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Budget 2018, the One Before 2019 Elections: Populist or Reformist?

This years’ budget will be the first post-GST budget of India. It will also be the last full budget before the 2019 elections.

The year 2017 was year of contradictions for the Indian economy. Taking further cues from it, let’s put down the points which will form the background of this budget:

We are awaiting eight major state elections, and central elections in 2019. Historically the previous governments have had a populist budget strategy to woo the voters. With the current election results from Gujarat, the distress in the rural and agrarian sector is clearly visible. So populist measures are almost an imminent situation.

Another issue was the horrendous implementation of GST. The government hurried in implementing GST and it resulted as the second blip for the economy after demonetization.

The biggest challenge will be to contain the fiscal deficit target. The government was able to contain the fiscal deficit till now because global oil prices were subdued. The latest data showed that the government’s fiscal deficit reached 112 percent of the full-year target during April-November 2017. Experts feel that the rating upgrade by Moody’s also increases pressure on the government to retain fiscal discipline.

Inflation has also shown a rise since November 2017. This would also be a key issue as retail inflation is likely to rise ahead.

Job creation – this has been a red mark in the scorecard of this government. The government has been unable to create and cater to the growing demand for jobs. Demonetization just added to woes of the job market.

These points would be basically laying the base for the upcoming budget. Economists say the budget could be a mix of populist schemes and reform measures, with focus on reforms and substantial allocation to agriculture and rural development schemes. Industries, exporters and markets have also been demanding GST transition relief, hoping it would be considered in the upcoming budget.

What to expect in the upcoming budget?

Tax reforms – back in September 2017, an article was published where a task force was formed to review the existing tax rate and exemption norms. With GST, the government has consolidated indirect taxes. So there will be something on the direct tax front in this budget to lighten the taxpayers' burden.

According to news and sources, a proposal to hike the personal income tax exemption limit from Rs 2.5 lakh per annum to Rs 3 lakh or more is also being considered. Other expected reforms are an ncrease in limit of Section 80 C so as to accommodate benefits of ELSS, redefining period of holding under Section 10 (38) so as to help increase domestic investment. The holding period for short-term capital gains (STCG) tax on listed securities could also be extended beyond the current period of one year to maintain more liquidity in the market. There are expectation for the return of standard deduction in some form as well as additional benefits for health insurance.

Investors also are expecting withdrawal of DDT. According to market experts and analysts, this could be a major step to increase and retain investment. What could hold back these benefits would be a narrow tax base and uncertainty in revenue generation from GST. The FM had left the tax slabs unchanged in last year’s budget. Industry body CII has in its pre-budget memorandum to the finance ministry sought a reduction in the peak tax slab from 30 percent to 25 percent and corporation tax rate to 18 percent, including all surcharges and cess, would help India emerge as an attractive business destination and create jobs.

In a budget meeting with the government, and sectoral experts, the economists have favoured the re-imposition of the long-term capital gains (LTCG) tax on listed securities and mutual funds. This will help mobilise revenues for the government.

Agriculture – as mentioned before, the budget will be pro-farmer. The major reason is bad performance in rural areas in recently concluded state elections, which means more allocation for agriculture and rural development. The focus would be on job creation in rural areas, development of specific agriculture products, and better linkage of farmers with markets and higher minimum support price. Agriculture experts have suggested income security for farmers, tenant farmers and farm labourers. The median of income of farmers has been far less than overall national median average. Although the government should refrain from waiving loans as it blows out the fiscal deficit and worsens the situation of banks and economy.

Bank recapitalisation – in October 2017, the government announced recapitalisation plans for public sector banks for Rs 2.11 lakh crore. This was necessary as banks are still reeling under a high mountain of NPAs. The government has also received suggestions for providing tax exemption on fixed deposits in banks in order to encourage savings so that more funds come into banks.

Infrastructure – this could be yet another priority in the upcoming budget. Infrastructure creation, including rural infrastructure, railways infrastructure, urban infrastructure, water, housing and sanitation could get a boost in this budget. Another step which government undertook last year is “Bharatmala”, to develop and expand approximately 83,000 kilometers of roads at an investment of Rs 6.9 lakh crores. According to the transport ministry this just might get an allocation of Rs 70,000 crore in this budget. All in all, increased infrastructure spending by the government will be pivotal for the economy in a bid to revive it and create more jobs.

Inflation - as a net importer of crude oil, the rising prices of crude are not a good sign for India. It could blow out the current and the fiscal deficits, increase the costs which result in higher inflation, which will affect the revival of investment cycle and also impact the demand levels, which could lead to an economic slowdown.

Apart from these, there are other expectations as well from the budget.

Biocon Chairman Kiran Majumdar Shaw says, "I would like to see a greater spend on healthcare as here we have stagnated at below one percent GDP levels. For a country like India which is trying to aim to deliver universal healthcare we will need to treble this investment in healthcare. "She also said that the country has affordable access to healthcare, but the need of the hour is a greater investment in this sector.

The pharma companies want increased support and budget allocation for R&D and innovation. Ease in filing of patents, and encouraging research could be part for ease of doing business. According to a recent report by the department of science and technology, India's gross expenditure on R&D as a percentage of GDP for the last couple of years has been at around 0.69 percent.

In case of retail markets, the players in the industry want a single retail policy for laws and regulations affecting the retail sector. They want a unified market in order to minimise licences required and establish a system of single-window clearance. Introducing 100 percent FDI will be helpful ahead and will help in creation of more jobs.

For the realty sector, its biggest expectation from the budget would be inclusion of the sector in entirety under the GST regime. The partial exclusion of the sector has resulted in denial of input tax credits, imposition of other local levies like stamp duty and registration fees.

Startup investors are hopeful that the government will resolve the issue of angel tax in the upcoming budget, which is one of the major key reasons for a sharp fall in angel investment for startups in 2017. At present, the angel tax rate stands at a whopping 30 percent, which according to Nasscom has resulted in a 53 percent drop in angel funding during the first half of 2017.

Several economists have suggested an increase social security pension and implementation of maternity entitlements, while suggesting to stick to the fiscal deficit target as overall impact on the fiscal deficit will be minimal. The amount has been Rs 200 per month which could be increased and also, the coverage could also be increased.

This budget holds the key ahead for this government as the impact of this budget would be directly visible at the 2019 elections. As for what would work out in this budget and what would not, we eagerly await to see on 1 February, 2018!

This article is by Niraj Bora and Abhas Surjan of Surmount Business Advisors.

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