An exercise in caution

 

 

Source: By Alok Ray: Deccan Herald

 

 

The Union Budget 2017-18 is the first post-demonetisation budget designed to mitigate the adverse (economic and political) fallouts of the unprecedented experiment as well as falling private investment, which is the biggest problem facing the economy. Otherwise, the economy is in fairly good shape as inflation is under control, both fiscal and current account deficits are down and more FDI is coming in despite the global slowdown in FDI flows.

 

However, the 'twin balance sheet' issues - rising bad debts of banks and the corporate sector - continue to haunt the economy while the bonanza arising out of falling oil prices is coming to an end and the rise in Federal interest rate is pulling out more FII (foreign institutional investor) money from other emerging economies, including India.

 

Finance Minister Arun Jaitley has reduced income taxes for the lowest tax bracket from 10% to 5%, provided a tax rebate of Rs 12,500 for people earning more than Rs 5 lakh while imposing a new 10% surcharge on income from Rs 50 lakh to 1 crore per year. He has also reduced taxes for 96% of business firms - the so-called MSMEs having a turnover of less than Rs 50 crore.

 

The FM has also proposed to bring in a legislation to confiscate the assets of people who flee abroad to avoid taxes. Jaitley has announced that the income tax department would pursue cases of lakhs of accounts (thrown up by big data analytics) where the big cash deposited does not match with income tax returns. The basic purpose behind these moves is to placate the aam aadmi and the small firms which had to bear the brunt of demonetisation and the resulting cash shortage.

 

At the same time, the government wants to project the impression that it is pro-poor and is keen to tackle the problem of black wealth. This is all the more necessary since most of the demonetised currency, contrary to initial expectations, has come back into the banking system. Another much-touted step to curb black money is that the anonymous cash contribution from a single source to a political party would be limited to only Rs 2,000 (as against Rs 20,000 at present). Any contribution above this limit would have to come in the form of cheques or purchase of electoral bonds which would not bear the names of contributors (though, the banks selling those bonds would apparently have names of the contributors in their books and the government and the tax authorities would be able to pursue them, if they wish).

 

So, it remains doubtful whether big contributors would be interested in buying those bonds as they would like to remain anonymous for both economic and political reasons. The escape route of Rs 2,000 in cash would probably be used by political parties to hide their source of funds by simply declaring most contributions as coming through small cash donations of Rs 2,000 each. Bundles of the new Rs 2,000 notes would come pretty handy here.

 

The basic reason behind falling private investment is the existence of excess capacity in many sectors and, therefore, there is no need to add to capacity by new investment. Creating demand is the need of the hour. The government wants to give a boost to expenditure by spending more on NREGA (25% more allocation), infrastructure projects in roads, rails, irrigation, affordable housing and providing tax breaks to SMEs (considered the biggest job creators all over the world) which would keep more funds in their hands to reinvest, (But, are funds the real constraint or is it the lack of demand?).

 

Higher budget allocation, tax reliefs (such as reducing the holding period for long-term capital gains on immovable property from 3 to 2 years) and incentives to affordable housing is also expected to boost construction activities which, again, are a big job creator in many sectors through various linkages. Consecutive good monsoons and higher rural income would be another source of additional expenditure.

 

The government seeks to improve the 'ease of doing business' by abolishing the Foreign Investment Promotion Board (FIPB) which is a duplicate source of red tape for FDI when more than 90% of FDI comes through automatic route and the protection of sensitive sectors (like defence, media etc) is ensured by clearance from respective ministries in any case.

 

Fiscal consolidation

 

There is an ongoing debate on whether the government should stick to its fiscal deficit targets or relax it to stimulate public investment when private investment is at an all-time low. The FM has chosen the path of fiscal consolidation by sticking to 3.2% of GDP (a slight departure from 3% target which the international credit agencies would hopefully condone) in the 2017-18 and then 3% in the next year.

 

More importantly, the earlier laid-down revenue deficit reduction path (revenue deficit - the excess of a government's consumption expenditure over current income - is a better measure of fiscal irresponsibility than fiscal deficit) is being followed. The pushing of cases against large cash depositors would hopefully bring in significant additional tax revenue as many of them may choose the path of paying extra taxes to avoid hassles from the tax authorities. This is another windfall from demonetisation which would come in handy for the FM to balance his books. In addition, the introduction of GST sometime in the coming fiscal may further boost revenue collection,

Overall, though there are no dramatic announcements (for that reason the stock markets are happy), Jaitley has done what he could possibly do, given the prevailing economic and political reality.

Dr Khan on Art of Answering

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Dr Khan

Dr. Khan began his career of teaching in 1988 as lecturer in a college of University of Delhi. He later taught at Delhi School of Economics, University of Delhi. He has several research papers and books to his credit.
Dr. Khan has been teaching General Studies since February 1992 to IAS aspirants and is very proud of the fact that almost every State and Union Territory in India has some civil servants who personally associate with him.

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