Budget 2017: Expectations

Despite protests by the opposition, the govt. has secured a Supreme Court approval & an Election Commission concurrence, with caveats though, to present the Budget on Feb 1^st. While preponement of the General Budget makes eminent sense, to ensure a quicker disbursal of funds to the states, presenting the same this year after Mar 8^th – after the conclusion of the assembly elections to the 5 states – would have been morally suasive to avoid any undue advantage to the incumbent, especially when the same is seen as a semi-final before the 2019 final.  That the govt. insisted & got its way indicates that some sops are in the offing to obliquely influence electoral outcomes, camouflaged as benefits for the entire populace.  Expect therefore a populist budget.

Subsuming the Railway Budget with the General Budget, though, is welcome for the Railways can now operate under the radar, away from populism, to rectify its distressing financials.

Five broad principles shall guide the Budget preparation

(1)Stimulus to the economy post Demonetization

India’s growth could shrink from 7.6% last year to 6.6% this year, as per median estimates, due to a tepid global economy & demonetization. An agile finance ministry would however ensure that the fiscal deficit would be maintained at 3.5% by playing around with the tax rates on petroleum.  While the commitment as per FRBM (Fiscal Responsibility & Budget Management) Act was to meet a fiscal deficit of 3% by FY18, it could in all likelihood be pegged between 3- 3.5% for next year, since Finance Minister (FM) Jaitley signalled such an outcome during the 2016 budget speech; he shall now be armed with such a recommendation from the NK Singh committee too.  This move is welcome especially when the private sector is reeling under the impact of low utilization & is in no position to enhance investments even with a corporate tax reduction or a dip in interest rates – another of their pet asks.

Expect an infra push in roads, railways & inland waterways. While ports too would be an ideal candidate, for investment, the opposition from the port unions for corporatization to raise money has tempered the govt. launch of port based China style mega Industrial cities one in AP & the other in Gujarat is however likely to spur manufacturing & job creation.

Analysts have been alluding to the Trump triumph & his commitment to reduce corporate tax (CT) rates to 15% to spur investment & hence job growth. A roadmap to reduce CT to 25% without exemptions has been announced by the FM earlier. In a bid to avoid the tag of “Suit Boot Ki Sarkar” to stick, the govt. would marginally reduce CT by 1-1.5% this year & announce a concession on the personal income tax front too; the later could drive consumption. Parity demands that the peak income tax rate be reduced to 25% with an option to pay either at 25% without exemptions or 30% with exemptions; the other two personal tax slabs, of 10% & 20%, likewise, can be dropped to 5% & 15% respectively. This shall be the most widely welcomed direct tax reform which shall have election traction too. Demands for enhancing standard deduction or slab amounts might not be accepted since only 1% Indians pay income tax & accepting either of those demands might reduce the fig. further.

(2)Incentivize cashless Transactions aka Digitalization

Experts opine that the informal economy in India is about the size of the formal economy.  Demonetization even with its flawed implementation & gaming of the system by interested parties has left some trail which could help in enhancing the size of the organized sector if cashless transactions are incentivised.

For individuals payments upto Rs 1000 vide plastic (Credit/Debit) attracts a transaction charge of 0.25% & upto 2000, 0.5%. Mohan Guruswamy opines that a Rs 100 note has a lifetime value of 1lakh courtesy 1000 transactions & costs Rs 1.8/- to print. However if the same is taken through a digital transaction at the lowest slab of 0.25%, it would mean the citizens expending Rs 25, much higher than the cost of 1.8/- for printing the note. Therefore, there is an economic story to drop the transaction cost to 0.01%. The govt. is better served implementing his recommendation instead of concentrating on capping the MDR (Merchant Discount Rate) on PSU banks only. Pushing for Aadhar based transactions apart from mobile payments is also necessary but by keeping costs nominal.

It must however be mentioned that despite 87% of Kenya’s GDP passing through MPesa in 2014, Kenya is 145 out of 176 countries on corruption perception index 2016 released by Transparency International indicating the digital transactions per se might not lead to a reduction in corruption. Therefore, while not recommending a police state it is necessary that the govt. uses big data to do the needful in a non- intrusive manner.

(3)Strengthen the Indian Defence Establishment in a troubled neighbourhood

India needs to be prepared for a war on two fronts – Pak & China. The Indian Defence Budget is at about $40 billion against Pak’s $8 Billion & China’s $150 billion. While India cannot match their combined spends, focus has to on outcomes than outlays especially when there is less of fiscal space; expect a further push to “Make in India” to resonate in the budget.

The governments’ strategy to spur nationalism by invoking the armed forces as a metaphor is commonplace & surgical strikes raised the crescendo.  They would be keen to ride such a wave again while entering the electoral fray.  However, unless matched with increased spends, this propaganda would be seen as mere rhetoric, which would be suicidal, especially when forces – including those from the paramilitary – are sharing viral videos of food, facilities or arms inadequacies.  The govt. could use an emotional sentiment to fund the forces as a route to sell family silver: the Public sector insurance companies & other un-revivable units would see disinvestments & an outright sale respectively; an overall budget target of about 1 lakh crores in disinvestments is not unlikely.

While Modi rightly hinted on Dec 25th that Capital market participants should contribute more through taxes for nation building, the FM quickly intervened to clarify that it was not a signal for introduction of Long Term Capital Gains Tax (LTCG). Likewise, a proposal for making foreign companies with more than 50% of their assets in India to pay indirect transfer taxes while exiting their investments has also been kept under cold storage with an intention not to spook the markets. Logically, the tenure of Short term Capital Gains (STCG) for listed securities should be equated to that for the unlisted ones which is currently at 2 years; however, to achieve a higher disinvestment target these proposals could be kept under abeyance. GAAR (General Anti Avoidance Rules) would however be effective from April 2017.

(4)Support for the Marginalized

The Rangarajan committee recommendation pegs Indian BPL figs at about 30% of the population.  While the traditional wisdom doled out to the populace is that the govt. has been supporting these marginalized sections through subsidies – Food (1.34L crore), Petroleum (0.27 lakh crores; 0.20 lakh crore on LPG & 0.07 lakh crores on Kerosene) & Fertilizers (0.70 Lakh crores) – accounting for about 2.3 L crores yearly, the same is not entirely true. Food stocks in the Food Corporation of India rot due to lack of storage spaces & has been diverted to liquor firms; mills make merry too.  Kerosene subsidy has contributed more towards adulteration of petrol & hence pollution rather than reach the intended recipients; transferring money through Direct Benefit Transfer (DBT) for buying 2 solar lanterns & removal of kerosene subsidy makes eminent sense.  Fertilizer subsidy is transferred to the producers & black marketing of this farm input is rampant; neem coating to prevent its use in chemical industries has helped only marginally.

The govt. cannot announce rationalization of the Kerosene or Fertilizer subsidy before the elections, an announcement through an executive order after Mar 11^th is not unlikely, if the electoral results are favourable to the BJP.

Since the CEA (Chief Economic Advisor) has indicated that the new economic survey would contain a large section on Universal basic Income (UBI) it is reasonable to assume that the govt. would announce more DBT for the marginalized. Transferring Rs 500 per month to the bottom 30% of the population (about 40 crores) would entail an expenditure of 2.4L crores; replacing subsidies with the UBI makes economic sense for it shall mean targeted subsidy.  While 111 crore Indians have already enrolled for Aadhar, this announcement would spur the others too to embrace Aadhar quickly.

Interest subvention of upto 4% for low cost housing has already been announced by the PM on Dec 31^st 2016.

The salaried class would be incentivized through increase in Deductions allowed under Sec 80C from 1.5L to 2L; Infra bonds could make a comeback. Doubling the exemption on medical reimbursement from 15K to 30K would give much joy. Change in LTA regulations that currently mandate pay-out for only 2 travels in a block of 4 years should be changed to a yearly pay-out & should include expenses on food & lodging rather than travel expenses alone; excluding foreign travel, though, would make sense to spur domestic tourism.  Pension income could become tax free & income upto 4L left tax free to provide relief to senior citizens.

 (5)Attack Black Money

The govt. would announce its continued resolve to tackle black money. Indonesia had announced an amnesty scheme with a  tax rate of 2- 10% on black money & succeeded in eliciting massive declarations in assets, since the amnesty seekers  were cowed by the fear that they shall have no place to hide once the automatic exchange of information between countries rolls out in 2018.  While the tax rate is low it propels disclosure thereby creating a perpetual stream of income. A replication of the same avoids legal & diplomatic battles & is hence economically pragmatic although it could invite accusations from the opposition of being soft on the bourgeoisie.  While this would serve as one of the best bets to fund UBI, the Govt. would be wary of such a strategy.

Conclusion

In short it will be a political budget to soothe the frayed nerves of a section of the populace reeling under the onslaught of demonetization. While the usual noises on public investment & support for job creation through start-ups support would continue, only the informed are willing to vouch that job creation of 1.2 crores per annum is a mirage. Hopefully the FM will skilfully juxtapose the political with the economic & announce a budget that is truly “transformational”.