The relevance and uniqueness of the Union Budget 2017-18 cannot be stressed enough. This is the first budget which will envelop the Railway Budget and be presented much earlier as compared to erstwhile years. The budget will also be announced in the backdrop of the unexpected demonetisation announcement, which though commendable from a combating black money standpoint, has resulted in severe liquidity issues in the economy.
The current economic condition which until the demonetisation effect was growing at a rapid pace registering GDP growth of around 7.6 percent, invites for more rigorous steps to ensure a quick revival through increased capital expenditure by the government, reviving private capex by providing necessary support to various industries and a calibrated move towards the GST regime. Also, the forthcoming state elections might compel the ruling party to ensure a populist budget to boost overall growth.
From an individual standpoint, the expectations from the budget involve rewarding all the honest tax payers across the country who faced hardships during demonetisation, which would warrant an increase in the basic tax exemption limit and the 80C limits. Also, the continued expectations of financial social security may require the government to look at the National Pension Scheme (NPS) which has constantly been pegged against the PPF. Hence, the conversion of NPS from an EET to EEE based scheme is also expected. Further, in an attempt to increase digitisation and pave the way for more cashless transactions in the economy, additional measures to target the under-banked sections of society could be announced to benefit customers and make it a success.
To demonstrate the concern of the government for the economically weaker sections of society and in line with the forthcoming state elections, the government may announce multiple welfare measures across various social segments ranging from education, health and housing. From a housing perspective, especially the affordable housing segment, the Pradhan Mantri Awas Yojna and push towards achieving the vision of ‘Housing For All by 2022’ might prompt the government to introduce measures to promote low cost housing and offer cheaper home loans to individuals. Additionally, a renewed thrust could be provided to the agricultural segment through enhanced measures to create irrigation infrastructure along with the availability of high quality fertilizers and seeds.
On the corporate front, expectations of a reduced corporate tax rate are at an all-time high following an announcement by the financial minister to reduce tax rates in a phased manner to 25 percent over a period of 4 years. Further, the possibility of delayed roll-out of GST can’t be ignored post the demonetisation effect. Therefore, a revised roadmap might be in offing as well. The recent outflow of foreign investments might also compel the government to promote foreign investments as well as improve India’s ranking on the ‘Ease of Doing Business’ scale.
Further, in order to create more jobs and enhance investment in the economy, the government could give a major push to some flagship policies like Start-up India, Make in India, Skill India and others. Measures could be expected to boost infrastructure development especially for railways, roads and ports by increasing capital spending in an otherwise ‘dormant’ economic environment wherein private capex is yet to pick up. Also, the focus on recent train accidents might compel the government to put railway modernization on the top of it’s to-do list.
From capital markets perspective, post the Prime Minister’s speech for increased contribution from market participants for economic development, fears of tinkering with capital markets tax rates have not yet dispelled despite finance minister’s assurance of no long term capital gains tax. Nevertheless, we believe that there is a high possibility of tinkering with the definition of long term (period) for equities or fixing a cap for upper limit for long term capital gains exemption as in case of dividend income. Further, raising of STT or short term capital gains tax cannot be ignored.
Overall, the expectations of the Union Budget 2017-18 being more on ‘feel good’ side stands quite high considering the government’s intent to kick start consumerism after the demonetisation effect. Also, the additional pressure of key state elections might require the government to adopt a more populist stance.
(The writer is National Head - Wealth Distribution and Advisory Business, Tata Capital)
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Updated Date: Jan 30, 2017 13:35 PM