India Union Budget - Challenges and Options

Union Budget – Challenges and Options – F 18

India is entering a phase of lot of challenges today, arising from developments around the world and in the Indian Economy. The New president assuming office in US has created lot of uncertainties for our IT , Pharma sectors and investments from US to India and India’s Exports to US.

The UK’s likely exit from Euro zone poses challenges for corporates which are operating in Europe.

The increase in commodity prices and oil price is a risk. Every $ increase in oil price, will increase the trade deficit by $ 1.4 bn and the government has to give an additional subsidy of Rs.1500 cr for every $ increase. If the Customs and Excise levies are kept at the present levels, this will increase the consumer inflation.

The demonetisation is a bold and progressive step by government but in the Short and Medium terms, the potential growth of the Indian Economy has come down and this year as per estimates China will regain the position of fastest growing large Economy in the world.

The advantages of demonetisation / digital economy are : Higher Tax collections, small Black Economy , less terror Funding, less fake currency , Higher Value Added for reporting ( GDP ) , Prevention Cross border Crimes , reduction of domestic crimes will come down and protection of environment.

The advantages of Cash transaction are It is the most common way of payment around the globe .1)cash does not involve third-party action for its immediate conversion into other forms value, 2)Cash requires no authorization for the person who carries it 3) Easy to make small payments,4)Feel Secure having cash , 5)Major form of Working capital for small firms 6) Accepted by Any one, any time, any where 7) Most liquid form 8) alleviate the risk of identity theft. 8) The use of cash does not involve any transaction fees 9) can foster good spending habits 10) Cash is 'easy-to-carry' form of payment 11) Cash payment does not require additional knowledge .

The fact is that, cash transactions in large economies are very high in China and Japan more than 90% and in US more than 50%. In countries around the world , the investment in sectors, where returns from investments are sub par, are supported by the cash economy where ROI is not the major consideration.

For a balanced growth of the economy both Digital and Cash transactions are required.

The demonetisation has already affected most of the sectors in the economy and SME’s are the most affected in a big way. The banks received higher deposits and they are in a comfortable position to lend . They had already reduced the interest rates. But the new NPA’s are likely to come from SME’s.

Government has seen a good increase in tax collection and this is likely to continue. Demonetisation has already had an effect, similar to the one which could have been achieved by GST.

The form of GST which is being talked about is one different from the initial concept, and many rates are being discussed and many exemptions are being considered. In the revised form, it may not fulfil the intended objectives and on top of demonetisation, it could reduce the growth rate further.  

In the light of above, Government could consider the following  while preparing the budget.

• The GDP growth objective for the year could be 8%.
• Higher Tax collection could be focussed on those who are still not on the tax net and focussing on the top 500 industrial / trading centres, the objective for higher Direct and Indirect tax could be achieved.
• Since already more have come into taxation net after the new measures by government, the corporate and Individual tax rates could be reduced to 28%.
• Through increased efficiency in tax administration , set a target to increase the tax collection by 20%.
• Due to increased level of Digital transactions, the banking model will undergo a change. Banks will lose one of the fee based incomes. Further, new exposure norms to large corporates will restrict the exposures to large corporates. The banks could focus on Government employees ( whose purchasing power has gone up due to pay commission recommendation implementations ), Retail customers and Micro Finance Institutions ( right now banks mostly lend to MFI’s and MFI’s in turn lend to groups. Instead of that a provision could be made for banks directly to MFI’s through creating a new SBU for MFI’s within Banks).
• The capital expenditure in the Corporate Sector and Infrastructure is yet to take off. Special incentives could be considered for kick starting the Capital investments, investments in Mining and other infrastructure sectors. Already lot of initiatives were taken in the Road sector. On the similar lines, enabling mechanisms could be created.
• To generate , more non tax revenues, as one option, The share holding in PSU’s , PSB’s above 75% could be sold in small lots through secondary market for the PSU’s / PSB’s which are listed and those who are not listed and have basic conditions for listing could be listed and 25% of shared could be sold.
• In each PSU / PSB through demerger, create Real estate subsidiaries. In the case of listed entities, even the other share holders will get the share. Then through sale / sale and lease back, lease , Invit, Reit, capitalise the value of the real estate properties.
• Create provisions for easy issue of Municipal bonds in India.
• Consider sale of Central government properties in prime areas with a target to mobilise at least Rs.20,000 cr through this route.
• Target a reduction of 25% in overall subsidies through Direct Benefit Transfer and micro – targeting of beneficiaries. Within a period of four years, set a target to stop all the subsidies.
• Since Individuals and SME’s are affected in a big way, measures to support these segments including increasing tax slabs , introducing more incentives for investments could be considered.
• Since the investment requirements for Infrastcuture and Industry growth are very high, the incentives available to Foreign Investors and Indian Investors should be continued. Any change in policy in this regard , will further increase the uncertainity.

Railways

·         This year, the railway budget would be merged with the General budget.

·         The government can consider creating a special fund and the tariff structure could be restructured in such way that, on an average for each journey, Rs.10 for investing in the equity capital of  Railway infrastructure corporation could be earmarked. The fund could be called Railway infrastructure development fund.

·         The amount collected would be Rs.8150 cr a year. This can be used to invest in additional capital of IRFC.

·         When it is routed through the fund, the fund has multiplier effect. That is the Corporation can borrow at least 6 times the additional capital. That is 48,900 cr.

·         The total amount mobilized would be Rs. 57000 based on the present numbers.

·         Assuming a growth of 5% every year, the total fund which could be mobilized for the next 10 years could be Rs.7,20,000 cr.

·         For the next five years, Rs.250,000 cr could be mobilized through this route and the remaining will come from other funding sources.

·         After the demonetization, there is an increased interest by pension funds to invest in India. Hence, IRFC can issue development bonds and SWF’s and Pension funds from abroad will invest in these bonds.