The Finance Minister, Mr Arun Jaitley, presented the Union Budget 2017 in the Lok Sabha on 01 Feb 17, in a departure from the past when it was presented in end February. Besides this, the other historic firsts for this budget was the merger of the railway budget into this general budget and doing away with the planned and non-planned allocation. The FM categorised his theme-based budgetary proposals into 10 themes, viz. Farmers, rural population, energizing youth, poor and underprivileged, infrastructure, financial sector, digital economy, public service, prudent fiscal management and tax administration. While drafting the proposals, the government took into account the volatility in the world economy due to rate hike by the US Fed, uncertainty of the commodity crude oil price and President Trump uncovering his protectionist trade policies in the coming times. The budget also considered the two tectonic reforms, GST and demonetization, launched in the previous financial years. With this budget, the Modi government wants to transform, energise and clean (TEC) India.
Firstly, to transform India, the focus of this budget is on the rural sector where government proposes to allocate Rs 1.87 Lakh Cr (including record allocation of Rs 48,000 Cr for MNREGA) and poverty alleviate one Cr households through Mission Antyodaya. Farmer community will benefit from the proposal to allocate a record Rs 10 Lakh Cr for credit distribution. The announcement to provide infrastructure status to affordable housing will benefit the economically weaker section of the society. The government also proposes to complete rural electrification in the country by May 18. The other focus area is infrastructure development for which FM proposed an allocation of Rs 3.96 Lakh Cr out of which Rs 2 Lakh Cr is transport sector’s share including railways. The transformational proposals in the financial sector include abolition of Foreign Investment Promotion Board (FIPB) to liberalise foreign investment, creation of an integrated public sector oil behemoth by merging existing oil PSUs, further divestment by listing IRCTC and IRCON on the bourses and lending target of Rs 2.44 Lakh Cr through Pradhan Mantri Mudra Yojana. Realising India is at cusp of massive digital revolution, FM focused on digitalization of India. For this, he proposed to allocate Rs 10,000 Cr for Bharat Net programme and create payment regulatory board at RBI. Secondly, to energise the country, the FM targeted the youth and proposed to reform the UGC by identifying colleges based on ranking and giving more autonomy, set up a National Testing Agency for all entrance exams, establish 100 India international skill centres and allocate Rs 4,000 Cr to launch skill acquisition and knowledge awareness. For tourism, he proposed to set up five special zones. In the public services sector, he proposed railway to offer competitive ticket-booking facility by withdrawing service charge for tickets booked on IRCTC, use head post-office for passport services and launch digi-gaon initiative. To incentivize the MSME (annual turnover less than Rs 50 Cr) he proposed to reduce the corporate tax rate from 30 to 25% and to energize the real estate sector, reeling under demonetization, he reduced the capital gains tax duration of immovable property from 3 to 2 years. Thirdly, in continuation of Government’s drive to clean up the system, he proposed to introduce two-tier exam system for Government recruitment, introduce laws to confiscate assets of economic defaulters, and bring about transparency in political funding by capping cash donations to political parties at Rs 2,000 (no limit for donations received digitally or by cheque) and introduce of electoral bonds. In its bid to move towards cashless economy, it proposes to cap cash transactions of any nature at Rs 3 Lakh, launch two new schemes to promote BHIM app, including cash back scheme for merchants, and Aadhar based biometric payment for people who do not have mobile phones. Pointing out that India is largely a tax non-compliant society with predominance of cash in society enabling tax evasion, he proposed incentivize and reduce personal income tax rate from 10 to 5% for income bracket of Rs 2.5 to 5 lakh and to levy 10% surcharge on income bracket of Rs 50 lakh to Rs 1 Cr (see table alongside). Further, he suggested simplification of the IT Return to one-page for taxable income up to Rs 5 lakh.
For the defence sector, the FM proposed to allocate Rs 2.74 Lakh Cr (including cap expenditure) but excluding pension, which would be approx Rs 90,000 Cr extra. This means a 10% increase in the capital outlay with only 6.2% increase in the overall budget from Rs 2.58 Lakh Cr last year. A modest hike in allocation indicates that defence spending continues to remain even this Government’s lower priority area. This hike is unlikely to cater for major weapons purchases and may barely meet inflationary pressures, rupee depreciation and the imposition of customs duty on military imports from last year. Despite the recommendation of defence ministry that the spending should be 2.5% of the GDP, the FM has decided to peg the defence budget at 1.62% of the GDP. Nevertheless, he has proposed to develop a centralized defence travel system for the convenience of defence personnel and establish a web based centralized pension distribution system for the ex-servicemen.
Prior to the presentation of the budget, the President, Mr Pranab Mukherjee, kick started the budget session by addressing both houses of the parliament on 31 Jan. He stressed on financial inclusion, social schemes and women power. Thereafter, the government tabled the deeply and innovatively researched Economic Survey Report 2017. The report highlighted the seven major reformist achievements of the government this year, namely, GST, Bankruptcy Bill, Monetary Policy Committee, Aadhar Bill, FDI liberalisation, Unified Payment Interface (UPI) interoperability and making the ‘M’ in JAM (Jan Dhan, Aadhar and Mobile) a reality, and promoting labour-intensive sectors. The survey noted that Indian economy had strong fundamentals substantiated by its key growth indicators (see figure alongside) and declining current account deficit (declined 0.3% in first half of the current fiscal year). The budget speech of the FM also pegged the fiscal deficit at 3.2% for the next year and a rise in the capital expenditure by 24%.
Although the budget received thumbs up from the Indian market with the Sensex gaining 485 points, maximum after any budget so far, and US industry groups calling it ‘forward-looking’, as always, it drew mixed reactions from political parties, economists and the society. The budget was deliberately mute on the effects of demonetization except a passing reference that it helped to increase the tax revenue by 34%. As promised by the FM, it failed to ‘honor the honest taxpayer’ and instead levied surcharge on existing HNI taxpayers. While mentioning that out of 1.2 billion Indians, only 24 Lakh file returns of above Rs 10 Lakh and only 1.73 Lakh of above Rs 50 Lakh it also failed to widen the tax base. Although it was pro-poor and pro-rural, it failed to meet the farmer’s expectation of loan waiver. Further, it did not address the looming demographic nightmare of millions of unemployed youth. It also did it not address urban area development that houses 40% of India’s population. It even missed the opportunity to create a state-owned asset reconstruction company, Public Sector Asset Rehabilitation Agency (PARA), as suggested by the economic survey report to address the bad debts of the banks due to the festering twin balance sheet problem.
The budget is balanced, consistent with the Government’s developmental agenda, and indicative of its fiscal prudence and consolidation. Nevertheless, it is only a cog in the wheel for India’s economic growth and emergence as the fastest growing economy. Hereafter, to propel Indian economy, the Government could or should implement some or all of the measures suggested herein. To widen the tax base, it could levy a banking transaction tax and consider bringing the large agrarian community under some sort of tax obligation. A suitable welfare measure is to introduce the Universal Basic Income (UBI) by subsuming all subsidies into it or give citizenry the option to either avail the UBI or the existing subsidies. The next big challenge for the Government is to roll out the GST on schedule and the FM leaving excise and other duties untouched is a pointer towards it. In view of Trump’s protectionist and isolationist policies and consequential global economic uncertainties, building global competitiveness into the Indian economy by reducing inspector raj and tax terrorism, strategic divestment and liberalizing foreign inflow will augur well for it, which the FM has already signaled with the abolition of FIPB. Last but not the least, implementation and usage of all that the FM allocated and promised in this budget is the key to growth of the economy and BJP’s return to power in 2019 because the proof of the pudding is in its eating.