Budget 2018-19 can be seen in three different perspectives: it is the final full budget of the present government, the budget will also carry the cascading effect of two major structural reforms of demonetisation and introduction of GST. Lastly, falling growth and rising fiscal deficit, unemployment, inflation, unstable indirect tax collection, weak investment and demand conditions will cast their spell on the allocation of funds.

Finance Minister Arun Jaitley has time and again set India on the road to fiscal consolidation, there will be no cut in expenditure on infrastructure and the tight rope walk between growth and fiscal prudence will continue. The tax base will have to be increased to generate more revenue and more people will be under the tax net.

The economy has just recovered to 6.3 per cent growth in Q2 from a low of 5.7 per cent in Q1 of the current fiscal. India’s rating has just improved to positive from stable by the Moody's. So the finance minister will present the last full Budget on February 1 with these sideshows running.

So where will the funds go – will they be for infrastructure, job creation through support to labour intensive industries, exporters, MSMEs, agriculture or the social sector.

Infrastructure

In India, infrastructure requirement is going to be big in the next five years, according to a report by CRISIL. India needs to spend at least Rs 50 lakh crore in the next five years through the year 2022 to develop infrastructure, the country will see close to Rs 3,000 crore investment per day.

“For years now, the government has been doing the heavy lifting in terms of infrastructure investments. However, having only the public investment cylinder firing is not good enough. Accelerating private sector investments is an essential complementarity, and the other cylinder that needs to fire,” it added.

More infrastructure spending will push private investment which will lead to job creation and also giving sops to labour intensive industries will boost employment at the lower strata of the economy. “Given that this government has come to power on the promise of generating 10 million jobs every year and has not achieved anything close this, the focus of the budget would be in enhancing jobs,” said N.R. Bhanumurthy, professor, National Institute of Public Finance and Policy (NIPFP), a research wing of the finance ministry.

Jaitley has on several occasions tried to explain why India should have a simple and efficient tax structure. That may translate in this budget into action by cutting the corporate tax rate to make Indian industry globally competitive and give incentives to infrastructure and small businesses without compromising on the government’s fiscal consolidation road map.

Industry bodies have suggested lowering corporate tax to 18-25 per cent, from up to 30 per cent at present. The minister may be looking at the chances of phasing out some of the exemptions and at the same time reducing them, it has been suggested. Corporate tax may figure on top of this agenda and also simplification of the rates would also feature in the Budget, it is widely expected.

The finance ministry recently set up a task force to draw up a new direct tax code, taking into account global best practices and the economic needs of the country. The government could be in the process of phasing out corporate tax exemptions and reducing the tax rate to make the tax system simple and reduce litigation, said a source. The tax rate for companies with annual revenue less than Rs 50 crore a year was reduced to 25 per cent from 30 per cent in the budget for the current fiscal year.

Corporate India sought lower tax and more incentives for investments while exporters called for quicker GST refunds at a meeting with finance minister Arun Jaitley in the run-up to the last full-year Budget of the NDA government before 2019 general elections. The finance minister exhorted India Inc to make investments in infrastructure sector to build a stronger India.

Private investment

“Across the world, people are reducing corporate taxes and in India the rates are among the highest. We do need to create more demand and capacities for private investment and if you see today, GST has increased the tax rates,” CII president Shobana Kamineni said. CII suggested that the road map for corporate tax rate for India should include reducing it to 18 per cent, all inclusive, at the earliest and withdrawal of surcharges and cesses.

Not just cutting taxes, industry says the government can raise revenues through putting more PSUs on chopping disinvestment block, selling airwaves to telecom companies. It is almost sure that these two developments find their way into the budget papers.

Private investment along with public and foreign investments are the key to boost growth and create job opportunities. Industry has given various suggestions including permitting the purchase of banks' recapitalisation bonds by institutions and the public at large, allowing banks to securities their loans and sell the same, setting-up of Land Bank Corporation for monetisation of government land parcels, including those belonging to the Army and Railways.

Hit hard by the GST exporters, who are grappling with blockage of working capital, have also pressed for exemption from tax on export income or lower levies on forex earnings and faster clearance of GST refunds.

The finance minister has promised 25 per cent corporate tax rate long back and we expect that the finance minister will fulfil his promise in this Budget, says the head of an industry chamber.

The MSME and start-up sectors have also risen to the occasion seeking incentives highlighting the need to establish an export zone with manufacturing facilities but without any taxes or regulations.

There is also strong demand for drawing a road map for convergence of the various GST slabs. “The implementation of GST and refund delays are a cause of concern, so we have suggested that if they can give us the IGST refund also, along with the drawback. In the US, there is a differential tax rate for export earnings, so we have sought a lower rate of tax on export earnings than the normal corporate rates,” EEPC India Working Committee Member P.K. Shah said.

He said refunds to the tune of at least Rs 60,000 crore- Rs 70,000 crore to exporters are stuck post GST roll out in July.

“We have asked the finance minister to take the corporate tax to 25 per cent comparing with developed and industrialised nations. This would help in investment and which, in turn, would increase employment opportunities. Dividend distribution tax, which is around 20 per cent, should also be less,” said Assocham president Sandeep Jajodia.

“Incentives may be provided based on twin criteria of growth in exports and growth in workers so that while export is increased, the employment intensive units also get a boost,” exporters’ body FIEO said.

“We have requested for reduction in the direct taxes and a scheme to boost women’s employment and expedited the refunds under GST as they have been delayed,” said P.R, Aqueel Ahmed, vice-chairman of the Council for Leather Exports.

Challenge

Fiscal deficit of 3.2 per cent this fiscal and next year at 3 per cent is a real challenge which is acknowledged by the finance ministry. Economic Affairs secretary Subhas Garg had told FC that in a structural reform year, fiscal deficit control becomes difficult though the efforts will be on to keep it under the 3.2 per cent.

“We have been able to achieve these fiscal targets due to focus on expenditure rationalisation, plugging of loopholes in public expenditure through Direct Benefit Transfer Scheme and the Public Financial Management System and by making innovative revenue-raising efforts, among others,”Jaitley had said recently.

D.K. Joshi, chief economist at Crisil says the government must cut down on wasteful subsidies to check fiscal deficit. Economists like Jean  Dreze and Arvind Virmani have recommended in the pre-budget consultation with the finance minister that reforms in tax proposals, social security should be looked into.

It is expected that on budget day 2018, Jaitley will put his balancing skills on display to help get the measure of growth, fiscal deficit and falling revenues to tell the nation, investors and stock market how profitable it is to bet on India.

anjana.das@mydigitalfc.com