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Expectations from the 2018-19 Union Budget

  The current economic scenario in India makes for a challenging task for the Finance Ministry to come up with a Budget that will provide a boost to economic growth. Especially since this is also the prep year for the general elections, a lot is expected from the Union Budget 2018-19.  

Dr Suresh Srinivasan

The International Monetary Fund (IMF) expects the Indian economy to grow at around 7.5% during the following two fiscal years, i.e., 2018-19 and 2019-20. At this rate, India is expected to be the fastest growing economy in the world, as China’s double-digit growth over the last two decades has been cooling down and its growth is getting closer to the mid-single digits!
However, we also need to understand that the country is limping out of one of its biggest reforms, the introduction of the goods and services tax (GST), which was implemented from July 1, 2017. Even as the economy was recovering from the onslaught of the “note ban” that was implemented in November 2016, GST disruptions and the short term negative impact had a major impact on the economic activity of the country. Although the negative effects are slowly waning by now, the economy may need the coming fiscal year 2018-19 to completely recover.
Structural constraints in many industries like banking and telecom are likely to put more pressure on the government’s finances. For instance, Reliance Jio’s entry into the telecom market has slashed revenues to a very large extent of all the existing telecom players, thereby making them financially weak. This has made them unable to pay the government towards the spectrum sale, and the repayment of loans taken from the banks for these spectrum payments has also taken a hit. In effect, such financial weakness of telecom companies adversely impacts government’s fiscal deficit (shortfall in spectrum revenue to the government), and puts enormous strain on banking financials (banks will require more funding from the government to strengthen their capitalization).

Rural and populist schemes

The farmer distress stories are taking front page news and are ubiquitous across the length and breadth of the country. With the Union elections in India scheduled to be held in 2019, it is given that the present BJP government will prepare itself with populist initiatives to ensure a seamless continuation of power. This will be the last “full” budget before the general elections.
Now, the present BJP government has secured a certain amount of comfort and trust from educated urban voters that it is indeed aggressively on the reform path, and that this is likely to do good to the economy in terms of employment and income levels. However, the government cannot ignore the farmers and the rural communities if it has to come back to power. This will trigger and entail many social and rural initiatives; such populist measures and schemes, many of which could be announced in the 2018-19 Union Budget, will have at least some component of expenditure allocated for the fiscal year 2018-19. This will, in turn, exert further pressure on the budget finances.
From all the above perspectives, the budget for the year 2018-19 is certainly expected to be challenging, both from the ability of the government to increase revenues as well as the reduction of budget expenditure to preserve the fiscal deficit.

Fiscal discipline

The actual fiscal deficit for the current year 2017-18, which closes in March 2018, is expected to widen from the budgeted target of 3.2% of the country’s gross domestic product (GDP) to around 3.5%. Some analysts even peg the possible deficit to more than 3.5%. The primary reasons for such a widening of the deficit is the shortfall in budget revenues, mainly due to disruptions in the economy due to the implementation
of the GST and the resultant lower tax collections, lower economic activity and growth due to the note ban wherein many sectors including construction, infrastructure and real estate were severely hit, and the overall corporate performance stalled, resulting in lower corporate tax collections. Again, the spectrum revenues from the telecom companies will also be strained, further impacting the budget revenues.
The finance minister could possibly move the fiscal deficit target for the proposed 2018-19 budget to 3.5%, and attempt to achieve the same in the forthcoming year.

Aggressive disinvestment targets

In order to bridge the shortfall in tax revenue, the government is also likely to become extremely aggressive in disinvestment targets. A number of initiatives already seems to be in the making to get as much revenue as possible by selling the government’s shares in public sector units (PSU). Oil and Natural Gas Commission’s (ONGC) acquisition of Hindustan Petroleum Corporation’s (HPCL) shares from the government is alone expected to bring in around `35,000 crore to the government kitty.

International crude playing spoilsport

While the IMF and World Bank are optimistic of India’s economic activity picking up and achieving a higher growth rate of 7.5%, the increasing crude price, which has already moved from around $50 a barrel to around $60 to $65, is a concern that may widen the deficit further. Over the last four fiscal years, international crude price has been fortunately lying low in the range of $35 to $50, without exerting much pressure on fiscal deficit targets. However, this may not hold good for the year 2018-19.

Enhancing tax burden to improve revenue

While streamlining and improvement of economic activity is expected, the biggest concern for the 2018-19 budget will be the continued income shortfall, clubbed with increased budget expenditures. Especially since this is a general election preparation year, increased budget costs cannot be avoided, which means the only way to balance the budget and minimise the deficit will be to throw the spotlight on tax revenues.
In all probability, the government may not increase the corporate tax rate, which is anyway considered to be quite high compared to peer group countries. Then how can it collect more revenues through taxes? The government can possibly introduce an additional surcharge on the income tax to bridge at least some part of the income shortfall. For example, this surcharge may be levied on high income individuals.
The finance minister is also expected to look at tax revenues from long term capital gains, which are currently taxed at a lower rate as compared to the short term capital gains. In some situations like shares and mutual funds, long term capital gains attract zero tax. The government may, and is expected to, tinker around with such provisions to possibly enhance tax collections. Also, for income from sale of assets to be defined as a ‘long term’ capital gain, the taxpayer must have held it for 3 years. The government could also possibly look at redefining this period with an objective to enhance tax collections from long term capital gains.
With all these challenges, the finance minister is expected to have to walk the tightrope in managing the additional revenue and controlling the budget expenditure. The stock markets have already soared up over the last month to levels unseen before in Sensex and Nifty history. Any budget provision adversely perceived by the foreign and Indian investors could pull down the sentiments adversely. It is truly a challenge!