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Union Budget 2018: Watershed or Let Down?

Jan 30, 2017

Key Focus on Rural, Housing, Tax Rates and Fiscal Spending

The Union Budget 2018 is getting a makeover through a couple of departures from age old traditions, being presented earlier on February 1, and consolidated with the Railway Budget.

Rural India has been hit particularly badly by demonetisation. We would think Mr. Jaitley’s first order of business would be addressing the pain of the poor, especially in light of approaching elections in U.P. The big idea here in our opinion appears to be a universal basic income scheme or a more focused approach for the vulnerable segments. What hinders the universal basic income idea is the impact on the fiscal deficit. So we’d look for a targeted scheme through digital delivery to people with no sources of income. The government has a decent idea of who the poor are through the census. The idea is gaining traction in developed economies and could be the shot in the arm the Modi government needs to ensure the continued commitment of the poor to their cause.

Secondly, corporate India is desperately looking for an infra push. The trend we highlighted last year in our mid year outlook, decongesting metros, is something that we would look for the government to address in its roads and highways budget.

Third, the middle class has also borne pain via demonetisation, rises in service tax and the slowdown in the economy. We would look for a restructuring of the tax slabs with an eye to increasing the number of people in the tax rolls but making the tax structure fairer so that those in the middle class pay taxes, but pay a lower tax rate while the wealthy pay the lion’s share at the higher tax rates.

With the decline in interest rates, fixed income investors, particularly retirees are suffering. We would expect an increase in the exemption limit of Rs 3 lakhs for senior citizens.

For investments, we’d look for continued incentives for first time investors in financial markets.

From a tax perspective, the likely rollout of GST in July could mean that this is the last budget where we see line items for excise tax and service tax.

From an economic perspective, there is near unanimity today that the government needs to step up investments. Investors are calling for a pro growth budget, an aggressive stance on raising the fiscal deficit or deferring the glide path, and a reduction in personal income tax rates as well as corporate tax rates.

A Fillip to Business and Consumer Sentiment Is Needed

The onus is on the government to revive the sentiment and restore confidence through fiscal measures like tax concessions, keeping a higher fiscal deficit and spending to spur growth. Earlier, in Union budget 2015, government had indicated to cut taxes by 5% over four years in gradual manner. This year, the government might use the opportunity to cut corporate taxes by 2 to 3% to perk up corporate sentiment.

Job Creation

Although the government has undertaken reforms on an accelerated mode, little on the ground success appears visible. With half of the term over, and upcoming elections in key states, we would look to the government to give fiscal priority to job creation.

Card Payments & Digital Infrastructure

In continuation of the demonetisation scheme, we expect F.M. Jaitley to include emphasis on digital payments infrastructure and initiatives to spur investments in digital infrastructure, incentives to move to digital and programs to spread awareness on digital transfer methods.

Relief for Export Oriented Sectors

Anti-dumping duties levied on imports to defend the domestic industry in the last year are set to expire over next two to three quarters. Also, industry bodies are seeking to address issues related to inverted duty structure (this structure impacts domestic industry as manufacturers have to pay a higher price for raw materials in terms of duty, while the finished product lands at lower duty and costs lesser). We would look for the upcoming budget to provide relief for export oriented sectors like textiles, chemicals, pharmaceuticals, steels, ceramic tiles etc.