Budget FY'18 Has To Land On Its Feet!

What a time, what a situation, what's going on, dear o dear is how Bill Lawry the famous Australian cricket commentator would have stitched the issue if he were commenting on what to expect from the Union Budget 2017! He would not be wrong. Would he?!

Feb 1, 2017, will ring in a new date for the annual budget. It will be delivered soon after a massive demonetization drive that started with a 52-day promise but is slowly stretching towards 60 and more. The budget will also be delivered before some key states face the electoral ballet. It will also be the first time in many years rail budget will be part of the Union budget. This will also be the first time that a budget will be presented after the prime minister delivered a mini 'budget like' speech on December 31, 2016. With many firsts and the economy disrupted by a hard monetary policy, the expectations from this budget are sky high. It is in this backdrop that we need to set out our realistic budgetary expectations.

Whatever be the compulsions, India will be forced to structure its budget to meet the fiscal deficit target. There is not much elbow room for fiscal manoeuvring. Interest payments absorb almost a fifth of Indian government revenues - a consequence of high debt, which is estimated at about 64 per cent of GDP in fiscal 2016. Stabilisation of government debt ratios, therefore, cannot be compromised at any cost and more so when the global economic conditions are muted in more ways than one. This will be the 3rd budget of the Modi government. The 3rd budget of any term is usually a growth stimulator. This budget additionally will have lots of social compulsions too. While the country's economic situation needs 're-cranking', the needs of those impacted by the demonetization drive and the larger rural electorate will also have to be addressed. In more ways than one, the finance minister needs to demonstrate a Dhoni like 'situational awareness' that will truly ring in some happiness all round.

The 3 broad themes the budget will aim to address are:

Making citizens relevant again - An effort to bring back the smiles.

The government will certainly have achieved a couple of critical objectives of demonetization and one of them will have been expanding the individual tax payer pool from the exiting 2.4 mil. With more taxpayers identified the government will certainly have elbow room to reduce tax rates on income, particularly for those who earn up to Rs.10 lakhs a year. This will be a significant departure from the small populist tweaking's that happen every year on tax rates. Staying with personal taxation, there is a possibility of pension tax to be completely abolished or significantly reduced. More retained money in the wallets will certainly boost consumption in a big way. Demand pickup in key sectors will begin.

The expenditure statement of the budget in all probability will start from where the prime minister signed off on December 31, 2016. A lot of populist schemes will find higher allocations. The government will reallocate most of the limited demonetization gains into these schemes so that net burden on the budget will be manageable. Some areas that could see significant allocations are agriculture, healthcare and education apart from the now marquee schemes like Swachha Bharat, Krishi Kalyan etc. etc.

Loan waivers for the oppressed class in agriculture and related areas could be another noteworthy item on the budget agenda. This will help the government synchronise economics with politics in a very big way before the impending state elections. This will be a onetime gesture and in line with the slew of goodwill measures announced by the prime minister at the year end.

Re-cranking the economy - Reviving the private sector capex cycle, job creation MSME segment was the most impacted due to de-monetization. The prime minister on December 31, 2016, announced an enhanced credit guarantee for MSME. It is to be raised to Rs.2 crores from current levels of Rs.1 crore. This is a great opportunity for the MSME. The banks now need to look at this with equal honesty and lend. The finance minister in the previous budget announced a target for corporate tax reduction. This will be followed. However, a slightly higher reduction in corporate tax rates will not only excite the corporates, investors and connected stakeholders, it will allow corporates to plan fresh capex. Improved internal accruals for corporates and banks with more cash now than at any time in the past 3-4 years could be the right mix to kick start private sector capex cycle. This will translate into the higher number of jobs getting created and further improve efficiencies in supply chain utilisation. That can re-crank the economy.

Corporate tax reduction will also improve investment attractiveness of India. The effective corporate tax rate in India today is about 20 per cent (after considering all the exemptions and slabs). A 1-2 per cent reduction on that will amplify investment signals significantly.

The government also needs to take a look at bank capitalization plan. It had announced a 1.8 lakh crore bank capitalisation plan by 2018-19. It had promised banks with an infusion of Rs. 70,000 Cr during the period and asked banks to raise the rest. This plan needs a re-look. If the government can pump in Rs. 1.1 Lakh -1.3 Lakh crores from their side and also merge some under capitalised banks with the better-capitalised ones it will create a robust supply infrastructure to deliver to the re starting of a fresh capex cycle which is the need of the hour.

The government has overtly expressed its desire to make India a cashless economy to whatever extent it can. This will mean encouraging companies in the Digital space and startups that work with disruptive technologies and business practices. Startup ecosystem in the country is vibrant on hope and muted in terms of the way its valuations are getting marked down. The government in this budget will hopefully set out a slew of concessions for startups. That would include tax concessions on employee stock options, unlisted securities and convertible instruments etc. This should help infuse fresh energy into Indian start-up fraternity.
General Infrastructure & Agriculture Infrastructure should get focused recognition

The budget will offer a fiscal boost to the economy by ramping up infrastructure spending. Since the economy is in need of a strong stimulus to get back on track, projects with a quicker and higher return on investment like roads, warehouses etc. will get immediate attention in the budget. Larger allocations can be expected in these sectors because they can put back a lot of unskilled labour from the informal sector that was impacted by demonetization back to work.

For long Indian agriculture has been monsoon dependent. Our entire rural economy swings into depression or jubilation based on the quantum of rainfall. In order to derisk our crops from the vagaries of monsoon and sustain assured levels of grain and pulse production, the government should incentivize all investments in the agriculture sector that will ensure this. Technology in agriculture will hopefully get a big push in the budget.

This budget will throw up many challenges primarily towards the stated objective of keeping fiscal deficit under control. The complications will increase because the railways will be part of the union budget for the first time. The government should also look to tread the path of 'effective populism' as they try and please the masses post demonetization.

The need of the hour for the finance minister and the budget makers is to keep their cool and keep the country's interest paramount as they prepare the budget statement. The righting is on the wall - As the coin goes up for the toss it cannot afford to land on either side - It has to have a balanced landing! The budget on February 1, 2017, has to land on its feet!