New Delhi, February 1, 2017

Finance minister attempts a clean-up job, keeps projected expenditure growth low

Presenting the Union Budget for 2017-18 on Wednesday, Finance Minister Arun Jaitley attempted a clean-up job across the board – including on macro-economic indicators, some troubled sectors, and on tax compliance. A major impact on the Budget drafting process was quite evidently the decision by the government last September to demonetise high-value currency notes.

Jaitley chose to deviate from the exact path of fiscal consolidation slightly, budgeting a fiscal deficit of 3.2% of gross domestic product in 2017-18 instead of the previously projected 3%. However, he did still shrink the deficit, and promised to hit the 3% target in 2018-19. The six consecutive years of fiscal consolidation by successive governments add up to a visible and credible commitment to macro-economic stability in India.

Jaitley stayed true to fiscal consolidation partly by keeping projected expenditure growth low, at only 6.5% – although overall nominal GDP growth has been projected at 11.75%. In order to finance spending, Jaitley has relied heavily on personal income tax, expected to grow almost 25% in 2017-18.

This increase in personal income tax will come in spite of a halving in the tax rates payable by those with incomes between Rs 2.5 lakh and Rs 5 lakh, from ten to five%. This will be partly offset by an increase in the tax rates further up; a new slab of taxpayers has been created, with income between Rs 50 lakh and Rs 1 crore, who will pay a ten% surcharge on their taxes. Jaitley explained his tax cut as a “reward” for honest taxpayers, and presented statistics on the extent of tax evasion in India, which he called “largely a tax non-compliant society”. To reduce evasion, he banned cash transactions of more than Rs 3 lakh.

Other measures also bore the imprint of demonetisation. The FM said the Budget had been crafted to put a special focus on the rural and agricultural sector and the poor, among others – sections hit hard by the currency withdrawal. He declared an expansion of the electronic agricultural marketing mechanism for produce, and also of the funds allotted to irrigation. Over the year 2016-17, the rural employment guarantee scheme spent almost Rs 47500, a 23% increase over the Budget allocations – a sign of possible rural distress. Jaitley allocated a similar amount to the scheme for 2017-18 as well.

The digital economy, also a focus of the demonetisation exercise, received further boosts from the Budget, with a regulator being promised within the Reserve Bank of India and specific tax incentives offered for digital payments. The last Budget provided some incentives to start-ups; this one relaxed the criteria for accessing them.

But perhaps the most important post-demonetisation political point in the Budget was a proposal to clean up the financing of political parties. The ceiling for individual donations in cash was proposed to be lowered to Rs 2,000 from Rs 20,000, and a system of “election bonds” announced which would both reduce the reliance on cash to fund elections and also preserve the secrecy of political donations.

The stock market climbed steadily after the Budget speech to hit a three-month high at closing. The Sensex closed 486 points higher, a gain of 1.76%. Real estate stocks did particularly well, going up 20% on average, after the sector – also battered by demonetisation – received particular attention in the Budget.

Other drivers for the market included some tweaks to the ease of doing business. The long-term capital gains tax was left untouched – except for reducing the holding period for immovable property to be considered long term from three years to two. Jaitley announced the phasing out of the Foreign Investment Promotion Board, which raised hopes for easier processes for foreign direct investment into India. High-quality foreign portfolio investors also received clarity on how indirect transfers of shares would be taxed.

In spite of his tight leash on spending, Jaitley continued to try and increase capital expenditure, which he says would be Rs 3.1 lakh crore this year (an increase of only 10% over the Rs 2.8 lakh crore spent last year). This year, the Railway Budget was for the first time consolidated with the general Budget. Rs 55,000 crore was earmarked as Budgetary support for the Railways, contributing to a total capital and development expenditure of Rs 1.3 lakh crore. Transport overall received a 20-per-cent boost to spending over the Revised Estimates for 2016-17. Calculating capital expenditure became considerably simpler and clearer in this Budget, the first without the artificial division into Plan and non-Plan expenditure.

Another boost to spending is likely to be provided by the various provisions for the real estate sector. A big development is that affordable housing projects will be given “infrastructure status” when it comes to loan disbursal. Promoters of affordable housing projects were given a package of tax incentives last year which made more attractive in this Budget, including by lengthening the permitted completion time of eligible projects. In addition to the changes to their capital gains tax exposure, builders with a large stock of unsold houses will no longer have to pay tax on imputed rental income.

Meanwhile, revenue is being boosted by proposed disinvestment receipts of Rs 72,500 crore. In 2016-17, Rs 45,500 crore was realised from disinvestment, a shortfall of 20% over the Budgeted amount. However, this year a “time-bound” mechanism for the listing of public sector units was promised. A new exchange-traded fund with public sector shares is to be launched. Some enterprises run by the Railways will be subject to disinvestment this year, including IRCTC – which would be the first central digital entity to be listed.

Sector-specific moves included a halving in the Customs duty on liquefied natural gas (LNG) to 2.5%, which is expected to benefit petrochemicals firms. The electronics sector continued to be a focus area, with more money for incentive schemes like M-SIPS and EDF, which received Rs 745 crore.

There was some disappointment among larger companies when it came to the corporate income tax, however. Jaitley continued to delay his promised decrease of the overall rate to 25%. This year, he reduced the tax rate to 25% for those companies with an annual turnover of below Rs 50 crore, which he said were 96% of tax-paying companies. He also specified that minimum alternate tax, or MAT, would continue to be charged.

Another concern was the spending on defence. Although increased by 3.2% over last year’s Revised Estimtes, it will be only 2.14% of India’s GDP next year, down from 2.29% in the current financial year. In 2016-17, the defence ministry underspent its capital allocation by 8%.

Some of the omissions in the finance minister’s speech were notable. Smart cities did not find a mention, for example – and the outlay for smart cities and AMRUT (the Atal Mission for Rejuvenation and Urban Transformation) actually went down by almost six% this year.

[The Business Standard]