Union Budget 2017: How the shadow of GST kept govt on the straight and narrow

The surprising thing about the 2017-18 budget ‎is that it was not what everyone presumed it would be: A stimulus budget peppered with lots of sops and freebies to influence voters in states going to the polls this month. The fiscal deficit trajectory continues, there were no unaffordable farm loan waivers or sharp cuts in corporate taxes, nor was the basic exemption limit for individual taxpayers raised. The idea of a universal basic income, which the Economic Survey brought up for discussion, was not even mentioned.

So what was the opposition worried about when it vociferously demanded a postponement of the budget to mid-March, and further churlishly wanted the budget put off by a day due to the death of former UPA Minister E Ahamed?


While the refusal to go ultra-populist does the Modi government credit, one cannot but suspect that Arun Jaitley did not have the fiscal leeway to throw largesse in every direction. Barring a lowering of the tax rate for income earners in the Rs 2.5-5 lakh income bracket to 5 percent, and some marginal reliefs on long-term capital gains on property (where the qualifying time period is two years instead of three), Jaitley stuck to the straight and narrow, limiting his tax reliefs to just about Rs 20,000 crore - hardly enough to move any electorate in India's poll-bound states.

Union Finance Minister Arun Jaitley. PTI

Union Finance Minister Arun Jaitley. PTI

The two constraints were the failure of demonetisation to provide a fiscal bonanza (most of the Rs 15.44 lakh crore old Rs 500 and Rs 1,000 currency is said to be back with banks), and the impending implementation of the goods and services tax (GST), possibly from 1 July.

Jaitley's references to demonetisation focused more on the esoteric benefits of "clean‎" growth and the chance to filter the data on lakhs of large cash deposits made post-November 8 for detecting likely evasion. This suggests that there is no easy money available for distributing largesse. Each rupee of additional tax revenue gained from this sieving process will have to be extracted from likely tax evaders, one at a time. ‎That's a long and painful extraction method, and carries the risk of thousands of cases ending up in courts - a deluge neither the taxman nor the judiciary is equipped to handle.

But the bigger constraint on populism was surely GST - and the possibility that tax revenues may not perk up in 2017-18 when crude prices may be higher and corporate profits growth may be weak.

GST will be a huge challenge not only on the implementation front, but also ‎in its initial years of financing. Currently, both state and centre have signed on to this mega reform in the pious hope that GST will automatically boost revenues. It surely will, but the gains may not be frontloaded, and the costs of implementation and trial and error will come upfront.

But here's the sour part for the centre: it has signed a blank cheque to reimburse states for not only revenue losses post-GST, but also guaranteed a 14 percent growth annually. So if the initial year of GST is poor on revenue accruals, the centre will have to produce the money even if it does not have the wherewithal.


While early estimates of compensation to states were around Rs 50,000 per annum, post-demonetisation some states have seen a drop in tax revenues, and compensation figures may well swell to Rs 90,000 crore.

This kind of money won't be in the kitty in 2017-18, a year of recovery for the economy after note-badli.

So if Arun Jaitley has refrained from scattering sops in the direction of poll-bound states, there is ‎a very good reason for it: his pockets are empty. It is also worth noting that the new fiscal roadmap drawn up by the NK Singh panel offers an additional leeway on the fiscal deficit side of 0.5 percent of GDP if the government faces extraordinary circumstances in any year.

In 2017-18, that extraordinary event is the advent of GST.

 


Published Date: Feb 02, 2017 10:08 am | Updated Date: Feb 02, 2017 10:18 am



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