This year’s federal budget is going to be unlike any other. It will be tabled less than three months after the Prime Minister’s sudden announcement to withdraw high-denomination currency notes, which has caused a liquidity crunch and disrupted supply chains across industries.
The government is also planning to table the budget a month earlier than usual, giving businesses and ministries that much longer to plan for the new policies.
Two sets of accounts are going to be merged – the rail budget with the general budget, and plan expenditures (such as the construction of infrastructure) with non-plan ones (such as interest costs or subsidies) – to reduce procedural requirements and present a more consolidated picture of government finances.
Given the unprecedented backdrop, companies can look out for five broad risks in this year’s budget.
Credibility of numbers, projections: Frequent and volatile revisions in inflation and factory output data, coupled with growing questions over official GDP estimates, are likely to cloud the projections underpinning the upcoming budget’s calculations.
Demonetisation and the one-time tax amnesty offered in 2016 also ensured that tax collections and the amount of cash held by the public and banks are way off previous trends. Rainfall levels, which affect millions of agricultural families across the country, have also varied sharply from previous years, making the agricultural data incomparable too. Consequently, companies will need to interpret some of the budget numbers with a pinch of salt.
Goods and Services Tax (GST) pushed back: The government’s 1 April target for rolling out India’s most far-reaching tax reform is likely to be pushed back, although the law requires the government to implement the new tax regime by September 2017. The worry many companies had about compliance costs of GST was made worse by demonetisation, which sharply drove down sales of a wide range of items from cigarettes to cars in the last quarter of 2016. This makes its execution more vulnerable to political risk.
The government will now have to mollify a belligerent opposition in even more combative mood in the run up to the upcoming state elections. Accounting for half a year under one tax regime and the other half under another will aggravate the compliance challenges that many companies were already dreading.
Populism to be put before prudence: The government will be pressed to boost rural spending and increase the outlays for social welfare schemes. This, coming on the heels of a rise in the salaries of central government employees and armed services pensions, will boost consumer spending that has sagged post demonetisation.
In effect, growth is going to remain broadly pegged to consumer spending, which is good news for retail-facing industries. If the government wants to stir up other, slower-moving industries such as infrastructure, it will need to aim stimulus packages directly at them.
Fiscal limits to be pushed to boost growth: The government claimed a substantially higher tax collection between April and December 2016 compared to the corresponding period in 2015. However, the tax base is unlikely to have broadened to the extent hoped for, making these riches more of a one-time phenomenon.
The fear of a prolonged economic slowdown is likely to compel the government to relax the fiscal deficit target from 3 percent of GDP, the cap set by the Fiscal Responsibility and Budget Management Act for 2018-19. If the target is brushed aside, India’s credit rating could suffer, potentially raising the cost of future borrowings.
Private investment needs to pick up: For a government that came to power on a slogan of ‘Minimum government, maximum governance’, it is interesting to see public investments exceeding private investments for the first time in a decade.
Now, according to the Reserve Bank of India, the total non-performing loans of banks as a proportion of their total advances stood at 9.1 percent in September 2016, up from 7.8 percent in March 2016. This sits somewhat oddly with the so-called Basel IV norms on banking capital requirement that are beginning to be adopted in other parts of the world.
The lack of a credible recapitalisation plan in the budget will dim the prospects for a revival in private investment, and heighten the risk of too much reliance on government spending.
Whatever the direction set in this budget, it is going to be set amid uncharted waters. So fasten your seat belts, it is going to be a bumpy ride.
(The writer is Senior Partner, Control Risks - consulting firm dealing with security risks, political and economic risks for companies setting up operations in India)
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Updated Date: Jan 24, 2017 09:16 AM