A BUDGET FOR ELECTIONS
It is the time of the year when expectations are building that the routine vote on account may turn out to be as eventful as a regular budget. The Narendra Modi led NDA government is likely to opt for a non-routine exercise and roll out measures that may be rewarded by the electorate.
The government may make a few announcements in order to please rural voters and the urban middle class, who have many hopes on this budget. It is important to remember that government’s commitment to fiscal prudence does not give it a significant room for pursuing an expansionary fiscal policy, the target for fiscal deficit for FY2018-19 is 3.3% of GDP, on the other hand, the shortfall in GST collections do indicate that meeting the fiscal deficit target will be tough. The government has divested Rs. 35,134 crore against the target of Rs. 80,000 crore during the current financial year and there could be a shortfall on this account as well.
I believe that fiscal slippage will be minor, which can be managed by either expenditure control or by asking PSUs for a higher dividend.
The farm sector needs a few concrete measures and structural reforms to boost agricultural growth, but that would take time to have an impact. However, some steps to alleviate stress in the near term are likely to be announced to woo rural voters. The Prime Minister has ruled out farm loan waivers. The most likely step would be a cash transfer or DBT, in lieu of subsidies. In addition, I expect some income support scheme to be announced so that the rural voters are rewarded in a constructive manner. Certain other likely measures such as changes in crop insurance scheme, coverage of a wider range of crops, etc. could benefit the farmers in a big way. Also, I expect an increase in agricultural credit flow as well as an increase in spending on rural infrastructure, as the government will be banking heavily on the rural votes for the upcoming general elections.
The government may give an outline of the much-discussed Universal Basic Income for the poor, however, given the short time, it is very unlikely to be implemented this year, but may figure in the budget speech and also in the BJP’s (and other parties) manifesto.
The comprehensive review of direct taxes is pending and is likely to take a little more time; the government may, however, tinker with the current slabs to please the urban middle class, which contributes a major portion of the direct taxes. The most possible scenario is raising the minimum tax slab from Rs. 2.5 lakh to Rs. 5 lakh. Also, there could be an increase in exemptions for senior citizens. A hike in deductions under Section 80-C of the income tax act of 1961 from Rs. 1,50,000 to Rs. 2,50,000 cannot be ruled out, and if the government considers these expected changes, the middle class will cheer such a move and could strengthen the case for BJP ahead of the general elections.
I believe that a rethink is needed on the Long Term Capital Gains Tax introduced last year. As India needs long term equity capital to grow with its household savings rate, it can finance much of the capital needed. Generally, most of the capital borrowed by companies is in the form of debt, whereas growth capital needs to be more long term in nature. Companies can finance via Equity, Debt or Hybrid instruments. I feel that the equity culture in the country needs to be fostered by tweaking the LTCG in a smart way. This could turn out to be an incentive for participation in equity instruments. In equity markets, currently both Long Term Capital Gains Tax and Securities Transaction Tax (STT) are payable, I would like to see this anomaly being corrected either by removal of STT or providing credit for STT paid when calculating capital gains tax. The current tax policy imposes a burden in the form of double/triple taxation on dividends and some rationalization would be welcome by the investing circuit. Equities are best suited as an instrument for long term capital appreciation, hedging against inflation & providing for retirement savings. At a time when there is a need to promote “Equity Culture”, the introduction of Long Term Capital Gains Tax is a dampener. I also suggest that Long Term Capital Gains Tax be exempt if the underlying instruments are held for a period of three years or more. This will encourage savings in equity. Currently, Section 54EC of the Income Tax Act provides relief to taxpayers from capital gains subjected to cap of Rs.50 lakh arising out of transfer of a long term capital asset, where if taxpayers invest the proceeds in certain specified bonds within 6 months of sale transaction. On the corporate tax side, the threshold for the 25% tax may be increased. Currently, 25% tax is applicable to firms with revenue less than Rs. 250 crore, this may be hiked to Rs. 500 Crore.
In Infrastructure, I would expect allocation for the next budget to be upwards than that of last year’s, i.e. Rs. 5.97 trillion, with focus on flagship initiatives like Bharatmala, Sagarmala, housing, sanitation and water needs. Also, I expect railway allocation to focus on modernization like electrification of tracks and passenger safety. Rationalization of inverted duty structure in the capital goods sector is needed to provide level playing field to the domestic industry. While the government has recently provided some relief to start-ups from rules for Angel Tax, the industry feels it is inadequate and further relief may be granted in the budget.
Overall, I expect the vote on account to be expansionary and populist, with an attempt to win votes from farmers and the urban middle class. However, I don’t expect the government to break the bank. This will be a delicate balancing act, the government will need to raise revenues, and for this, I expect a higher pace of disinvestment in the coming year.
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