Dun &Bradstreet India presents an impact analysis of the Union Budget 2017-18 on
the overall macro-economy and around 21 major sectors and has assigned ratings based
on the likely impact of the announcements on each individual sector. This can be
a useful guide for decision makers to plan their business activities for the forthcoming
Budget 2017: Why FM Jaitley will look at reviving investments and creating jobs
Jan 23, 2017 - The Financial Express
The Union Budget, as an event, has always been way too much hyped in India. This
was because it was the Budget, through its reform agenda, which set the tone and
exulted or depressed the mood of the nation for the year. That notion, over the
past two years, has changed as businesses are increasingly getting accustomed to
bold reform measures being taken outside the Union Budget. In a way, the government
has been making a serious attempt to bring the Union Budget closer to what it essentially
is – a mere accounting and allocation exercise – while making reforms an on-going
year-long process. We thus anticipate that the Union Budget FY18 would be devoid
of any major or big-bang reforms/initiatives as it is likely to focus on hand-holding
the implementation of the many major initiatives already taken and assurances made
by the government earlier.
Yet, the Union Budget for FY18 is expected to be unique in many aspects. Firstly,
the Union Budget has been preponed, thereby allowing capital outlays and revenue
mobilisation to start right from the start of the fiscal year (April-June) instead
of later in the second quarter. Secondly, the Railway and Union Budgets have been
merged. And thirdly, the expenditure will be reclassified as capital and revenue
spending instead of plan and non-plan – providing a clear distinction between productive
and recurrent spending trends. Most important that it will be announced in the framework
of demonetization-induced shock to the economy, the downturn in the pace of domestic
growth especially rural economy, heightened risks to global growth recovery, firming-up
of global commodity prices and the delay in implementation of GST.
Under these circumstances, the Union Budget FY18 would walk a tight rope trying
to maintain fiscal prudence while providing for giveaways to boost consumption.
Beyond its own push to build infrastructure assets, one can expect a fresh raft
of measures to spur cashless transactions and promote financial inclusion. The most
important expectation from the Union Budget FY18 would be the manner in which it
focuses on reviving investments in its quest to kick-start economic acceleration
and create much needed jobs. Given the uncertainty already prevailing in the economy,
the budget is likely to stay away from any harsh measures that could further erode
the confidence of India Inc.
Under the fiscal consolidation roadmap, even as the government remains committed
to reduce fiscal deficit to 3% by FY18, any slippages in budgeted disinvestment,
rise in global crude oil price, need for recapitalization of state-run banks and
slowing economy could pose considerable challenge to the Central Government. The
Union Budget FY18 is likely to have thrust on the following core areas:
Push for Agriculture and Rural Development
When the earlier growth projections were framed, favourable monsoon, implementation
of 7th pay award and transmission of policy rate cuts to the borrowers were expected
to fuel the consumption demand in FY17. However, shock posed by demonetization derailed
the consumption growth story especially in rural areas. The Union Budget FY18 is
likely to introduce more measures to raise agricultural output with an emphasis
on irrigation. The National Agriculture Market, on the cards for some time, might
get a push. Use of latest technologies, high yielding and resistant crop varieties
could also get a boost to raise productivity. At a time when demonetization has
eroded rural incomes, the Union Budget FY18 is expected to focus on rural and skill
development through a range of measures and higher allocation. The sectors catering
to the rural demand could receive additional sops/benefits.
Thrust on infrastructure
Reviving investments will remain the focus area of the Government and continuing
with the trend of the previous years, a range of measures and higher allocation
could be expected in the infrastructure sector. The prerogatives would be not only
to increase fund allocation to various schemes/initiatives, but also to ensure effective
utilization of the funds allocated and fast track the execution of the various infrastructure
projects. Railways are likely to draw significant attention in this space. The focus
on solar power, highways and inland waterways may continue. Increased capital expenditure
in the infrastructure space will be pivotal to kick-start a virtuous cycle of employment-intensive
Focus on MSMEs
The Union Budget FY18 is likely to dole out incentives to the MSME sector, in view
of the disruption the sector has faced in the aftermath of demonetization drive
and given the crucial role the sector plays in providing employment. This could
be in the form of alleviating the challenges faced by the sector in meeting their
funding requirement so as to enable them to scale up to their true potential.
Ease of doing business
Corporate India can look forward to further ease of doing business and positive
changes around the corporate tax rates. While the government had already spelled
out the road map for corporate tax reduction to 25% over four years beginning this
year, the pace of reduction could be advanced in the upcoming Budget to stimulate
private investment. The Budget is likely to put an end to all the uncertainty surrounding
the Minimum Alternate Tax (MAT) regime.
Giveaways for stimulating the Indian consumer
Besides the rural segment, overall consumer sentiment needs a big push. The push
to consumer demand could be given either, directly by increasing the disposable
income by altering the tax exemption limits (progressively taxing the higher income
groups) or indirectly by making the consumer goods segment or services more affordable.
The Union Budget FY18 is expected to pave way towards increasing disposable income
and thereby bringing about a revival in demand in the economy. For the salaried
middle class, relaxation in personal income tax exemptions, albeit moderate, could
be on the cards to boost purchasing power. An impetus to household savings could
come in the form of increasing the limit of deduction under Section 80C or changing
the slab for income tax.
Increase in tax payers base
Increasing the revenue collection both from direct and indirect tax in the ensuing
year would be crucial. The demonetization narrative displayed the Government’s resolve
to track ‘untaxed’ income and the Budget is likely to announce more stringent measures
to take this forward. Moreover, with expected increase in global oil prices likely
to squeeze incremental revenue opportunities in the coming fiscal, the Government
would increase its focus on widening the tax payers base so as to improve the tax
to GDP ratio.
While demonetization was a push (involuntary) which forced people to declare their
taxable income, combining it with a voluntary compliance mechanism for declaration
of taxable income would make the entire method of increasing the tax base more robust.
The government would be relying on GST for indirect tax collection. However, the
near term is likely to be challenging with adjustment costs for the private sector
(coping with inter-sector implications of new tax rates), and the Central Government
(trying to compensate states for revenue loss).
Consumer Durables and Auto components
The consumer electronics and appliances manufacturing industry has been adversely
impacted following the Government’s demonetization move. An increase in import duties
would help the industry in boosting local manufacturing and discouraging imports.
The Indian auto components industry continues to face threat of cheaper imports.
In line with the government’s ‘Make in India’ initiative and to make India the preferred
global auto manufacturing hub, the need of the hour is to provide support for new
product development and to achieve world class quality. To enable the industry to
keep pace with the rapid technological developments, the government is likely to
provide support to enable enhanced expenditure on research & development and create
the relevant infrastructure for innovation.
While concessions on interest rates for low-cost housing loans under the Pradhan
Mantri Aawas Yojana have been announced a month a back, the budget too may have
some incentives for the affordable housing segment such as increase in the tax deduction
limit for housing loans, especially for metropolitan cities and more clarity on
the income criteria and other requirements for availing this scheme.
Moderation in the deposit rates for several banks given surge in the liquidity in
the banking system after demonetization has impacted depositor particularly senior
citizens as they are largely dependent on deposit income. Hence the government is
expected to provide some relief to this section of the society by increasing Tax
Deducted at Source (TDS) exemption limit on fixed deposits for senior citizens.
Further, given government’s thrust on promoting digital transactions, Union Budget
FY18 is likely to provide some tax benefits on digital payments and exempt bank
correspondent’s transactions from service tax. Further, given that banks are burdened
with rising bad loans, the Union Budget FY18 is expected to propose a capital infusion
plan for public sector banks. All eyes is on how the Union Budget FY18 would attempt
to accelerate the adoption of digital payments, particularly in rural areas. More
sops and incentives for cashless transactions and the makers of hardware required
to power such transaction can be expected.