Dr. Sinha, Principal – Economist – India Ratings and Research, shares his opinion on the budget
Budget 2017 was one of the most keenly awaited budgets in recent years and FM Arun Jaitley promised to “transform, energise, and cleanse“ India. Firstly we like to commend Arun Jaitley for his out-of-the-box ideas to clean up India’s political system by slashing the limit for anonymous cash donations from Rs 20,000 to Rs 2,000 per donor. The government has focused on cleaning the economy, along with transparency and governance.
Budget 2017 focused on 10 themes that strengthen the Indian economy but the broad theme of the FY18 budget has been reducing the pain arising out of demonetisation. The FM acknowledged the support that Indians extended to the government’s demonetisation drive and the pain they endured. Significant funds have been allocated for farmers, education and infrastructure, which are the three pillars of the economy. The FM has given further impetus to small and medium enterprises (SMEs) with the lower tax rate of 25%. This tax saving will give them additional liquidity for growing business and bring buoyancy in a sector with the biggest multiplier effect in job creation.
By lowering the income-tax rate on the bottom slab from 10% to 5% and imposing a 10% surcharge on higher slabs, Jaitley has transferred the tax burden from the lower middle class to the upper middle class. The simplification of the process for this income bracket will encourage more people to pay taxes. What is promising is Jaitley’s aim to use data mining of demonetisation and GST to reveal inconsistencies and evasion
I also believe that the FM’s decision to not change capital gains tax is a good move. Markets were delighted that much-feared levies on capital gains did not occur, tax exemption for indirect capital gains of foreign portfolio investors was reaffirmed; service tax was not increased to 18%. Budget evoked a frenzied 486-point gain in the Sensex.
FM has managed to keep fiscal deficit for March 2017 within the 3.5% target. He has also upped the ante on fiscal prudence by tightening the estimated fiscal deficit to 3.2% for March 2018. Although this is slightly higher than the 3% fiscal deficit target recommended by the Fiscal Responsibility and Budget Management Act, nevertheless when viewed against the growth requirements of the Indian economy, a fiscal deficit of 3.2% by March 2018 is a prudent number to achieve. We think that commitment to ensure macroeconomic stability is important, particularly in the context of RBI’s transition to an inflation-targeting regime.
Given the balanced stance taken by the government when the FM could have been populist we feel that the finance minister has managed the rather delicate balance between populism and fiscal prudence. In all nothing transformative but a budget suited for the occasion.
The budget increased the agricultural credit to Rs 10 lakh crores for FY18, announced Rs 8000 crores investment for dairy sector and increased allocation to MNREGA to Rs 40,000 crores. By reducing the rate of corporate tax to 25%, some relief has been given to the MSME sector. Similarly, the people who are on the lower income bracket they have been provided some relief in the form of reduction of income tax by 50%. Even the increased focus on housing for poor/affordable housing is a step to reduce the pain arising of demonetisation. In all nothing transformative but a budget suited for the occasion.
For more insights read India Ratings review of budget Union Budget FY18- Not Transformative, Focuses on Reducing Demonetisation Pain, Curtails Spending Growth
