Union Budget 17-18: 4 Key Components

Union Budget 2017-18 was not just unique due to its reformist focus but also because it was predicated on four unique building blocks. The Finance Minister surely had a tough task on hand. Firstly, he had to provide an antidote to the people after the pain of demonetization. However, this had to be done without increasing the burden on the exchequer too much. Secondly, infrastructure and agriculture required a quantum boost. However, the FM could not afford to be lenient on fiscal deficit targets. Thirdly, the focus of the Union Budget will be on the likely direction of fiscal policy in the coming years. However, the fiscal policy also needs to be conducive with the theme of a dovish monetary policy. It is in this background that the Union Budget was presented. Actually, there were four broad themes or building blocks which formed the thematic and philosophical base of the budget.…

Building Block 1: Big Focus on the Bottom of the Pyramid…

One of the most influential books by noted thinker, C K Prahlad, focused on the bottom of the pyramid as a distinct emerging economic powerhouse. According to Prahlad, a vast majority of people in developing countries were virtually at the bottom of the economic pyramid. However, a combination of fiscal stimulus and directed welfare reforms could go a long way. This Union Budget has surely taken a leaf out of Prahlad’s book. The Union Budget has a big focus on Affordable Housing and has accorded Infrastructure Status to this segment. This will change the economics of affordable housing and give it a big boost. At the bottom of the pyramid, a boost to housing has larger externalities. It can have a multiplier impact on the economy in terms of incremental jobs, incremental income and eventually incremental demand. The Budget has also made a record allocation to MNREGA (rural employment guarantee programs), big investments in rural infrastructure, massive outlays for less privileged farmers etc. At an urban level, the entry level tax rates have been tweaked. There were also expectations of a Direct Benefits Transfer (DBT) or a Universal Basic Income (UBI) scheme. While these did not come about in the Union Budget, they are expected to happen sooner rather than later!

Building Block 2: Fiscal discipline first and fiscal discipline last…

In the previous Union Budget, 2016-17, the Finance Minister resisted the temptation of fiscal laxity despite having the added liability of OROP and 7CPC. In the Union Budget 2017-18 the FM has continued to build on the pillar of fiscal discipline. In fact, despite the leeway of 50 basis points offered by the FRBM, the Budget has decided to stick to a fiscal deficit target of just 3.2% for 2017-18 and at 3% after that. Additionally, the government borrowing target for the fiscal year has also been cut by 20% and that will ensure that rates stay low and private borrowing is not crowded out. Fiscal discipline, as a pillar of the budget, is importance for a variety of reasons. Firstly, it assures the external rating agencies of the commitment of the government to fiscal prudence. Secondly, it is viewed positively by global portfolio investors while committing money. Lastly, it keeps the INR stable, which is a big advantage in the midst of a volatile global economy.

Building Block 3: Widening tax base and better compliance…

If demonetization was the trailer, the Union Budget was the real story. The purport of demonetization was to reward the honest tax payer at the expense of the tax evader. The economic rationale was that better compliance and sharper audit trails will result in more individuals and businesses coming into the tax net. The budget has taken a few concrete measures. Firstly, the tax rate on entry level incomes has been cut by half from 10% to 5%. This low rate of tax is expected to substantially improve compliance, especially from individual entrepreneurs and traders. Secondly, the budget has cut tax rates for MSMEs and small companies with turnover up to Rs.50 crore to 25% from 30%, since most of them do not qualify for exemptions. Thirdly, the budget has also made an effort to simplify audit and compliance for small and medium-sized companies. Lastly, the presumptive rates of net income for tax purposes in case of small businesses have been cut from 8% to 6%. Combined with technology-based targeting and transaction audit trails, the target is to widen the tax net in a substantive and meaningful manner.

Building Block 4: Focus on capital spending and de-focus on revenue spending…

The big theme of the Union budget is to shift the focus of the central government from revenue spending to capital spending. Consider these numbers. The budgeted capital spending is expected to increase by nearly 13.3%. Within this increase, defence will rise by just 5.5% while non-defence capital expenditure will increase by a whopping 22.4%. On the other hand, revenue expenditure will rise by just 6.6%, which will be at par with the growth in revenue receipts of 6.6%. This discipline will ensure that the government does not impose the mismatch of using capital receipts to fund revenue expenditure. This is also evident from the fact that the revenue deficit for the fiscal year 2017-18 has been pegged at 1.9%; lower than the FRBM target of 2%. The composition is more important. For example, under capital expenditure, the focus is more on non-defence investment like infrastructure. Within the ambit of revenue spending, the focus is more on health and education which are long-term accretive for the economy.

All in all, it has been an interesting budget. A good start has been made in terms of the building blocks. A lot will depend on the implementation!