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24 Jan 2017

Budget giveaways uncertain due to demonetization distress

Finance Minister Arun Jaitley is under pressure to offer tax giveaways and increase capital and welfare spending in the upcoming union budget.

However, Jaitley faces a predicament as the economic distress caused by demonetization has made it difficult to offer giveaways.

The budget, announced on February 1, will likely be driven by political considerations as they come ahead of the crucial state elections.

In context

Budget giveaways uncertain due to demonetization distress

IMF trims India's growth outlook

India's growth outlook for 2017-18 (starting April) has been trimmed to 7.2% by the International Monetary Fund (IMF) from 7.6%. The IMF cited the negative effect of demonetization on India's cash-reliant economy for reworking its outlook.

Why Jaitley faces an unprecedented budget


Why Jaitley faces an unprecedented budget

Demonetization has also made it difficult to forecast next year's revenue outlook.

Annual indirect tax receipts increased by 14.2% in December. However, revenue outlook looks less than ideal due to a decline in consumer spending and a services and manufacturing contraction.

Delay in the launch of the Goods and Services Tax (GST) which would replace multiple indirect taxes has added to the uncertainty.

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Need to boost public capital spending

Corporate investments in the economy remain weak. Jaitley will need to stimulate growth by boosting public capital spending. The new income tax declaration scheme, which may have yielded an estimated $22 billion, could help meet part of the potential public spending commitments.


Jaitley may announce budget sops for farmers

Jaitley may announce measures to revamp the agricultural sector in the budget in a bid for the BJP to win over farmers ahead of state elections.

Sources said these measures could include more allocations to National Bank for Agriculture and Rural Development (NABARD), a continuation of concessions in loans to farmers.

Farmers faced losses due to supply chain disruptions and depressed prices after demonetization.

Economic strain

Taxes could be reduced but at a risk

Jaitley is expected to alter personal income tax allowances and reduce the 30% corporate tax rate by 1%, according to an expert.

However, such a move which is aimed at wooing voters, could risk straining public finances.

This could also negatively affect investor confidence and ratings agencies who have previously praised Jaitley for his fiscal prudence.

Government may increase social security benefits

The government is considering an expansion of social security benefits, including universal basic income or a targeted jobless allowance. However, this could make Jaitley's previous pledge of bringing down fiscal deficit to 3% of GDP in 2017-18 from 3.5% this year untenable.

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