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FM Jaitley stares at tough balancing act

FM Jaitley stares at tough balancing act
Presenting his third consecutive Budget, Jaitley faces the onerous task of reviving Indian economy meeting the expectations of as diverse sectors as agriculture and industry.

The finance minister has his task cut out – boost public spending, however, the challenge is from where he gets the funds to do so. For a higher growth rate, as predicted by the economic survey, Jaitley will have to garner resources to boost public spending amid adverse global economic scenario.

Rising rural distress because of back-to-back droughts have put considerable pressure on the Finance Minister to spend more on social schemes. However, he simultaneously has to send a positive message to foreign investors craving for faster reforms. With agriculture reeling from drought and lower crop prices, the government is likely to retain spending on the rural employment guarantee programme, expand crop insurance and boost irrigation outlays.

FM’s difficulties have been compounded by the huge payout of Rs 1.02 lakh crore that will become necessary on account of the 7th Pay Commission recommendations for government employees. How much he does this without compromising on the previously-announced goal of lowering the fiscal deficit to 3.5 per cent of the GDP next year is to be seen.

It remains to be seen if Jaitley will loosen his purse strings or continue to consolidate. In the event the government decides to increase spending, it would be a challenge to ensure that the funds are channelised into capital investments. Jaitley in the last two Budgets has shifted the proportion of expenditure toward infrastructure and away from subsidies.

Jaitley is also likely to fulfil his last year’s promise of gradual reduction of corporate tax from 30 per cent to 25 per cent over four years. 

It is expected that he may begin the exercise in the Budget today that may be accompanied by withdrawal of tax exemptions to keep the exercise revenue neutral. In view of sharp fall in crude prices and low probability of increase over the next one year, the government may reintroduce customs duty on imported crude, petrol and diesel, which was removed in 2011, when crude prices had increased over USD 100 per barrel. The government could increase import duty on gold, since gold imports have increased over the year and has partly contributed to the trade deficit and weak rupee on account of forex outflows.

To shore up revenues to meet the increased expenditure, the finance minister may also need to increase indirect tax rates or introduce new taxes. Service Tax, raised to 14.5 per cent last year, may see a hike to prepare for the level of 18 per cent being envisaged in the GST. Further, new cess to fund initiatives such as Start-up India or Digital India and other programmes is being speculated, similar to the Swachh Bharat cess levied last year.
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