The die has been cast. Departing from the earlier tradition, the Union Budget this time will be presented to Lok Sabha on February 1. Explaining the rationale, chief statistician and secretary department of statistics TCA Anant told the media that: “The preponement has been done to permit government expenditure from April 1. The purpose will be to shift the profile of government expenditure, and expenditure will be shifted to the earlier quarters of the year.” It is common knowledge that government expenditures get bunched at the end of the year and government departments race to expend their budgets in the last months of the financial year that ends on March 31. Anant said that in the present scheme of things sometimes the formal authorisation for spending does not come before June. This reduces the window available for expenditures and lead to less than optimal spends.
What Anant and other government officials did not say is that this year’s will be the last full year budget from this government. General elections slated for the first part of 2019 means that the NDA government can only present a vote-on- account (or an interim budget next year to be followed by a full budget by the government after the elections are over). It is natural that in the pre-election year, the government would want to maximize its spending (targeted and focused) – to improve the electoral prospects of the ruling party. Therefore, it is a great idea to be able to spend from as early as possible. Which is why, a February 1 budget is more enabling than a February 28 budget.
While it is not possible to predict with precision what delights Finance Minister Arun Jaitley would offer to the public, the general expectation is that a lot of focus in 2018-19 will be on the rural economy. The farm sector is in distress and this came out clearly in the just-held Gujarat election. Although the ruling BJP won for the sixth time consecutively in Gujarat, what was patently visible was a rural-urban divide. Though Modi’s popularity remained untarnished in urban Gujarat, in the rural parts it was a different story. Gujarat is just not a state but an important one because it’s the Prime Minister’s home state. Thus the elections for Gujarat were followed that is if the nation had gone to polls.
The focus on the rural economy will be targeted to create more jobs in the villages and enable farmers to earn better incomes and improve their feeling of well-being. The incentives could take the form of higher procurement prices for farm produce and more funds for creation of more rural infrastructure and better crop insurance. The latter will have a spin off in creating jobs in the construction sector in rural areas. Job creation is very important because the yield of the agricultural sector is not increasing. But a huge number of people are employed in agriculture and they are underproductive. This is clear from the fact that agriculture now contributes only 12% to the GDP, but employs 40% of the labour force. These people engaged in agriculture have to be shifted out to other activities in the rural economy and hence the finance minister may possibly provide funds for constructing rural roads, bridges, godowns etc. Since the displaced farm labour for whom these activities will create jobs have little expertise or technical skills, a larger outlay under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) will be made available. Historically, the quality of assets created under MGNREGS has been poor making it a dole of kinds. But this year the government will not bother about such niceties.
Fiscal Deficit And Growth Rate
An important parameter by which a budget is judged is the fiscal deficit. By all accounts, the fiscal deficit targets have been met by the government in the last years. But it seems difficult this year considering that India’s fiscal deficit touched 96.1% of the budgeted estimated at the end of August. This happened because with a downturn in the economy, the government had to pump in more moolah to keep it running fast. The fiscal deficit target for 2017-18 is pegged at 3.2% of the GDP or Rs 5.47 lakh crore. Last year’s target of 3.5% was met and so was the 4.1% for 2014-15. In all probability, this fiscal deficit target will be exceeded albeit government officials exude confidence that it won’t be. International rating agencies like Moody (which has recently upgraded the rating of India) also predict a higher deficit: “Lower government revenues than planned in the budget and somewhat higher government expenses could lead to a higher deficit.” The NK Singh committee on fiscal consolidation has recommended that the fiscal deficit go down to 2.5% by 2022-23 in a gradual manner. It had recommended fiscal deficit to be cut to 3% in 3 years (from last year) but allowed some ‘escape clauses.’ These clauses allow relaxation of fiscal targets of 0.5% of GDP in case of structural reforms leading to unanticipated fiscal implication. The adverse impact on tax collections due to implementation of GST can be invoked this year for relaxation of fiscal deficit targets. However, it is possible that by a sleight of hand (meaning reclassification of some expenditure) the government can show better fiscal targets).
However, it is a fact that higher government expenses were targeted at revving up the economy which seemed to have been enveloped in the earlier part of the year by a demand recession. Similarly, government collections were reduced by a cut of Rs 2 in excise duties in petrol and diesel from October onwards. This will lead to a loss of duty collection of Rs 13,000 crore (and Rs 26,000 crore for the whole year) but were targeted to place more money in the hands of consumers. As a consequence the growth rate in the economy is showing signs of recovery. At 6.3% for the period July- September, this is a smart recovery from 5.7% in April- June. In the period January – March, growth rate was 6.1%. However, agencies like the World Bank, Asian Development Bank and OECS have revised downwards the projections of growth rate for 2017-18 blaming it on the impact of demonetisation and GST. These agencies expect growth to claw back in 2018-19.
In the good old days, it used to be said that the Indian budget was a gamble in the monsoons. If it rained well, crops would be bountiful, farmers would have more income and this would translate into higher demand and more tax collections for the government. Nowadays, it is more apt to say that the Indian budget is a gamble in international oil prices. About 80% of India’s oil needs have to be imported and therefore the country is greatly dependent on global oil prices. Due to internal compulsions of the Oil and Petroleum Exporting Countries (OPEC) international prices fell and this eased India’s import bill and acted as a positive for the Indian economy. But now the prices have again started rising what with the OPEC deciding at the end of November to enforce production costs all through 2018. Whereas oil prices ruled at $51 a barrel in October, it rose the next month to $63 a barrel. What will happen to oil prices in the next few months is a matter of conjecture, but will add to the worries of Finance Minister Jaitley in a pre- election year. If the prices start climbing, then the minister will have to raise resources in other ways to keep the budget in control and also ensure that the economy does not falter. This is going to be the X factor in the forthcoming budget.
In some ways, the budget is all about tax rates. There is a demand from apex industry bodies to reduce corporate tax rates from the present effective rate of 30% (after exemptions) – this is 25% for companies below a turnover of Rs 50 crore- to 18% (inclusive of exemptions). Industry argues that will establish India as a hugely attractive place to do business. True that this argument might be, in this pre-election year the government is unlikely to cut corporate taxes. But by the election logic, the government might proffer tax concessions for individual by reordering tax slabs. Presently the top rate of 30% for personal income tax is levied on taxable incomes to Rs 10 lakh per annum. Even the direct tax code recommended in 2009 that this slab be relaxed to Rs 25 lakhs. Similarly, there is a case for relaxing the 20% level (which is presently for incomes between Rs 5-10 lakhs). It is quite possible that the government does away with income tax at the lowest level of 5 per cent levied on incomes between Rs 2.5- 3 lakhs per annum).
With the GST council in place, the budget is unlikely to have any proposals regarding indirect taxes. But analysts would prefer if the government would outline its thinking that could be made into concrete proposals and brought before the GST Council later in the year. This would include whether petroleum products will be brought under GST and whether the 12% and 18% GST rates will be merged.