The Union Budget on the whole is a well-documented exposition of how the government plans to manage its balances in FY18. There can really be no complaints on any score to the extent that none of the proposals seek to impose significant burden on any section of society. But there are some misses in the presentation which could have been addressed but have been kept aside.
The first is the revenue realization from the IDS schemes which are to garner significant revenue. Their exclusion is a comfort to the extent that there is a buffer available to the government for the future – which can range from Rs 50,000 to Rs 1.5 lkh crore. The budgeted numbers do not take into account the impact of any of these disclosure schemes. Providing such a number would have also thrown some light on the success of the demonetization scheme as well as reassured that there was ammunition in case any other revenue source fell short.
Second is the impact of GST. As this scheme would be introduced hopefully in the second quarter of the year, the budget does not clearly state whether or not the impact has been factored in. This is important because there would be a tendency for revenue to either increase or decrease on various products which would make the picture complex. Presently the numbers budgeted for appear to be more in line with the trend movements in the past. A separate exercise on this would have been useful both from the point of view of the states and the union as the appropriation between the two could have been indicated. Quite clearly if there are major swings in these collections in FY18, there would be challenges for the government or an additional cushion.
Third, the budget has been very aggressive in the disinvestment target which is always the case. The number of Rs 72500 crore would be the highest ever to be raised if it materializes. But given that there have been major slippages in the past; it would have been useful if this strategy was unveiled in the budget so that the market would have felt a bit more reassured. It does seem that the government would be very aggressive this time with the stance on the general insurance companies already being put forward. There is news that the insurance companies would be a part of this scheme which will help to get to this target. Those under SUUTI would be the companies to watch out for if this ambitious target is to be realized.
Fourth, there are no specific measures for boosting savings in the budget. This has been a problem in the country where financial savings have been coming down. An increase in the 80C section would have helped households to enhance the same. Today, with interest rates coming down there is pressure on banks to garner deposits and there is a lurking apprehension that there could be migration to gold. The budget has been silent here and has provided some income tax rate sops and left it to the households to decide their preferences. Further, the budget does talk a lot on housing and to strike a twin blow could have also enhanced the exemption limit of interest on home loans further.
Fifth, the emphasis on investment is missing. The government is spending more on infra but is not adequate to boost investment. Private investment has to increase and for this to happen industry has to be provided some incentives. Lowering of corporate tax rate, which was largely expected, would, have triggered this move. With low level of capacity utilization there is little reason for the companies to invest and this is where such incentives like through an investment allowance could have encouraged capital formation. The problem with investment today is that private investment is down in manufacturing due to excess capacity and infra due to viability and funding issues which could have been addressed here.
Sixth, the fine print in the budget also talks of a drawdown of cash of around Rs 40,000 cr. The amount is large and it was three times that of what was budgeted. While these are legitimate balances drawn down, it does camouflage the true fiscal deficit which would have been higher fir FY17 and been closer to the budgeted number of 3.2%. Hopefully, the number for this year remains at the budgeted level.
Seventh, the budget is still expecting a good amount of non tax revenue especially as dividend from RBI and banks. The amount is around Rs 75,000 cr which is interesting as PSBs are unlikely to turnaround to pay dividend and the entire amount has to come from the RBI. The demonetisation impact on the RBI balance sheet would probably deliver this number on the revenue side and be higher than that of last year by around Rs 10,000 cr. The comfort of spectrum sale would be missing this year as no fresh auction is expected.
The government may be said to be in a sweet spot mainly due to the non-inclusion of the IDS receipts. Any shortfall in any revenue receipt can be filled by these proceeds. Further, there is also the option of spending more if it likes. One can surmise that this amount has not been taken into account because the GST impact is still uncertain and it was prudent to exclude both the effect, which makes sense.
(The writer is Chief Economist, CARE Ratings)
Updated Date: Feb 02, 2017 07:05 AM