Budget 2017: The Reality

The FM presented the first Budget of Independent India where the Railway Budget was subsumed with the General budget; the segregation between Plan & Non - Plan expenditure has been dumped. It is a workmanlike budget without flourishes; no bad news is good news, sighed the market, relieved that a LTCG (Long Term Capital Gains) Tax has not been introduced & rewarded the FM with a rally.

The FM leaned on the IMF data that predicted the world economy to grow by 3.4% next year vs. 3.1% this year & India 7.2% next year & complimented himself for achieving an inflation rate of 3.5%, CAD of 0.3%, FDI of 1.45L crores in H1 (36% growth)& $361 billion reserves. He then proceeded to lower Fiscal deficit to 3.2% for next year & promised lowering debt to GDP ratio to 60% progressively to keep the rating agencies happy; lowering the borrowing target for next year to 3.48 lakh crores is a signal to the RBI to drop interest rates. In this tight rope walk, the Budget, however, has shrunk in size as a % of GDP next year as compared to this year, laying bare the promises of a “Modi Stimulus” blared on national TV from the last few days.

The FM quietly sneaked in listing of the PSUs in his budget speech without mentioning the divestment target of 72500 crores which would have invited accusations of selling family silver during the impending state elections. If he does achieve the same, it will be truly transformational. Abolishing FIPB, though welcome, does not mean that everything is under an automatic route as clarified by Economic Affairs Secy. Shaktikanta Das; sectors like Telecom, Defence etc. would still need approvals. That the rules governing FDI, would be released a few months hence indicates that the govt. still continues to make announcements before thinking through the fine-print.

Introduction of the “Thin Capitalization” rule means that company’s interest cost in excess of 30% of EBITDA cannot be tax deductible; this could induce better financial prudence from companies & help Govt. net a higher tax revenue too; highly geared companies would face an uphill task, though, in the short run.

The overall impact sector wise:

Industry

96% of these companies were rewarded with a reduction in the corporate tax (CT) rate from 30% to 25% which could spur investments & job creation. The MSME sector accounts for 45% of the GDP & 80% of the workforce; thus all MSMEs & more would benefit since the rule applies to all companies with a turnover of under 50Crores. CII which had demanded a CT to be dropped to 18% were miffed but the Govt. gains in shedding the tag of “Suit Boot Ki Sarkar”

3.96L crore capital expenditure, with a major 2.41 Lakh crore in the transport sector (Railways: 1.31L; Roads: 0.64L) though welcome, might not unleash the animal spirits of the economy.

Agriculture

The FM, incredulously, promised that agricultural growth would continue to grow by 4.1% without unveiling the plans. Plans to double farmer incomes in 5 years too are still unknown. About 50% of the population are dependent on agriculture although it accounts for only 14% of the GDP; this data point, though, is sufficient, to indicate that this is crying for investment.  Enhancement of farm loans to 10 Lakh crores, apart from the PMs announcement on 31^st Dec of a 60 day interest waiver were the only concessions. While a muted rise in MSP during the last few years has kept inflation in check, a strategy to achieve the BJP’s manifesto promise of a 50% increase in farmers’ incomes in 5 years is yet to be unveiled; advise to farmers to diversify incomes by adding animal husbandry, pesi-culture etc. are not helpful enough. E-NAM to connect mandis to ensure that farmers access a national market, though welcome, is a slow burn. The govt. has now recommended removal of perishables from the ambit of the APMC; states like Bihar have rightly abolished the APMC but that strategy alone has not helped agriculture become profitable. While Investments are an urgent need for this sector, the budget merely promises to circulate a contract farming model act to the states.

Against a budget of 38500 crores, for NREGA, the Govt spend 47500 crores in FY 2016-17, possibly to cushion the distress of demonetization, negating the PM’s stand against the ACT in Parliament earlier. A further increase this year to 48000 crore, with a promise for more, along with a shift towards asset creation, is welcome. The UBI (Universal Basic Income) thought triggered by the Economic Survey would cost about 5% of the GDP while the NREGA costs only 0.3%. NREGA has the advantage of self-selection too; UBI would be a dole transferred to the account of a poor man without any need to work while a poor man would have to work to get NREGA wages.  

Transferring, however, the 2.3L crore of subsidies - Food, Fuel & Fertilizers - through DBT (Direct Benefit Transfer) to the recipients, is welcome since it would be more directed & would also eliminate leakages. Subsidies account for about 1.7% of GDP & along with NREGA 2%.

Services

No specific measures to the service sector in the budget. An increase in the ST rate to 18% was not announced, perhaps paving the way for multiple service tax rates in the GST; the budget too expects a 11% increase in service tax revenues this year as against only 5% for excise.

The reduction in the lowest slab of IT (2.5 - 5 Lakhs) would be welcomed by the 1.95 crore people who file taxes in this bracket since it translates into Rs 12875/- gain. The FM announced that the reduction in tax would lead to an outgo of 15500 crores; 2700 crores, though, is recovered through a 10% surcharge on the salary bracket between 0.5 – 1 crore, translating into a minor stimulus of about 12800 crores which coupled with the OROP rises, 7^th Pay commission wages & the likely wage increases to be announced by the states could spur consumption.

The reforms in political funding mooted by the FM include Electoral Bonds & mandatory disclosures - of contributions received beyond Rs 2000/- against the current norm of Rs 20,000/- - is nothing but hogwash. Political funding smacks of quid pro quo & anonymity helps the culprits which calls for greater transparency. It is also true that ruling parties target the funders of their opposition who might therefore demand anonymity. The solution suggested by the FM neither supports anonymity nor transparency; banks that issue electoral bonds would have the data regarding the identity of the funder & the parties who have redeemed the bonds which if accessed by the govt. of the day would continue harassment. Lowering of the disclosure norm to Rs 2000/- would only increase the workload of the accountants who would now show 10 times the no. of funders.  Transparency in elections is a sine qua non & all political parties should be mandated to reveal every paisa received as funding; simultaneously, mandatory disclosure of expenses at the booth level by all political parties, monthly, regulated by the EC & open to a hawk eyed opposition shall bring a genuine transformation in our polity. 

Conclusion

To circumvent the twin balance sheet problem – banks loaded with NPAs & the private sector gasping for breath because of a debt overhand – a huge increase in public spending & an aggressive FDI invite were needed. The budget, unfortunately, fails to give a massive push to investment in a bid to retain fiscal prudence; a larger disinvestment target to fund investments while still retaining a fiscal deficit target of 3% would have been a better choice. Treat this budget, therefore as more of consumption & less of a massively Investment driven one; it is a political budget which pressed all the right buttons to influence the impending state elections. Only time will tell if the govt. has indeed achieved its economic & political objectives.