30 Jan 2018 19:42 IST

Budget 2018: strike balance between populism, fiscal prudence

Banking, rural growth, housing finance and agriculture will be in focus, says contest winner

On February 1, Finance Minister, Arun Jaitley will present his last full budget, before the general elections in 2019.

This year, however, is a peculiar one. The Budget was preceded by two of the most disruptive decisions to have affected the Indian economy — GST and demonetisation. Jaitley is caught between the classic case of populism and fiscal prudence.

Arguments in favour of populism are that the Lok Sabha elections will be held next year; the slowdown in rural growth; government’s will to reduce dependence on monsoon; and relief for people facing difficulties due to GST and demonetisation.

Arguments in favour of fiscal prudence are that it will ultimately boost growth, even if there is a minor slowdown across sectors. It will encourage the optimum utilisation of resources and rein in spending in the economy before it goes out of control.

So, this year, if I were to present the Budget, it would be based on the following:

~ Increasing rural income: Farm equipment, rural consumption and rural housing.

~ Affordable housing: Boost real estate, urban construction, housing finance, and cement industry, which is also a way of generating local employment.

~ Boost local production: Increase in production of consumer durables and capital goods, which could create more jobs and ease the pressure on imports.

~ Boost road and rail infra: Increase connectivity and create jobs.

~ Reduce pollution: Promote e-vehicles and renewable energy, while discouraging use of chemicals and other polluting activities.

Rural growth

For rural growth, the Budget allocation could see a jump of 20-25 per cent, which would mean an extra outlay of ₹30,000 crore. Here, MNREGA could see an allocation of ₹48,000 crore, along with an allotment of ₹19,000 crore to Pradhan Mantri Gram Sadak Yojna, and ₹6,000 crore to urban and ₹23,000 crore to rural in Pradhan Mantri Aawas Yojna, which is a significant increase from ₹15,000 crore last year.

Fiscal deficit

According to last year’s budget estimates, the fiscal deficit was around ₹5 lakh crore, which is 3.2 per cent of GDP. However, this year, the gross tax revenues (Centre and States) are expected to increase roughly by 14 per cent to ₹21.8 lakh crore (roughly ₹14 lakh crore to Centre) owing to better compliance and increase in corporate earnings (expected to increase by around 20 per cent).

With the historical increase in revenue and capital expenditure of around 15 per cent, the fiscal deficit is expected to be around 3.4-3.5 per cent of GDP. Nominal GDP is expected to grow at 11.5 per cent to around ₹186,00,000 crore.

Disinvestment

Disinvestment, targeted at ₹95,000 crore, will play an important role in reducing the fiscal deficit. With major acquisitions, such as of GAIL by BPCL and of Oil India by IOC, these two companies alone could generate around ₹57,000 crore. Along with this, the government could consider selling its minority stakes in companies such as ITC, Axis Bank or Hindustan Zinc. The target of fiscal deficit to GDP ratio could then be brought down to 3-3.1 per cent.

Also, we could reduce the burden on taxpayers by increasing the exemption limit from the current ₹2.5 lakh, keeping the extra deduction relief to only those who have invested in government infrastructure projects. This is likely to boost funding in government infrastructure projects The tax exemption limit under section 80C could also be increased to ₹2 lakh.

Capitalisation

Another focal point is capitalisation of public sector banks. The government has already reported that it will infuse ₹90,000 crore into 20 state-possessed banks by March. That will truly be a fillip to an area that is struggling with a number of bad loans on its balance sheets.

Long-term capital gains

Changes in long-term capital gains tax on equities too could be introduced. The Government could increase the holding period to two or three years. This would not only encourage long-term investments but also reduce the volatility and speculative nature of the markets.

To boost local production, import duties could be levied more on consumer durables or metals, which will reduce the import burden and reduce effective tax rates, thus boosting consumption.

Real estate

Along with this, higher allocation to infrastructure can also be expected, with Union Minister Nitin Gadkari demanding another ₹25,000 crore, with the target of spending around ₹1,40,000 crore.

In real estate, the GST rates for affordable housing projects can be lowered to 12 per cent, with 50 per cent abatement for land, taking the effective GST rate to 6 per cent.

Thus, the focal sectors would be banking with a recapitalisation plan, rural growth, housing finance, agricultural products and increased consumption with lower effective taxation rates, infrastructure, real estate and clean tech. The populism part of the Budget will be covered by disinvestments and boosting local production and consumption.

All these would be accompanied by a focus on a cleaner economy, with better tax compliance and an emphasis on the digitised economy.

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