February 1, 2018
In hours from now, Finance Minister Arun Jaitley will present annual Budget for the financial year 2018-19. This will be Modi government’s last full fledged budget ahead of General Elections 2019. The Finance Minister has to tread a very fine line as the expectations are high but there is very little fiscal room to fulfil those expectations.
The government has some serious issues that they have to address in this budget only. Some of the challenges are: agrarian crisis, formal and informal job creation, economic recovery, infrastructure, improving healthcare, spending on education and making India’s business environment competitive by bringing down corporate tax rate.
However, there is little hope that Jaitley could deliver on all fronts as the GST collections have declined, inflation has shot up, and fiscal deficit has widened. Exports are not growing at a desirable pace – almost half the rate at which they expected to. The agricultural sector has not been able to perform as well as it used to. Private investment, which had fuelled India’s growth story in the past, has not been as good as it used to be.
This leaves the government with the option of investing out of its own pockets, which will mostly come from the Finance Ministry. This will be in the form of infrastructure investment, as well as social and rural investment.
Individual taxpayers have been expecting relaxation in the income tax slab of Rs 2.5 lakh. Chances are that the tax slab might be raised to 3.5 lakh, although the expected tax slab of Rs 5 lakh seems unlikely to come to pass in this budget. Industry stakeholders have also been looking for a corporate tax rate cut. Whether these changes in the taxation norms for individual taxpayers and corporate sector become a reality or not will depend on how much the government can spare from its finances, which have been stretched due to GST not delivering the kind of returns it was supposed to. This has narrowed the fiscal space for any incentives in the taxation scenario.
Ahead of the budget, Chief Economic Adviser Arvind Subramanian said that by definition if growth is picking up and inflation is rising, there is less scope of monetary easing. In such scenario, RBI may not go for interest cut, and if it does not do so credit demand will remain low, and the government will have to pump in capital to create jobs and get the economy running. The Finance Minister will most likely keep these facts in mind and will set his priorities accordingly.