The first big message of Finance Minister Arun Jaitley’s Budget for 2017-18 is that it seeks to address the concerns arising out of demonetisation without ostensibly doing any harm to either the Indian economy or the government’s finances.
It applies the necessary balm to those earning an annual taxable income of less than Rs 5 lakh by reducing their tax liability by half, and brings down the tax rate for medium and small enterprises (with an annual turnover of up to Rs 50 crore, which account for 96 per cent of all Indian companies) from 30 per cent to 25 per cent. Both these segments were hit hard by demonetisation and the finance minister’s Budget seems to be offering some relief to them.
At the same time, Mr Jaitley has done no harm to the economy by making sure that he met the fiscal deficit target of 3.5 per cent of GDP for the current year and proposed to reduce it further to 3.2 per cent, even though it would mean a marginal deviation from the promised fiscal consolidation path of achieving a fiscal deficit of three per cent of GDP in 2017-18.
It must be noted that Mr Jaitley has increased the government’s capital expenditure by 11 per cent. Admittedly this is not a big increase, since in 2016-17 also, the government’s capital expenditure went up by about 11 per cent. Perhaps, the compulsions of fiscal deficit reduction forced the finance minister to keep his capital spending growth at only 11 per cent.
But the quality of expenditure proposed for 2017-18 has seen a significant improvement. The government’s total expenditure growth has been reined in at 6.5 per cent next year, compared to 12.5 per cent growth seen in the current year. And more importantly, the government’s revenue expenditure growth has been reduced to only six per cent next year, compared to about 13 per cent in the current year. A higher rise in capital expenditure augurs well for the overall investments climate in the economy.
The finance minister’s revenue numbers, however, are a puzzle. In spite of nominal growth in the economy being projected at 11.75 per cent, total gross tax revenues are expected to grow by only 12 per cent. In the current year, when the nominal growth of the economy was lower at a little below 11 per cent, gross tax revenues grew by 17 per cent.
Apparently, this may appear to be an example of conservative budgeting. But take a closer look at the break-up of different tax collections projected for next year, it becomes clear that there is an over-reliance on personal income taxes which are expected to grow by 25 per cent on top of an increase of 23 per cent in the current year.
The revenue growth projection for other taxes like corporation tax (nine per cent), excise (five per cent) and service tax (11 per cent) are fairly conservative. What this means is that next year the government’s tax man will have to remain overactive chasing higher tax collections from individuals. What shape this chase takes without the promised reforms in tax administration is anybody’s guess.
Arun Jaitley’s fourth Budget numbers are also dependent on a 60 per cent increase in proceeds from disinvestment in 2017-18. Against the actual realisation of Rs 45,500 crore in the current year, the target under this head is over Rs 72,500 crore and realisation of this target would depend on strategic sales of public sector units (Rs 15,000 crore), divestment of government equity in public sector units (Rs 46,500 crore) and listing of insurance companies (Rs 11,000 crore). This target is ambitious and the government can realise it only with the help of dilution of its stake in PSUs at a faster pace.
An area of concern is a six per cent increase in defence outlay at a time India’s armed forces are in dire need for more resources that are required to be spent on acquiring arms and modernising equipment.
The Budget is also not short on some reforms. The proposal to abolish the Foreign Investment Promotion Board will reduce discretionary powers of the finance ministry over investment proposals from abroad. The proposal for issuance of bearer bonds by banks for companies to donate funds to political parties without disclosure of their identity can help channel more resources to political parties which can them declare these funds in their annual returns whose filing is to be made mandatory.
