Union Budget- Commentary and Outlook

Contributed by: Vivek Rathi, CFA, Member, IAIP

India has witnessed a major disruptive event late last year in the form of Demonetization of higher value currency notes of Rs.1000 and Rs.500. This seems to have acutely hit the major part of the economy Because of this the GDP is expected to decline, the predictions for which range from quarter of a percentage to couple of percentage points.

Also, the world is heading towards uncertain times, where protectionism is on the rise. The policies of the new dispensation in United States seems to be moving towards de- globalization, UK is on verge of moving out of European Union and the looming elections in other European economies (like France) where the rising popularity of the conservative parties increases the chances of break-up of Euro zone.

Though the budget was presented against the backdrop of these disruptive events, it still appears to be a continuation of the process laid out in last budget. Rural/agriculture and Infrastructure was the theme this time round as well.

Defying all expectations, this budget had no fireworks; there was no major populist announcement like loan waiver for farmers, Universal income, etc. It was more of a document of intent of the government, signalling the direction which the current regime seems inclined to follow.

Apart from the rural and infrastructure sectors there were few other important policy decisions, like the ban in Cash transaction exceeding Rs.3 lakh, reforms in political funding process and the legislation for confiscating properties of individuals fleeing to other countries (who are under investigation of various agencies).

Analysis

Budget is one of the important tools which the government has at its disposal but it is not the only one. It has to be followed up with implementation on ground and at the same time supported by other important policy actions. To be precise, every budget has to lay a foundation on which future budgets can be built upon. Considering this, it is pretty clear that the focus of Modi government is on infrastructure inclusive of Roads, Railways, Power and Waterways. In fact, infrastructure (whether it be railways or roads) is the common theme in last three budgets i.e. 2015-16, 2016-17 and 2017-18.

Rural economy was severely affected by demonetisation as it is dominated by cash transactions. But 86% of the cash was removed from the system overnight. Hence, demand took a severe hit, halting the entire rural economy. And with impending state elections, the stage was set for the budget, with the majority of analysts predicting it to be a populist one. However, this did not materialize. Rural areas are critical to win state/general elections. Going by this back ground it was obvious that the rural stress had to be addressed first. Therefore the spotlight was turned to farmers/irrigation/rural infrastructure.

In current year, agriculture is expected to grow at 4%, which is a positive for agriculture dominant economy like India. This would be complemented by the increase in agriculture credit to Rs.10 lakh crore which would be further supported by the 60 day credit period (interest waiver) announced by the prime minister. There are number of other agriculture focused schemes where the funds allocation was increased considerably like Fasal Bhima Yojana, funds at NABARD, increase in allocation for MNREGA to Rs.48000 crore, etc. These schemes are expected to reduce farm distress considerably.

Apart from this, there is substantial outlay of Rs.19000 crore (Rs.27000 crore if state spending is included) for building village roads under the Pradhan Mantri Gram Sadak Yojana. The pace of construction of roads under this scheme is 133Kms/day, which is commendable. This, coupled with other schemes like, the target of complete village electrification by 1st May 2018 and construction of 1 crore houses, would stimulate the rural economy in big way. Though the allocation of funds for these schemes has increased, the implementation will still be challenging. There are number of other such schemes having rural focus, the total allocation for which stands at Rs.187223 crore, a considerable increase of 24% over last year. This would surely have positive impact on economy in long run. As almost 52% of India’s population bank on agriculture sector for survival, it is very important that this segment is taken care of. There is some hope in this direction as MNREGA funds are now used for making ponds or other like storages for water. It is also used to build toilets in villages. Such moves would not only provide employment opportunity but would also help in creating better infrastructure and in, clean India mission. Similar innovation has to be identified for other schemes as well.

The focus on roads, railways & power is a hallmark of this government. It has set a very ambitious target and the progress till date seems satisfactory. Last year, Finance minister has allocated Rs.57,976 crore for building of roads and highways and the same has been increased to Rs.64000 crore in 2017-18. The total length of roads built since 2014-15 is 140000 kms, which is laudable and we hope that it continues at same pace.  With this, the total allocation for Railway, Roads and Shipping stands at Rs.241387 for 2017-18. In addition, the extensive focus on Renewal energy & Digitization will have positive impact on economy in the long run. Overall, the total expenditure in infrastructure stands at Rs.396135 crore, which has capacity to generate ample employment opportunities, especially in rural areas.

Another positive outcome was the decision to stick to the fiscal deficit targets of 3.5% this fiscal year and the change in target for next year to 3.2% of GDP from 3%. This was very important, as government had to step up spending to tackle the twin wrath of demonetisation and timid private investment.

Some other critical announcements were the increase in capital expenditure by 25.4% and phasing out of FIPB.  These measures would support employment generation and abut economy in long run. On taxation front, though there were some minor change in personal tax rates but the big change was in the corporate tax rate for MSME sector, the tax was reduced from 30% to 25%. The writer feels that this could be major bonanza for small industries, and would also help in employment generation as still the considerable proportion of population is employed in this sector.

At present, revenue does not look like a major challenge as government is trying to bring more people into tax net either by pushing for digitization or incentivizing cashless transfer or steps like demonetization. This seem to have borne fruits as well, as advance tax collection for the Personal Income tax has increased by 38% for first three quarters of current fiscal year. Government can be in comfortable position if the trend continues. Also, the revenue would be bolstered by the privatization of PSUs and IPOs of government insurers’. In fact, the revenue from IPO’s could be significant as the SEBI rule mandates holding of maximum if 75% percent by promoter, so the government can expect huge revenues with these IPO’s.

The writer believes that the major challenges of this budget would lie in the implementation of the announced schemes. In fact, the crux of all the last three budgets lies in execution of the proposed projects, the results of which have been mixed till date. Some important schemes like electrification of Villages, Affordable housing, MNREGA, etc. could be exploited by middle men to their advantage. Thus, the devil lies in implementation.

Conclusion:

Over all, it is a continuation of last budget, as most of the schemes remain same but with significant increase in funds, though the gist would lie in implementation of the same. For this budget to have visible impact, the Finance ministry and PMO will have to keep track of every penny spent and ensure that it reaches the intended recipient. Another challenge for the finance minister would be to ensure that enough funds (allocated amount) are available for the announced scheme and is diligently used for intended purpose. At the same time he has to ensure that there are other avenues available for raising revenues in case there is shortfall in expected collections from various sources.

VR

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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