Context
Author points to several positives in the budget but has specifically two grudges with it – absence of a clear roadmap for corporate tax reduction & setting of fiscal deficit target at 3.2 per cent instead of 3 per cent
A budget of several firsts
Union budget this time had several firsts
- Advanced by nearly a month: The presentation of the budget was advanced by almost a month so that the government could start spending from the beginning of the financial year
- Merger of railway budget: For the first time in the history of independent India, the railway budget was included in the general budget. This will help in better transport planning, which is likely to improve outcomes
- End of plan and non-plan classification: It was also the budget that marked the end of the planning era in the country. As a result, the classification of expenditure has changed to revenue and capital expenditure from Plan and non-Plan expenditure
- Demonetization: It was the budget that was presented in the aftermath of the unprecedented move of demonetization
Three issues worth noting in the budget
Author states that given the backdrop of the currency swap initiative, weakness in economic growth and continued sluggishness in private sector investment, there are at least three broad issues worth noting in the budget.
- The impact of the demonetization on black money and the economy in general: The government now has an enormous amount of data on bank deposits made after the currency reform was announced
- Mining data without hassling honest taxpayers:The challenge now for the tax department will be to mine the data and be able to check tax evasion in a meaningful way without causing hardship to honest tax payers. Reduction in evasion and improvement in compliance will, over time, reduce the burden on honest taxpayers
- Drive to push digital transactions: Boosting digital transactions will lead to formalization of economic activity that will help economy in number of ways in medium to long term
- Reform measures to help the economy: The government has taken several reform measures in the budget that will help the economy
- Increase in capital expenditure: In the light of a weak private investment, government has increased capital expenditure by over 25%, which will help push growth in the coming year
- The special focus on agriculture and rural India will also benefit the economy. This has been mentioned under the first editorial of The Hindu
- Increasing foreign investment: The government is also taking steps that will help increase foreign investment, which is already buoyant. The commitment to abolish the Foreign Investment Promotion Board in 2017-18 is a positive
- Cleaning the political funding: The government has also done well by initiating reforms in political finance which will help reduce the role of cash and lead to greater transparency and accountability. Currently, about 70% of the donations that political parties receive comes in cash. It can be argued that parties can still show donations in cash even with the reduced limits. But the fact that steps have been taken in this direction is a positive. Outcomes can always be reviewed and rules can be adjusted.
- Disappointment on corporate tax reduction: There is one big disappointment on the reforms front. While the rate of tax for smaller companies has been lowered, the corporate tax rate has not been reduced, as was widely expected by the market. At the least, a clear road map for reduction in the corporate tax rate would have lifted sentiment among investors
- Fiscal deficit target should have been lower: While the tone of the budget was positive and encouraging, the decision to target the fiscal deficit at 3.2% of the gross domestic product (GDP) is a disappointment even as market borrowing (government borrows to finance the fiscal deficit & it has been fixed at a lower level than previous year) has been fixed at a lower level. In the given circumstances, there was a strong case for adhering to the 3% target. It would have enhanced government credibility a great deal and placed it in a much better position to implement the new fiscal rules.
Conclusion
Author states that the budget has moved in the right direction however there should have been a clear road map on rationalization of corporate tax and adherence to the fiscal deficit target of 3% of GDP
