The NDA Govt announced its blockbuster union budget on the 1st of February, 2017. The reason I tend to call it as a blockbuster budget is because of the number of sectors & aspects referred to in this one. The Finance Minister has given a pure class in terms of the coverage of the overall economy (Although, there might have been a set of announcements for the vote bank). However, let us look at the various aspects of this union budget in detail and quickly touch upon the likely impacts of the various measures put in place.
Arun Jaitley has focused on the following broad themes of the union budget this year:
- Rural Population
- Education & youth
- Poor & the underprivileged in terms of affordable housing and healthcare
- Restoring stability in the financial sector
- Digitization of the Economy
- Prudent Fiscal management
- Tax administration, Transparency & Implementation
Let us look at each of the themes, the key aspects of announcements and the likely impact.
Amidst higher than normal rainfall in the previous, FM indicated that the agricultural sector is expected to grow by 4.1% in the current year. Although the risk of post-harvest losses continues to pose threats to the agricultural growth rate, the NDA Govt seems to be optimistic about the measures being taken for reducing the same. To reduce the same, markets reforms are expected to be put in place so that the farmers can denotify perishables from the APMC and get better prices & integration of the farmers growing vegetables with the ones growing fruits in order to reduce the post-harvest losses. This is being supplemented by NABARD pitching with their existing agricultural schemes. Credit availability for farmers has been a critical cause of concern for the Govt lately. Reforms have been announced for the same in ensuring the availability of Rs 10 Lac crores (a record allocation for any union budget) with an add-on of 60 days interest waiver scheme. Also, the critical aspect of loss cover, the FM has announced to increase the transparency of the Fasal Bima Yojana and the sum assured budgeted has been doubled as compared to the previous year. There have been set of announcements focusing on the soil quality checks and additional funding for the dairy business which adds to significant additional income for the farmer class. The reforms seem to be optimistic. However, there will be a significant amount of dependency of the harvest yield this year, the monsoon rainfalls and the extent of financial inclusion in terms of the credit flow. If all goes well, we should be able to reach the target growth rate. Implementation of the said reforms holds the key.
The reform in this sector has been heavily focused on the expanding on the MNREGA schemes. A lot of other announcements included the increase in allocations for The Pradhan Mantri Gram Sadak Yojana for better rural connectivity, Pradhan Mantri Awas Yojana for rehabilitation of the rural housing, 100 % rural electrification programs and human resource availability for the panchayat raj institutions to implement the reforms. Although the allocation to rural development has increased significantly, the expected increase in rural income response looks quite lukewarm from the past 5 years. The NDA Govt needs to revamp and reorient the existing schemes in order to support the rural population while creating opportunities for small industries in order to create a self-sufficient model.
Education & youth:
The education which does not help the common mass of people to equip themselves for the struggle for life..is it worth the name – Swami Vivekanand
The Finance Minister has given critical emphasis on reorienting the course structures in order to make them more flexible to empower innovations and a special focus on the educationally backward blocks of the economy. The NDA Govt will also be looking to push the online learning platforms, unification of the entrance exams and the boost towards increasing the reach of skill India mission. A special focus is shall be given on increasing partnership with various states for increasing the tourism-related employment opportunities with “Incredible India V2.0”. Although the FM has provided the measures to revamp education in India, the efforts are quite minuscule in nature and lacked luster in order to empower the youth with best in class education.
Poor & the underprivileged in terms of affordable housing and healthcare:
The announcements were focused towards creating the welfare schemes via various existing scheme. The structure of the implementation and the approach seemed quite unchanged compared to the previous budget. The announcements also included an Aadhar based smart card for the senior citizen for their health-related information to be stored.
The union budget this year was special since for the first time in the history of the Indian Economy, the railway budget was being merged. The announcements of the railway budget were made under the infrastructure theme of the union budget this year. The rail budget has been focused on passenger safety, cleanliness and financial and accounting reforms. The FM has set up measures in order to improve the operating ratio of the railways which have been adverse in the past 5 years. There have been no major announcements in the telecom sector except widening the existing scope of internet connectivity to the rural areas of the country. The NDA Govt will be pushing for reforms for solar energy usage in the long term. There will be set of amendments to the new Metro Rail Act in order to standardize the same across various Tier 1 and Tier 2 cities for implementations. The Govt also aims to make India the electronic hub for manufacturing. The overall infrastructure budgeted spends have increased significantly which is a good news for Indian Economic growth.
Restoring stability in the financial sector:
The Financial Investment Promotion Board (FIPB) will be phased out as 90% of the FDI investments have now started coming through the automatic investment route. A special effort is being taken in terms of the implementation for the commodity derivative market for the farmers. Cyber security related reforms have been announced in order to reduce the extent of frauds happening in the financial transactions.The Finance Minister has also announced that a number of public sector institutions shall be listed in order to increase transparency & governance. The increasing number of stress accounts in the banking sector has been one of the key concerns for the govt as well as the banks. The profitability is under immense stress because of the increasing provisions & writeoffs. The legal framework to handle such cases has been strengthed with the bankruptcy code and some key amendments in the SARFAESI Act as well as the DRT (Debt Recovery Tribunals). The allocation for the Pradhan Mantri Mudra Yojana has been increased in order to fund the unfunded and the underfunded.
Digitization of the economy:
With demonetization effects, the need for digitization has increased quite significantly in the recent past. The NDA Govt has proactively launched the BHIM App in order to facilitate payments across various bank by linking your account with Aadhar number. The FM has emphasized various reforms in ensuring the best in class infrastructure for digital payments shall be setup to empower the rural and the semi-urban population. Cheque Dishonours has been a key concern for the Govt lately since the payee does not get paid in time thus leading to the collapse of the residual cycle of the transaction. The Govt is thus considering to amend the Negotiable instruments act to reduce such transactions and benefit the payee with timely payments. Although digitization has started, it would be an ongoing process for the NDA Govt in its residual tenor as the ruling govt. However, the push for digital payments has been welcomed so far by the public at large.
Prudent Fiscal management:
The capital expenditure (which in turn contributes to the growth rates ) has been increased by 25.4 % compared to the previous year budget which has indicated a positive outlook. Another special aspect in regards to the fiscal management has been the consolidated budget of all the departments and ministries in a single budget thus providing the opportunity to improve accountability. In the case of the Indian economy, it is evident that the economy will be on a growth path provided the Debt to GDP ratio is kept under regular checks as per the FRMB committee. The FRMB panel has recommended a Debt to GDP ratio of 60% by 2023 as its long-term target and a fiscal deficit of under 3% for the next 3 years with a levy of 0.5 % basis the “escape laws“. However, amidst sluggish private investment and weak global growth, the fiscal deficit target for the upcoming year has been pegged at 3.2% of the GDP. The provided estimates breach the current mandate of the FRMB act of maintaining fiscal deficit at 3% of the GDP. Although the NDA Govt has faced challenges in keeping the fiscal deficit under control, they have managed to reduce the net market borrowing (Net market borrowings are used to finance the fiscal deficit) to Rs 3.48 lac crores as compared to 4.25 lac crores in the previous year. The fiscal management has been prudent in terms of keeping the net borrowing under checks but compliance with the FRMB act has yet another time failed and is expected to fail in the coming year as well.
Tax administration & transparency:
Tax reforms have been a major area of announcements in the union budget this year especially with the GST implementation in the next financial year. The country still looks to be struggling with the lower tax to GDP ratio as well as direct to indirect tax proportions. The Govt is expecting an increase of 17% in the tax revenues this year, thanks to the demonetization impact. To increase the availability of the unoccupied housing and reduce the levels of hoarding, the NDA Govt has announced a bold move of reducing the Long-term Capital Gains criteria of holding period from 3 years to 2 years. The Govt also has created room for reducing the LTCG tax liability by changing the base year from 1981 to 2001. This should ideally provide some mobility to the immovable property markets thus creating room for affordable housing.
SME/MSME sector has been struggling with higher tax liabilities which are at par with the large corporates. However, withstanding the existing scenario, the FM has announced that the SME/MSME sectors having turnover up to 50 crores shall be liable to pay 25% as taxes instead of the 30% levels. This will help in boosting the investments and net profits of the sector in the medium term. The long term approach should be creating such reforms regularly and making the credit flow availability for the SME sector by standardization of the lending norms for the same. The Govt & the RBI shall be the key drivers for such transformations.
On the banking front, the NPA provisioning deduction limits have been increased to 8.5% from 7.5% levels in order to reduce the tax liability for the banks on the stressed assets. The taxes were being charged on the NPA accounts basis accrued interest income. With the new budget announcements, the NPAs shall now be taxed basis the actual receipt of the interest income thus reducing the overall interest income and reducing the tax liability for additional accrued interest income.
A set of reform has also been announced in case of electoral funding. The cash donation to any political party cannot exceed Rs 2000. This would ensure that the donations are accounted for via digital transfers and the bonds which shall be issued. The FM has announced significant changes in the existing regime in order to ensure ease of doing business. Domestic fund transfer pricing taxation was becoming a process taking up an immense amount of time for assessment thus creating hurdles for the companies to plan. The same has been amended which will now consider only those companies for scrutiny where either of the transferees has a profit-linked deduction. This would enable quick & efficient assessment of the tax liability. The Personal tax has been reduced to 5% from 10% for the mass in the bucket of 2.5 – 5 lacs taxable income. Although the move shall dent the tax revenues, the same are expected to be recovered with the increase in custom duties & import duties.
The GST (the biggest reform since independence) is expected to roll out by Jul 2017. The current stage being the IGST & CGST drafts being finalized. However, the consensus on the GST rate yet looks to be far fetched. However, the expected roll out dates might be missed judging by the overall progress.
To sum up, the union budget has been quite fulfilling in terms of the coverage of the various sectors. I feel the budget has been more inclined towards the expenditure route rather than the subsidies route. There have been significant reforms/reorientation in the existing tax regime which are certainly expected to create the way forward for a much transparent & unambiguous tax structure. The markets seem to welcome the new Finance Bill looking at the bull trend recently. However, the key aspects to emphasize will be the continued inflation targeting regime, fiscal consolidation, key reforms to ease the financial sector stress situations & most importantly an accommodative fiscal and monetary policy stance. The rainfall this monsoon & the harvest yield in the first half of this fiscal year shall the weighage for the overall economic growth. As the FM rightly mentioned, I hope that we have & will continue to move:
a. from a discretionary administration to a policy and system based administration;
b. from favoritism to transparency and objectivity in decision making;
c. from blanket and loose entitlements to targeted delivery; and
d. from informal economy to formal economy