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Union Budget 2018-19 would be the first post-GST budget and last full budget before the general elections of 2019. Real GDP growth is projected to moderate to a four-year low of 6.5 per cent in FY2018 (compared with 7.1% in FY2017) as per the first advance estimate of national income by the Central Statistical Office.
The real GVA growth for FY2018 is also expected to moderate to a three-year low of 6.1 per cent against 6.6 per cent in FY2017 and RBI’s estimate of 6.7 per cent. The slowdown in domestic economic growth is mainly on account of initial teething problems of GST implementation while the economy was still recovering from demonetisation.
The CSO typically publishes the advance estimate of GDP one month ahead of the Union Budget, which helps the government compute tax buoyancy and fiscal deficit in the Union Budget.
The role of the Union Budget has reduced over the past few years, as we have seen the government take important policy decisions outside the Budget as well as governments’ increasing focus on co-operative federalism, thus effectively making the states driver of capex.
Having said that it remains an important event to gauge broad direction and outline of government policy. Budget 2018 will be important against the backdrop of the ruling party’s poor performance in the rural belt in the recently-held Gujarat election and the packed election calendar ahead in 2018. We see a threat to the fiscal deficit number for FY18 due to lower-than-expected tax collection and the recent surge in crude oil prices. Further, despite lower interest rates, we have not seen any pickup in the private capex cycle.
This will require the government to walk a tightrope in managing rural as well as urban expectations.
On the rural front, the government has already introduced tangible schemes in the form of DDUGJY for rural electrification, Pradhan Mantri Ujjwala Yojana (PMUY) to accelerate LPG adoption and to accelerate road construction through (Pradhan Mantri Gram Sadak Yojana) PMGSY. We expect an increase in spending under these heads, as the government aims to meet its promise of 24X7 Power for all.
Although the government has stated its long-term objective to double farm income, we have not seen any tangible reforms on that front.
We expect measures to encourage allied activities in farming (dairy, shrimp farming etc) and reduce dependence on traditional crops.
Urban infrastructure will continue to remain in focus with increased allocation for Metro projects. Further, the government has relaunched the Bharatmala Pariyojana (BMP), an initiative to add 35,000 km of new highways (subsuming existing plans to add 10,000 km national highways) with an outlay of Rs 5.35 lakh crore over the next five years, which will raise investments in infrastructure and boost economic growth.
Although funding of this programme would largely be outside the Budget, NHAI being driver of this project, its allocation remains critical. PMAY (Pradhan Mantri Awas Yojna) is yet to take off significantly, and we expect fiscal incentive to expedite its execution.
Similarly, railways’ spending needs to be assessed against the five-year framework published by the ministry.
Financialisation of savings has remained a broad theme since the demonetisation drive and we expect the government to announce measures in this direction. Post bank recapitalisation and balance sheet improvement of a few banks, the government’s policy towards consolidation of PSU bans is expected in this Budget.
In November, the Finance Ministry constituted a six-member task force for direct tax reform. Although the committee is likely to submit its report by May 2018, the Budget speech may include some direction on the tax law.
Some of the key expectations from the Union Budget 2018-19 are:
It is expected that proposals for changes in direct taxes (personal income-tax and corporate tax) and customs duty are likely to be unveiled in the Budget. The current government has been vocal about the low tax base in the country and the fact that it needs to be widened to reduce tax evasion.
Tax rates also need to be rationalised. To review the existing structure of direct taxes in the country and related exemption norms, the government has created a task force headed by CBDT member Arbind Modi. The theme behind the task force is to make direct taxes more contemporary, which would be in line with modern-day requirements.
Arun Jaitley has mentioned that the government wants to maintain the momentum at which new infrastructure is being developed in the country. It is expected that urban infrastructure, housing, water and sanitation needs would see a lot of focus at the Budget.
Since the Railway Budget has been merged into the Union Budget, railway infrastructure will be an important topic. The government is focused on improving infrastructure, especially in rural areas. It is expected that allocation towards road construction will see significant increase.
On the funding side of infrastructure projects, these projects have long gestation periods and thus the government needs to look at ways for long-term financing of these projects.
The government is expected to further enhance its focus on spending in areas like agriculture, rural road development and irrigation. A higher allocation to Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), higher minimum support prices (MSPs) for agricultural crops and significant boost for other rural development schemes is expected.
To conclude, we have seen the government undertake various structural reforms such as GST, demonetisation, JAM (Jan Dhan, Adhaar, Mobile) trinity outside the Budget, which have helped it formalise the economy. We expect Budget 2018 to consolidate gains from these measures.
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