjoying the fruits of Make in India program. Special programs are expected to enhance the quality of primary and higher education of India.
In short, the national budget for FY2017-18 is likely to set a new trend in the introduction of fiscal policy of the country in terms of its structure, status, approach and policies. This is primarily because of the various policy changes occurred in the economy like the introduction of demonetisation, stoppage of five-year plans, upcoming GST regime, aspirations to become a cashless society, etc. But it is also true that the persistent structural problems in the economy like the increase in number of absolute poor, decline in productivity of major crops, more people still on agriculture, existence of large unorganized sector etc are still posing as a major challenge for the government to push for more economic reforms. Right balance is expected from the budget to cater the need for all sections of the society.
(An economist, the author is an assistant professor with the Indian Institute of Space Science and Technology, Thiruvananthapuram)