Budget 2017-18. A well-crafted package

The Indian economy is going through a major transformative journey. Demonetisation and the ensuing adoption of GST hold a lot of promise for the future even as every churn causes some dislocation in the interim. Globally, clouds of uncertainty dot the horizon, especially following the phenomenal change in the US policy framework. Against this backdrop, the Budget has delivered an extremely well-crafted package — balancing deft fiscal management, a strong push to inclusive growth and furthering the agenda of ease of doing business.

In the current fiscal, the Government has managed to contain fiscal deficit at 3.2 per cent of GDP — better than last years’ target of 3.5 per cent. This has been achieved despite the increase in capital expenditure beyond budgeted limits. Tax buoyancy, part of which could have been on account of the demonetisation, may also have contributed to this. That the net market borrowing has been pegged at a significantly lower level than in the previous year should gladden the bond markets and perhaps open up the space for a more accommodative monetary policy.

In fact, the finance minister is aiming at a revenue deficit of 1.9 per cent of GDP, going a step beyond the correction recommended by the FRBM committee. This shows that even the quality of fiscal deficit is improving. The Government is intending a big jump in capex, over and above a sharp increase in the current fiscal. This should bode well for the economy, at a time the private sector investment cycle appears sluggish.

The boost to capex appears pointedly in agriculture, the rural economy, and physical infrastructure. After the integration of the railway budget with the general budget, an integral approach is being followed for the transport sector. And this is welcome. The development of multi-modal logistics parts and offering of end-to-end integrated transport solutions by the Railways will enable optimising logistics cost for manufacturers. The new scheme to strengthen the export infrastructure should help at a time of slowdown in global trade flows.

The Budget also places a lot of emphasis on roads and housing. Accordingly, the infrastructure status to the affordable housing sector makes immense sense. The record target of ₹10 trillion for agricultural credit, a fund for dairy processing infrastructure, increased focus on creation of productive assets in MGNREGS and ambitious plans for setting up skill centres are all welcome steps. Particularly noteworthy is the bold announcement of bringing one crore households out of poverty by 2019.

There was expectation of some tax cuts, especially in the area of direct taxes. There have also been concerns about India’s tax-to-GDP ratio being low and the share of direct taxes being sub-optimal. The minister, in fact, voiced these concerns in his speech. There were also considerations of maintaining fiscal discipline and the imperatives for an investment push to boost growth. Amidst these constraints, it should not be a big disappointment that the finance minister did not carry out a reduction in corporate tax rate across the board. The Government’s roadmap for bringing down corporate tax rate to globally competitive levels over the medium-term remains in force. The extension of the concessional withholding tax rate of 5 per cent on interest on ECBs and extension of this benefit to Masala bonds, as also the increase in the carry-forward period for MAT credit are sweeteners for the corporate sector. The finance minister did give relief in corporate tax to the smaller companies, which is certainly well deserved.

There are many announcements in this budget that further the process of economic reforms. An important one is the phase-out of FIPB. This will ease the flow of FDI through transparent and automated processes. The simplification of labour laws into codes is laudable. This should enhance the ease of doing business and help employment creating sectors. The creation of a Model law on contract farming promises to be another important beginning. It can potentially be a game-changer for enhancing farm productivity and infusion of capital and technology into the sector.

The divestment target for FY18, at ₹72,500 crore, is an ambitious one. However, the Government seems to be looking at a revised mechanism for time-bound listing of CPSEs and leveraging the ETF mode for divestment. It would help in unlocking a lot of value. Some of the potential value-unlocking targets were already mentioned in the Budget — including listing of the railways’ select enterprises and creation of an integrated public sector oil major. The latter would create an Indian giant, with a strong muscle-power to undertake large investments in the oil and gas sectors in India and abroad. Overall, the divestment game-plan would help balance the fiscal arithmetic and result in more efficiencies and enhanced professionalism in PSUs

On the social and political front, the big reforms pertain to the comprehensive concept of political funding. The two needs, of discouraging cash donations and maintaining the requirement of secrecy as to the political party to which a donation is being made, seem to have been achieved through the concept of electoral bonds. It should go a long way in making our political process cleaner.

The finance minister also enunciated a number of steps to discourage cash transactions and to encourage the digital mode of payments — taking recourse to the carrot-and-stick method. The tax sops given for the equipments that form part of the digital payment infrastructure, launch of Aadhaar Pay and creation of a Payments Regulatory Board in the RBI are all enablers in the move towards a digital economy.

These steps constitute a natural follow-up to the process that has been set in motion since demonetisation. Over time, this should help make India a tax-compliant society and in realising the conversion of the informal economy into the formal economy.

Overall, the Budget carries forward the previously announced priorities of the Government, and continuing reforms. It should help the economy rebound faster in FY18 and to move forward on our medium-term objectives of a poverty-free, growth-enabled and cleaner society.

The writer is chairman of the Aditya Birla Group