India Union Budget Challenges

India Union Budget Challenges – 27th Jan 2018

India had the highest economic growth among the major  economies  in the world and in 2017, China became the fastest growing major economy in the world. Recent World Economic Outlook by IMF predicts that India will regain the position in 2018. The initiatives on Infrastructure development, Affordable housing and improving sentiments on economic growth should help to achieve the desired high growth in the next financial year. Since the budget is prepared in the year before the election year, there are many challenges in achieving the desired balance in budget.  

The government will not be able to plan for a very big increase in revenues and since the revenues will be growing at a slower pace, Governments expenditure has to be restricted.

GDP growth. In FY 17, the Economic growth was at 7.1% and in FY 18 it likely to end with 6.5%. Growth in Agriculture , Industry and Services, all of them witnessed a fall in growth rate. Higher growth in GDP is very important for achieving higher level of tax revenues. Industries are still operating at less than 75% of the capacity and before they start investing in new capital investments, the capacity utilisation has to go up above 85%. Stimulating the rural growth will help to achieve a higher economic growth.

Fiscal Deficit. Government was committed to meet the Fiscal targets. It appears that it would be difficult to achieve the fiscal targets this fiscal year and the next fiscal year. Government has to postpone the target date to bring the deficit below 3%.

US withdrawal of Stimulus. US started increasing the interest rates and the cheap money which has been deployed in Emerging markets would be gradually withdrawn from the markets. Further, USAs new found plan to make US regain its manufacturing competitiveness and reduction of income tax rates , will reduce the capital flows on account of FDI and FII, which was a good source of money to achieve a higher industrial growth.

GST. When the GST was introduced, the assumption was that it would help to increase the revenues from the indirect taxes. There is a mixed performance in collection of GST and at every meeting of the GST council meeting, many items were brought under the lower GST slab. Still the visibility of higher revenues is to be witnessed. Many more iterations on the rates have to be undertaken, before the GST rates stabilise. The rate of growth in indirect taxes has come down and it is likely to be lower in the next fiscal year also compared to earlier years.

Direct Taxes. The rate of growth in direct taxes also has shown a decline. Many large corporates reporting profits have seen their profit dwindle. The government has set a target to move towards lowering taxes. Already for companies having a turn over of less than Rs.10 cr, income taxes were lowered. But the scope to reduce taxes further on a large scale is very limited.

Government Expenditure. To support the Economic growth , the government was spending more money to sustain the high economic growth. This has helped to keep the economy growing at a good growth rate. To continue to spend more , the revenues have to continue to rise. To make up the shortfall in taxes, the government was able to mobilise more resources through disinvestment. It would be possible to raise large resources from disinvestment in the coming fiscal also. The major role played by government in sustaining the economic growth has to continue through government expenditure. There is a need to review the scope for reduction in expenses relating to non development expenses by the government.

Subsidies. Food Subsidies, Fertilizer subsidies and other subsidies continue to be at similar levels. Food subsidy alone is likely to cross  Rs.150,000 cr  and Fertilizer likely to cross Rs.70,000 cr . Since the large scale digital initiatives are in place both at the Centre and states , the scope for targeting the subsidies and reduction has to be explored with great speed. This will help to reduce the government expenditure.

Oil and Commodity Prices. When the oil prices were going down, Government was able to keep the final product prices and earn more revenue from the indirect taxes. Now that the crude prices are at much higher levels, the scope for increasing final products is very limited. The government has to cap the indirect taxes raised through keeping the prices at present levels. There may be a need for the government to reduce the indirect taxes to keep the oil prices at lower levels. Any rise in oil prices is likely to increase the inflation . Commodity prices , this year also at high levels due to synchronised up turn in economic growth across the world in 2017 and expected continued good performance in 2018. Since India imports commodities on a large scale, this will increase the import bill. But at the same time, exports continue to grow at much lower rate than imports . Government has to consider giving incentives to increase the export growth. This will put further pressure on government finances.

Infrastructure Projects. Government has drawn up a big plan to execute projects relating to Roads, Ports, Railways and Metros. The demonetisation has helped to increase the allocation of investors to financial products diversifying their portfolio away from Gold and Real estate . This is reflected in more money flowing into mutual funds and increased retail investor in the Capital markets. The government has big plans to raise bonds , long term loans directly from investors instead of seeking the bank borrowing . This is going to crowd the debt market and there will be lot of issues of debt at higher interest rates. This will keep the interest rates at high levels in the economy. Since the government is the largest borrower of funds, even the cost of funds for government will go up. The mobilising resources for implementing infrastructure projects at low rates of interest will be one of the challenges.

Since government has got lot of operating Infrastructure projects with  operating revenues, these projects should be taken through many InVits and the government should issue many Invits to make this product a success. Similar strategy could be thought of for the leased government properties for Issuing REITs. Apart from disinvestment, these sources also will aid in increasing the overall revenue of the government.

Jobs. About 15 million in a year are entering the Job market every year. More than 90% of the jobs in India are created in the informal sector and there is a limited scope for increasing jobs in the formal sector. Many new jobs in the informal sector is also in the form of entrepreneurship. After demoentisation / GST, the rate of growth in creation of new entrepreneurs has come down. India has one of the largest Unemployment Management Programmes in the world and schemes like MGREA is helping to create jobs for more than 50 million people. Already a big budget is provided for supporting the employment programmes. Further action plans have to be identified by the government to ensure no loss of jobs and new opportunities for creating entrepreneurs. Through start up initiatives, jobs are being created in new age sectors. But , there need to be action plans to create jobs in the traditional sectors.  

The government is likely to balance the interest of all the segments of the society and likely to continue its contribution to the development expenditure. It has already liberalised many sectors for FDI and it is likely to announce stimulus measures to increase the industrial , services and agriculture growth. The government can target a GDP growth rate of at least 7.75% and working backwards could identify the measures required in every sector. It would be necessary to keep the interest of investors on the capital markets high and continue the present sops given to Equity and Debt investors.