For its focus on fostering economic growth, the Union Budget 2017-18 gets a Thumbs Up

    The Finance Minister presented the Union Budget, 2017-18 with slowing economic growth as the backdrop. With this as the unescapable macro-economic scenario, as an economist, in previous posts I had argued that the following 4 announcements are recommendations as well as possibilities for the budget:
  1.       Relaxation of the Fiscal Deficit/GDP ratio target 
  2.       Increase in Capital Spending to re-boot India’s capex cycle
  3.       Support to the MSME segment, which accounts for 45% of India’s industry
  4.       Support to banks in the face of rising NPAs
All four suggestions found a place in the FM’s budget speech today, which reflects that a consideration for macro-economic health has been the key guiding force for the latest union budget. 

The specific ways in which the budget addressed this issues is as follows:

1.   Modest relaxation in Fiscal Deficit/GDP ratio for 2017-18: Even though the FM has chosen to maintain the target for 2016-17 at 3.5%, that for 2017-18 has been relaxed by 20 basis points to 3.2%. This makes perfect sense in light of the economic growth band projected by the Economic Survey yesterday, as per which, growth could fall to a low of 6.75% in 2017-18 (lower than the 2016-17 expected growth of 7%); though it does project an upper limit of 7.5%. At a time when capital spending by the government is essential, and revenues could take a potential hit on account of slower growth as well as tax relief to both business and individuals, the increase in targets was thus prudent.

Read my post “Canthe centre meet its fiscal deficits targets?” for a  detailed background and economic argument on this measure.

2.  25% increase in Capital Spending: After muted increases in capital spending allocated by the government in the NDA’s present term, FM increased capital expenditure by 25.4% for 2017-18 citing the multiplier effect this spending has on economic growth. In absolute terms, this accounts for INR 3098bn, which is now covered under the head of 'Total expenditure through budget' as per the new classification of expenditure, which has done away with the plan versus non-plan categories of spending. The increase in spending is particularly remarkable at a time when revenue spending growth has been reduced to 6.1% only indicating the increased emphasis on capex.

Read my post “Canthe centre attempt to reboot the capex cycle?” for a detailed case for why government intervention is required on capital expenditure at present.

3.  5 percentage point reduction in MSME corporate income tax: In a very welcome step, the government reduced the corporate income tax on MSMEs with a turnover of less than or equal to INR 500 million by 5% to 25% from the current rate of 30%. The tax breaks will directly result in a cost saving for these companies, which are estimated to be at 667,000 in number as per the budget. The amount of revenue lost by the government is expected to amount to INR 7.2 billion, which is a small hit of 1.3% of the total expected corporate tax collections of INR 5.4 trillion in 2017-18. In sum, there could be significant support to the MSME segment – especially in the industrial category – in so far as its costs are reduced which can either be passed on to consumers and incentivise demand or increase their profits which can be ploughed back for better or more production. Either way, the sector gets a boost.

Read my post “UnionBudget, 2017-18: Crystal Ball gazing the FM’s announcements” for details on sectors most likely to benefit from this announcement.

4. Provision for NPAs increased to 8.5%: In light of continued NPAs among banks, particularly the public sector banks, the budget has increased the provision for NPAs by 1 percentage point from 7.5% to 8.5%. The increase in provisioning is expected to reduce the tax liability for banks. In line with the focus on capex spends and tax reductions for MSMEs, the latest provisioning will also support growth by feeding into the capex cycle, as it frees up banks’ resources for more lending going forward. Low systemic credit growth is at least partly on account of supply side factors, so this measure should help in easing financial sector conditions.

Read my post “UnionBudget, 2017-18: Crystal Ball gazing the FM’s announcements” for more on the NPAs faced by banks.

Special mention on income tax rate reduction

Besides these, one key announcement deserves a special mention – the reduction in income tax rate for those with income ranging between INR 250,000 and INR 500,000 to 5% from 10% will be a relief to a number of smaller tax payers, who have particularly suffered on account of the recent demonetisation drive. It will also give more money in the hands of all tax payers. Each tax payer with an income of over INR 500,000 will gain INR 12,500 in tax saving as a result of this. Cumulatively for all tax payers above this slab, the tax saved would be INR 9,500 crore. The amount would rise if we also include all tax payers who at present are paying 10% for incomes between INR 250-500,000. This measure is a slightly bigger hit to total income tax collections of the centre, which are anticipated to be hit by 3.5%. If the measure, however, results in greater compliance of taxes, then the effect will be neutralised. The impact of the income tax rate reduction on the overall consumption expenditure in the economy will be minimal at around 0.1%, though this too, can have a multiplier effect on the economy.


Given the constraints that the government functions with, namely (i) reduction in the Fiscal Deficit/GDP ratio, which reins in total permissible expenditure (ii) a slowing economy, which will tell on revenue collections necessary for adequate spending; the FM has done a fine balancing act, with multiple positives that will have a buoying impact on the economy in the days to come. The budget deserves a thumbs up for that.                            

No comments:

Post a Comment