Indian Union Budget 2017
I have to say — the only thing that excites me more than elections is a Federal Budget. And this week India delivers both so I’m well and truly in my happy place.
As I mentioned in my previous post, the Union budget is handed down on the 1st of Feb by Finance Minister Arun Jaitley and I thought I could use this post to think through with you some of the implications of the probable announcements. They’re all quite topical given that other countries around the world have also had similar debates recently.
Background
Economic indicators aren’t flash tbh. The government is expecting economic growth of 6–7 % (at least a percentage lower than forecast) due to the chaos of demonetisation, a drop in consumer and investor confidence, leading many to believe that government spending will need to play a larger role in the uplift. There was mention of a rail budget in a Modi press conference yesterday so it will be interesting to see what that entails.
- Inflation has remained rather sticky at around 5%.
- Fiscal deficit of about 3.5 % of GDP although given GST announcement later this this is expected to change.
- Current account deficit down to 0.3 % in the first half of FY 2017 (1Apr to 31Mar in India).
Restoring confidence
While it is expected that as the effect of demonetisation wears off consumer confidence will rebound, investor confidence is slightly more stubborn and will involve changes to the way business is conducted in India.
It will require confidence on the part of investors that if things were to go pear shaped, they have timely recourse to justice — something the overburdened Indian judicial system at present clearly cannot provide. International arbitration is an avenue, however measures have been taken through bilateral treaties to close this avenue to ensure the primacy of Indian courts.
The Make in India campaign has aided in this regard by getting states to report on a number of metrics that assess the ease of doing business in India. Pioneered by Modi to drive India’s manufacturing and cultural and arts sector (whole list here), the project also included FDI (foreign direct investment) reforms released last year to increase the limits increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy.
In the tax mix- consolidating GST
A vast majority of workers in the Indian economy are employed in the informal sector — about 80% (as per 2012 figures). This means there is no easy way to ensure compliance in payment of income tax. Thus it falls on other easily enforceable taxes to raise revenue, like land tax and consumption tax.
The Indian government has been working on a GST bill, to be released later this year, that will simplify the indirect taxation system. At present the states levy a series of value added tax that differ by state and, best I can gather, “level of relative luxury”. The revised GST will subsume a number state and federal taxes and excises. I’ve read a few different accounts of how this would be structured in practice. It seems like a model not unlike the Commonwealth Grants Commission in Australia — where the tax revenue accrues to the federal government and then gets divvied among states depending on considerations — could be implemented. However I have also seen reports that suggest that both state and federal government will likely levy GST which makes things rather complex. Either way, it’s likely we won’t see much about this in the Feb 1st budget but stay tuned as some experts say that GST might be legislated as early as 2017.
The way I see it, a key aspect of consideration for the government is how to avoid unduly punishing workers in the formal sector who pay income tax and will additionally shoulder the burden of a rather high GST (some reports suggest as high as 20% — though unsurprisingly they’re debating the low rate, no exemptions ; high rate, with exemptions).
Universal Basic Income
Flavour du jour indeed. I did not expect this to get much traction particularly given India’s population (high) and the sheer number of people who could be eligible for a UBI — I just didn’t think it would be financial viable. But it does seem that the government is serious about using the UBI to do away with a large number of State subsidies for poverty alleviation.
The Economic survey released today before the union budget delves into this in some detail. I would highly recommend flicking through it if issues around implementation of UBI is your cup of tea (p173 onwards).
Defence spending — nothing to tell
Pretty self explanatory title really. Despite India’s neighbours growing their defence spending India has been able to do the same largely because of the immense burden of personnel wages. With almost 1.3 million people in the army whose wages need to be accounted for, little remains for capital expenditure and purchasing new equipment.
In Conclusion…
Well it’s hard to say really. This would seem to be a rather crucial one for the Modi Ministry and for Arun Jaitley but really the effects of demonetisation while bad have worn off and more people are erring on the side of giving the Pradhan Mantri (Prime Minister) the benefit of the doubt.
The 2019 Election is still two years away — a lot can happen between now and then.
I’ll attempt a debrief post-budget once I’ve had a chance to digest all the announcements.
So much possibility! It truly is the most exciting time of the year. Wouldn’t you agree?
