Expect small sops, prepare to pay more
The 2017-18 National Budget to be presented in Parliament shortly before the process of Assembly elections starts in five states, including heavyweight Uttar Pradesh, is most unlikely to be a soft or a populist one. The reasons are simple: the government can't afford to be in a giving mode with its expenditure in the coming financial year set to go up by over Rs.2,50,000 crore to be close to the Rs. 23,00,000 crore mark. And, the government has to raise lots of additional resources to meet the income-expenditure gap. The sources of revenue are less elastic than one would wish. Things would have been much less difficult if the country's GDP could show a 7.6 per cent growth — projected before demonetisation — for the current fiscal. The latest IMF estimates bring India's GDP growth rate down harshly to 6.6 per cent. That would make the next financial year's budget making hardly comfortable. Also, the latest centre-state compromise on somewhat truncated GST, which may come into effect earliest by July 2017, will put further pressure on the Central government's originally projected revenue aspiration on account of the new taxation system.
A stable tax regime is vital for any economy and its growth. The government's hands are somewhat tied to fiddle with indirect and direct tax proposals beyond a level. They aren't advisable either. Yet, there is a case for increasing the maximum exemption level for tax calculation and rearrangement of direct tax slabs to encourage more people to come under such tax net. It is a shame that the world's ninth largest economy does not have even two per cent of its adult population paying income tax. The corporate tax too needs to be lowered for the benefit of the sector and its better compliance. Conversely, the government could raise indirect taxes on conspicuous spending on luxury and also unhealthy consumption of goods such as gold, upmarket products, fast food, fizzy drinks, alcohol and manufactured tobacco. The government could still try to sweeten the budget by offering small sops for minimum level direct taxpayers, delaying interest recovery from farmers, giving small incentives to MSMEs and startups and making minor changes in indirect taxes for the benefit of the common man. Providing some relief to exporters, marginal farmers and modest tax burden on essential imports is a standard budgeting exercise. However, there may be more hidden or not so well specified tax burden on industry and consumers in the budget to help the government mop up revenue to pay for its massive expenditure. For example, higher petroleum prices, following the OPEC decision to cut oil production, may well improve the government's indirect tax income while it will hurt almost all industries and consumers.
Also, it could be a matter of concern that the non-tax revenue kitty too may be under pressure. The government's dividend income from public sector banks and other PSUs may drop substantially in 2017-18 due to shrinking business, sales, and net profit. The impact of it would be clear by June 30, 2017. Purely from the market point of view, it would be unfortunate if the government indulges in distress sale of PSU stocks or sell their fixed assets in a depressed market to raise funds to support its enhanced expenditure, next fiscal. The only other option before the government is to increase borrowing. However, high additional borrowing does not appear to be a desirable option either, even for a short term. India's external debt at end-March 2016 witnessed an increase of 2.2 per cent over its level at end-March 2015, primarily on account of a rise in outstanding NRI deposits. The external debt to GDP ratio stood at 23.7 per cent at end-March 2016. The Reserve Bank has already warned the government against the growing public debt. Just weeks before the Union budget, RBI Governor Urjit Patel's message for the Narendra Modi-led BJP government was: 'Cut down on borrowing and spend on public infrastructure to improve productivity.' He referred to the IMF data to show that the country's deficit is one of the highest among G20 countries. "In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade," Patel said.
The GST, after the latest compromise, will substantially lose its brand as a unified indirect tax regime. The national budget will have to find ways to balance the revenue expectations of both the centre and the states. The more it tries to give away, the more it will have to find the means to take away. In the end, the industry, business, and consumers may all be at the receiving end. Thus, the budgeting exercise, this year, is going to be much tougher than earlier.
The BJP-led NDA government will have a little more than two full financial years to go to end its current term and prepare for the next Parliamentary election. Post demonetisation, the government is under pressure to bring about the next phase of structural reform of the economy. The government expenditure needs to be focussed on public infrastructure for lasting gains on the GDP front. Investment in public transport, roadways and railways, urban MRTS, air and seaports, telecommunication, low-cost housing and sanitation, pollution control is of utmost importance. For all these investments, the government will require a lot of funds. And, they will restrict the government from preparing a mid-term please-all budget now. Honestly, a short-term vote-on-account budget would have probably pleased top Union Ministry of Finance officials involved in the preparation of the final budget document.
(The views expressed are strictly personal.)