After the Demonetization move by the Indian Prime Minister on November 8th, 2016, the next big thing for which the Indians were waiting eagerly was the Indian Union Budget 2017. India’s Finance Minister Mr. Arun Jailty presented the budget on February 1st, 2017, in a supposed to be a challenging time for the Indian economy. Tailwinds like low oil and commodity prices which have been supporting the economy, are gradually turning into headwinds now. Additionally, legacy issues like the pile of bad debt continue to delay a broad-based investment revival. Last but not the least, the shock of demonetisation seems to have hit aggregate demand and consumer sentiment, necessitating sops. Mr. Jaitley was therefore presented with the intimidating challenge of aiding a recovery in new investments, growth, and jobs, without compromising macro-economic stability at a time of growing global uncertainties.
This has been a historic budget where for the first time after 92 years the railway budget and the general budget have been merged and presented together. The budget was mainly focused on 10 themes viz. Farmers, rural economy, energising youth, poor and underprivileged, infrastructure, financial sector, digital economy, public service, prudent fiscal management and tax administration.
Sector Major Announcements Impact
Agriculture
With a pledge to double the income of farmers in the coming five years a host of announcements were done for the farmers. A sum of Rs. 10 lakh crore is allocated as credit to farmers, with 60 days interest waiver. NABARD fund will be increased to Rs. 40,000 crore. Government will set up mini labs in Krishi Vigyan Kendras for soil testing. A dedicated micro irrigation fund will be set up for NABARD with Rs 5,000 crore initial corpus. Irrigation corpus increased from Rs 20,000 crore to Rs 40,000 crore. Dairy processing infrastructure fund wlll be initially created with a corpus of Rs. 2000 crore. Issuance of soil cards has gained momentum. A model law on contract farming will be prepared and shared with the States.
Rural Population
The government targets towards providing employment and basic infrastructure to the rural population. The government has set its target to bring 1 crore households out of poverty by 2019. During 2017-18, five lakh farm ponds will be taken up under the MGNREGA. Over Rs 3 lakh crore will be spent for rural India. Steps will be taken to ensure participation of women in MGNREGA up to 55%. Space technology will be used in a big way to ensure MGNREGA works. The government proposes to complete 1 crore houses for those without homes. Rs. 19,000 crore allocated for Pradhan Mantri Gram Sadak Yojana in 2017-18. It was said that the country is well on way to achieve 100% rural electrification by March 2018. Swachh Bharat mission has improved sanitation coverage from 42% in Oct 2013 to a 60% currently
Youth, poor and underprivileged
In order to energize the youth through education, skills and job a system of measuring annual learning outcomes will be introduced and an innovation fund for secondary education. Focus will be on 3,479 educationally-backward blocks. Colleges will be identified based on accreditation. Skill India mission was launched to maximise potential. 100 India International centres across the country will be set up. Courses on foreign languages will be introduced. Steps to create 5000 PG seats per annum will be taken.
To strengthen the system of social security, healthcare and affordable housing, a number of policies were announced. Rs. 500 crore allocated for Mahila Shakthi Kendras. Under a nationwide scheme for pregnant women, Rs. 6000 will be transferred to each person. A sum of Rs. 1,84,632 crore allocated for women and children. Affordable housing will be given infrastructure status. Owing to surplus liquidity, banks have started reducing lending rates for housing. Elimination of tuberculosis by 2025 targeted. Health sub centres, numbering 1.5 lakh, willl be transformed into health wellness centres. Two AIIMS will be set up in Jharkhand and Gujarat. Structural transformation of the regulatory framework for medical education will be undertaken. Rs. 52,393 crore was allocated for for Scheduled Castes. Aadhaar-based smartcards will be issued to senior citizens to monitor health.
Infrastructure and Railways
Infrastructure spending is given importance in order to improve the efficiency, productivity and quality of life. A total allocation of Rs. 39,61,354 crore has been made for infrastructure and Rs. 1,31,000 crore for Railways. No service charge will be taken for booking tickets through IRCTC. Raksha coach with a corpus of Rs. 1 lakh crore for five years (for passenger safety) will be operative. Unmanned level crossings will be eliminated by 2020. 3,500 km of railway lines will be commissioned this year up from 2,800 km last year. SMS-based ”clean my coach service” is put in place. “Coach mitra” facility will be introduced to register all coach related complaints. By 2019 all trains will have bio-toilets. Five-hundred stations will be made differently-abled friendly. Railways to partner with logistics players for front-end and back-end solutions for select commodities. Railways will offer competitive ticket booking facility. Rs. 64,000 crore allocated for highways. High speed Internet to be allocated to 1,50,000 gram panchayats. New Metro rail policy will be announced with new modes of financing.
Financial sector
India’s financial sector has been envisaged to grow steadily through stronger institutions. With the new FDI policy reforms, more than 90% of FDI inflows are now automated. Shares of Railway PSE like IRCTC will be listed on stock exchanges. Bill on resolution of financial firms will be introduced in this session of Parliament. Foreign Investment Promotion Board will be abolished. Computer emergency response team for financial sector will be formed. Pradhan Mantri Mudra Yojana lending target fixed at Rs 2.44 lakh crore for 2017-18.
Digital economy and Public service
For speedy accountability and transparency, the digital economy theme has been adopted. Digital India – BHIM app will unleash mobile phone revolution. The government will introduce two schemes to promote BHIM App – referral bonus for the users and cash back for the traders. Negotiable Instruments Act might be amended.
Head post office will be the central office for rendering passport service. Easy online booking system for Army and other defence personnel will be introduced. For big-time offences – including economic offenders fleeing India, the government will introduce legislative change or introduce law to confiscate the assets of these people within the country. No cash transactions above Rs. 3 lakhs will be allowed.
Cash donations capped at Rs 2,000; anything above that to be in cheque/via digital mode; amendment to RBI Act for issuance of electoral bonds; all parties required to file returns within specified time.
Fiscal situation
Government pegs fiscal deficit target at 3.2% for 2017-18 and 3% for next year with a deviation of 0.5% of the GDP. The total budget expenditure has been decided as Rs. 21, 47,000 crore. Plan, non-plan expenditure to be abolished and focus will be on capital expenditure, which will be 25.4 %. Rs. 3,000 crore allotted under the Department of Economic Affairs for implementing the Budget announcements. Expenditure for science and technology is Rs. 37,435 crore. Total resources transferred to States and Union Territories is Rs 4.11 lakh crore. Revenue deficit allowance is 1.9 %.
Tax administration
India’s tax to GDP ratio is not favourable. Out of 13.14 lakh registered companies, only 5.97 lakh firms have filed returns for 2016-17. Proportion of direct tax to indirect tax is not optimal. In this year’s budget the theme around tax administration targets to honour the honest. Tax rate halved to 5% from 10% for those earning between Rs 2.5 – 5 lakh. All other income brackets to get uniform benefit of Rs 12,500 per assesse; 10% additional surcharge on Rs 50 lakh-1 crore income levels. Long-term capital gains tax holding period for housing reduced to two years from three years.
On a concluding note
The single biggest takeaway from the budget is that it is not expected to obstruct the recovery of the Indian economy. Jaitley has missed his own target for cutting down the fiscal deficit but the deviation is not large. The fiscal math behind the budget projections are slightly optimistic but not over the top. He has also planned a big increase in capital expenditure, which can pull in private investments and boost growth, if all goes as decided. The tax relief for small companies and the middle class may help widen the tax base and boost consumption spending. The relief for small and medium enterprises will also have the same effect and help propel job growth in the sector.
Apparently there are two big risks that this budget faces. One is the government’s revenue expenditure (for routine expenses), which the government expects will increase only by 6% compared to the revised estimates for the current fiscal year, roughly at half the rate of growth of the past fiscal year. There is a real risk that the government will over-shoot these targets and to compensate, cut down on capital expenditure. This will in turn hurt overall investment growth of the economy. The government’s disinvestment targets also appear over-ambitious. Secondly, the finance ministry did not do much to recapitalize state-owned banks. No big step was taken to resolve the bad debt issue quickly. Jaitley has set aside just Rs. 10,000 crore for the capital requirements of banks, which is barely 1% of the total non-performing assets of India’s banking industry. Without a quick resolution of the bad debt problem, we are unlikely to see either a broad-based capex revival or a return to a high growth trajectory.
