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The Central Government will present the budget for 2017–18 on February 1, 2017. The decision to present the budget a month in advance is praiseworthy; normally the budget is presented on the last day of February. Another salient feature of the impending Union Budget is that the Railway Budget has become part of it. Expectations about the budget are unparallel this time, especially when the country faces considerable challenges from the demonetisation-induced demand shock leading to uncertainties in the economy. The problem is crucial in the rural sector of the country. Even before demonetisation, the economy was suffering from certain concerns such as increasing non-performing assets, poor investment activity, weak industrial production, rising core inflation, FII outflows and rupee depreciation. Adding fuel to fire, demonetisation has accentuated the crisis. Hence, the Government will stay away from hard measures, which may further affect the economy adversely.

Sops for Poor and MSME

Rural India, with little access to digital and plastic money, seems to be the worst hit by demonetisation. There is every chance that farmers may be given some relief to compensate for their pains. What experts believe is that the capital expenditure may rise in rural areas, particularly for roads, housing and irrigation.

Another sector adversely hit by demonetisation is MSME. There is a short-term liquidity crunch and hence more sops will be announced for the uplift of this sector. Yet, an honest approach cannot be expected in this segment; all steps will be political gimmicks.

Sector-wise Focus

In respect of sectoral impact of demonetisation, agriculture, cement, automobile, fertilisers, textiles, real estate and retail have faced a negative impact, whereas, power, pharmaceuticals, oil and gas, IT and electronics and infrastructure have had a positive impact, which is not substantiated properly.

The real estate sector that was a major contributor to GDP has been on a downslide for the last two years. Demonetisation has created a cash crunch in this sector, apart from the damage created by RERA. Having grown the housing finance market at 30 per cent CAGR in the last 30 years, there is scope for further growth considering increasing urbanisation, lower interest rates and demographic dividend. Better incentives and policies will be rolled out in the budget for the developers of the affordable housing segment. The slogan ‘Housing for all by 2020’ being a goal of the Government, one can expect some positive announcements for the benefit of the housing sector, particularly for the lower income groups. Relaxation in interest rate, hike in HRA deduction limit for salaried class, measures to standardise construction material cost etc will be part of the announcements in the budget.

With regard to other industrial sectors, the metal industry expects protectionism measures so that it can compete with cheaper imports. The cement industry expects lower excise duty as the Government moves towards providing affordable housing, whereas, the automobile sector expects special dispensation as its sales have been hit due to demonetisation. The investment in infrastructure will be very high this time, as railway becomes part of the budget. The banking sector needs special mention, as it is blessed with huge volumes of deposits. There will be additional measures in the budget to provide growth in the credit. Recapitalisation of banks may not get adequate attention this time.

Social Sector Spending

India’s spending on human capital, education and health to GDP ratio is the lowest among BRICS and lower than OECD and emerging market economies averages. It is even lower than that of comparable per capita GDP economies such as Vietnam, Bolivia and Uzbekistan. Bangladesh performs better than India in this segment. There is no expectation that the Government will reverse the trend and attitude; no surprise can be expected in the budget allocation for social sector spending. The point often ignored by all governments is that social sector spending can play a leading role in realising higher growth, lower inflation and lower public debt so that macroeconomic stability can be maintained. No doubt, PM Suraksha Bhima Yojana, Jeevan Jyoti Yojana and Atal Pension Yojana will get some allocation, which will be a continuation of the existing strategy.

Digitalisation

There will be announcements for moving the society from cash economy to less cash economy. The Government has already announced certain measures like discounts on card payments, discounts on tollbooth payments using cards, waiver of merchant discount rates when using debit cards at POS machines etc. In continuation, there will be more announcements relating to the use of debit cards, credit cards, mobile wallets and apps. There are chances for measures to provide greater access to cashless transaction modes in rural areas, especially for farmers. The companies that manufacture POS machines, finger print cards, biometric cards and micro ATMs may be given some incentives through cutting or eliminating excise duty on these items. The excise duty exemptions that will cease to exist by March 2017 may be extended. It is rumoured that import duty on the components required for manufacturing the above products may be reduced.

The question is how far the Government will address the issue of commissions and charges collected by banks and service providers, thereby lessening the burden on the customers.

Tax Rationalisation and Fiscal Consolidation

One of the key agendas of the Government has been to improve India’s ranking on the World Bank’s Ease of Doing Business index. Simplifying and streamlining tax policies will be continued. There is a possibility that corporate tax may be cut from 30 per cent to 28 per cent, as part of the stated objective of reducing it to the level of 25 per cent. MAT rate is also expected to be reduced from 18.5 per cent to 15 per cent. On the direct tax front, there is a possibility for raising the 80 C limit from Rs 1.5 lakh to Rs 2–2.5 lakh. There could be an increase in the tax rate for short-term capital gains from 15 per cent to 17.5 per cent. Reducing lock of bank deposits in tax rebates, raising the threshold for mandatory TDS on interest income etc are other expectations. Service tax may be hiked to 18 per cent in line with the GST proposals.

It is expected that the Government will stick to the 3 per cent of GDP target for the core fiscal deficit. According to the global financial services major, the Government should continue with its fiscal consolidation in a ‘practical fashion’ and stick to the 3 per cent pre-announced fiscal deficit for 2016–17, but give itself headroom for compensating states for revenue losses once GST is in place. The report of the high-level committee headed by N K Singh on ‘Fiscal Responsibility and Budget Management’ is pending with the Government. The recommendations of the committee may be included in the budget proposals. If so, the result may be a fiscal deficit target of 3.3 to 3.5 per cent of GDP. GAAR[1] will also be rolled out in the next fiscal.

Conclusion

The Government going for populist announcements amidst elections declared for five state assemblies, as they restrict the freedom to announce sops for the poor and rural sector, is a major challenge. At the same time, Indian economy needs consumption-led stimulus now, as investment is a long cycle. No doubt, investment in Research and Development must be encouraged at a higher pace. But consumption based on the strategy of social sector spending should be the spirit of the budget proposals. Sector-specific expenditure along with social sector spending is required to reverse slump in demand and not a single sided thrust on investment boost.

The anti-globalisation developments around the world must be heeded. The Brexit vote and the victory of Donald Trump in the US presidential elections are some events that would lead to a host of protectionist policies. The FM will have to evaluate the situation, while making budget proposals. Considering all these, it is apt to say that, “… it will be an unprecedented budget,” as one official spokesperson said.

  *Dr Martin Patrick is Chief Economist at Centre for Public Policy Research. Views expressed by the author is personal and does not reflect that of CPPR.

This article was originally published in The Dialogue

[1]GAAR (General Anti-avoidance Rule) is a set of general rules to check tax avoidance. These rules target any transaction or business arrangement that is entered into with the objective of avoiding tax. It was introduced by then FM Pranab Mukherjee on March 16, 2012 during the budget session.

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Dr Martin Patrick is Chief Economist at CPPR. He holds a PhD in Applied Economics from the Cochin University of Science and Technology (CUSAT), Kochi and also had a post-doctoral training at Tilburg University, Netherlands. Presently, he is a Visiting Fellow at Indian Maritime Institute, and Xavier Institute of Management and Entrepreneurship, Ernakulam.

Dr. Martin Patrick
Dr. Martin Patrick
Dr Martin Patrick is Chief Economist at CPPR. He holds a PhD in Applied Economics from the Cochin University of Science and Technology (CUSAT), Kochi and also had a post-doctoral training at Tilburg University, Netherlands. Presently, he is a Visiting Fellow at Indian Maritime Institute, and Xavier Institute of Management and Entrepreneurship, Ernakulam.

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