Budget 2017-18 Tough or Tepid?
CFO|February 2017

The jury is still out on Budget 2017-18 as experts read the fine print. While the government has earned kudos for its continued focus on fiscal consolidation and balanced and broad reform agenda, there are also narratives of discontent. 

The biggest event in India’s economic calendar 2017-18, was billed as a tightrope walk for Finance Minister Arun Jaitley. Would he walk the talk or give in to populist pressures? Presented in the backdrop of demonetisation and the high-stakes Assembly elections in five states, viz., Punjab, Goa, Uttarakhand, Uttar Pradesh and Manipur, it was a crucial budget.

By most accounts, the government managed to win laurels for its restrained pro poor, pro small businesses, pro rural with an eye on long term growth budget. What has struck a chord in the finance and business community is the admirable fiscal restraint narrative against the tide adopted by the FM. Making every rupee count is something our CFOs have to juggle with at all times. Hence, the FM’s attempts at fiscal discipline in the face of raised expectation following cash ban induced slowdown, is worth examining.

Experts point out that in the last three budgets presented by Mr Jaitely, fiscal restraint is a discernible thread. At the time of the first budget in 2014, the share of borrowings in every rupee spent by the government was 28 paise, which has been brought down to 17 paise in the last three budgets (source: howindialives. com). Traditionally, governments have been on an increasing expenditure leading to budget deficit financed by increasing borrowings path. But the FM has been trying to change the course. Notably, what is easily achievable when the economy is growing fast as there can be more tax collections is being attempted when our growth forecasts are down.

The second cause of cheer was the government’s decision to walk the transition tightrope to the biggest reform in India’s indirect tax structure, Goods and Services Tax (GST). In all probability, GST roll out would now commence on July 1.

A budget of firsts, it also ushered a new era of presenting the Railway Budget along with the General Budget. Economists and experts wanted to see how the government would accomplish this feat. “There is a big monster called the Railway budget coming as part of the General Budget this year. This can sharply spike numbers on the expenditure. How will the government handle the new situation is worth watching,” to quote Dr. Devendra Kumar Pant, chief economist at India Ratings and Research (Ind-Ra).

The merger from this financial year freed the state-owned behemoth from having to deal with stressed finances and political populism. The Indian Railways can now avoid setting aside funds for dividends of about ₹10,000 crore to the government every year. Announcing two big initiatives, Jaitley said the Indian Railway Catering and Tourism Corporation (IRCTC) and the Indian Railway Construction Company Limited (IRCON) would be listed on the bourses. Among other highlights were the sorely needed impetus to railway safety by way of a corpus of ₹1 trillion for a safety fund to be spent over five years; solar power for 7,000 railway stations; redevelopment of 25 railway stations; 70 projects for construction and development through joint ventures with nine state governments; and commissioning of 3,500 km railway lines in 2017-18, up from 2,800 km in 2016-17.

The government’s decision to advance the date of budget presentation to February 1 instead of the regular last working day of the month was “so that expenditure is authorised by the time the new financial year begins”, as Prime Minister Narendra Modi earlier stated in his address to economists at Niti Aayog’s meeting on Economic Policy – The Road Ahead. How the government goes about implementing its words, will be keenly watched.

In this backdrop, the burden was on the finance minister to deliver and he is earning kudos for a cautious and balanced budget. Though the budget has been given the thumbs up by rating agencies like Moody’s and Fitch and many experts, there are indicators that raise questions on the country’s growth rate and direction of reforms.

Balanced or Skewed?

Demonetisation deflated the tyres of a speeding economy, admittedly. Though the government skimmed over cash ban effects in the budget, the severe liquidity crunch that brought growth forecasts down cannot be downplayed. The government claims that the effects of the cash ban will fade “and is not expected to spill over to the next year”, as stated by Shaktikanta Das, secretary, Department of Economic Affairs, Ministry of Finance. However, there are disagreeing voices from among experts and the people. The hardest hit was the informal sector and some experts are wondering if the digital push in the budget has come at the cost of these hapless players. The real estate, automobiles and fast-moving consumer goods (FMCG) sectors affected by demonetisation induced cash crunch, may find some succour from the budget as disposable cash in the hands of the lowest tax slab rises.

India Inc though cheered the budget was given the short shrift as their demand for reduction in corporate tax rate by 5 per cent to bring it down to 25 per cent from the current 30 per cent, remained unfulfilled. The Associated Chambers of Commerce and Industry of India (Assocham), in its pre-budget presentation, had recommended cutting down this tax to 25 per cent to attract more investment and also demanded a cut in individual tax rates and an upward revision in the exemption limit to up to ₹5 lakh. Prior to this, industry body Confederation of Indian Industry (CII) and the PHD Chamber of Commerce and Industry had also made similar proposals. The CII had asked the government to restrict the corporate tax at 18 per cent, while the PHD Chamber of Commerce and Industry suggested bringing down the tax at 25 per cent, along with cesses and surcharges.

It is pertinent to note here that Mr. Jaitley had earlier announced reduction of the corporate tax rate from 30 per cent to 25 per cent in a phased manner over the next four years starting 2015-16. However, in post budget meetings the FM and other Union ministers have been indicating it is time the industry pulled its act together. In a breakfast meeting with CEOs hosted by Open magazine, the FM said the government has done enough, the state, the Union and foreigners are all investing and “it is now time for the Indian private sector too to start investing”.

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