Next week it will be time for an annual drama: The Union Budget. Once again, the news media and Corporate India will line up with outlandish expectations and once again they will be disappointed. Markets won’t care. Since 2000, on average, the Nifty has moved up a meagre 0.6% on the next trading day after the Budget, and 0.7% one month later. Indeed, the Union Budget isn’t the place to look for big-bang reform. The government has the remaining 364 days in a year for that. The Union Budget, instead, is just a statement of annual accounts and the only number that really matters is the fiscal deficit. Even on that front, there’s hardly any surprise to expect. This is because the road to fiscal discipline is a one-way street. Finance Minister, Arun Jaitley, already delayed fiscal consolidation by one year in last year’s Budget. A repeat performance won’t go down well with anyone from the RBI to ratings agencies, even India Inc.
Thus, a target of 3.5% of FY17’s GDP for the fiscal deficit next year is non-negotiable. The target appears ambitious given the sluggishness in the Indian economy, but that was the case last year as well and – to their credit – the Government is set to achieve the 3.9% target for this financial year. Since the formula worked last year, there’s no reason to be adventurous this year. Here’s how the math is likely to play out:
1. Increase in service tax: This is an easy, low-hanging fruit. Remember that the steady increases in excise duties on fuel and an increase in the rate of service tax worked wonders last year and the Government will should continue the pattern this year as well. So, be ready for an increase in Service Tax rate from 14.5% to 16%. An increase to 16% also prepares us for an eventual move to the Goods and Services Tax rate of 16-18%. On indirect taxes, this Government’s counter-cyclical policy of raising taxes as crude prices fell helped shore up excise duty revenue. So, it will be interesting to see what the Government does if oil prices rise in FY17.
2. Doing away with direct tax exemptions: Jaitley has already committed to reducing corporate tax to 25% from 30% over the next four years. So the main thing to watch out for is removal of tax exemptions for corporates. Remember what he said: “I wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away; but I thought it would be appropriate to give advance notice that these changes will start from the next financial year.” For individuals, at best, the Government could increase income tax exemption limits but there’s nothing really new in that.
3. Staggering big-ticket expenditure: The Seventh Pay Commission will cost us around Rs1 lakh crore. As this Business Standard article points out, this adds 5.5% to total expenditure next year. There is no room in the Budget to accommodate this in a single year without upsetting the fiscal deficit target. Hence, this expenditure will be staggered over two financial years. What this also means is that the room for big bang expenditure is limited. At best, you can look for increased capital expenditure from Government.
4. Improving delivery of subsidies: The fall in crude prices has helped reduced the fuel subsidy bill, but not made any major dent in the bills for food and fertilizer subsidies. However, the Government has moved to reduce fuel subsidy (restricting LPG subsidies, etc.) and improve delivery of subsidies via direct cash transfers. A forceful move forward in food and fertilizer subsidies would be the best case scenario on this front.
To sum up: do not expect anything big in the Budget. We cannot spend money we do not have on expenditure we can’t have afford. Forget a dream budget – just one which is clear in math and good in intent will be good enough for now.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50
