The Budget spells out the vision of the Modi Government for a $ 5 trillion economy in the next 5 years. However, whether this is achievable or merely aspirational remains to be seen.
On the Economy
The Budget has set an ambitious target of GDP growth of 8%, while lowering the fiscal deficit target marginally to 3.3%. This is done despite slowing GST collections, pressure on Government expenditure on account of social welfare programs and worries of global slowdown and trade war. The Budget has announced investment of INR 100 lakh crores in infrastructure, without giving any specifics. An expert committee will be set up to determine how this will be funded.
Recapitalisation of the banks to the tune of INR 70,000 crores over 3 years should revive lending and hopefully boost private investment. Perhaps the most controversial decision is to borrow from overseas market through sovereign bonds to finance the budget deficit. This implies that the Government is optimistic in maintaining the Rupee exchange rate.
The Budget proposal of increasing public holding in listed companies to 35% from the existing threshold of 25% is a good move for the long run, but the immediate stock market reaction is a thumbs down.
Direct Tax Changes
On the Direct tax front the super-rich have been targeted, with income over INR 5 crores being taxed at 43%, raising concerns over reintroducing a high tax regime. Of course, the super-rich must have heaved a collective sigh of relief as the much talked about inheritance tax was not introduced.
The welcome move is that companies with turnover upto INR 400 crores in 2017-18 will now pay tax at an effective rate of 29.12% as against the existing rate of 34.94%. Much has been mentioned about resolving long pending issues relating to start ups. But the devil is in the fine print, and several of the start-ups may discover that they actually do not benefit from the proposed measures. In an attempt to root out corruption, the Budget promises faceless electronic scrutiny. Will this actually benefit the tax payer or will it deprive him of his right to get a fair hearing; only time will tell.
Indirect Tax revisions
On the Indirect Tax front, the constitution of the National Appellate Authority for Advance Ruling for dealing with conflicting advance rulings is welcome. This would go a long way in bringing about uniformity in tax positions adopted across different States on identical issues. Further, the mechanism to settle legacy issues of Service tax and Excise law by introducing a dispute resolution cum amnesty scheme will allow businesses to unload this old baggage and move on.
The Budget has set ambitious targets and is high in intent, but falls low on content. Scrapping import duties on several products on the ground that it is not made in India runs the risk of perpetuating that deficit forever. Resource mobilisation through selling of PSU stocks is highly ambitious and relying on dividend from RBI for fixing the fiscal math is not a great idea.
The FM has thanked the honest taxpayers. However, the FM in the same breath has stated that if taxes are not paid honestly, the Government like a rampaging elephant may trample upon the tax payers. An ominous warning indeed.
The Budget was presented under the backdrop of the resounding electoral mandate of the BJP Government and hence, if ever, this was an opportunity to hit some boundaries. However, the FM has chosen to play steady, choosing to be incremental rather than radical in her approach.
As they say, good economics make bad politics!