On a Pragmatic Note

Business Today speaks to an elite panel to understand what they make of Jaitley’s first Budget after demonetisation

T he first Budget since demonetisation has been a careful exercise by Finance Minister Arun Jaitley. It caters to the core constituency – farmers and lower income people – while not introducing anything that hurt industry. The increased focus on infrastructure spending at `3.96 lakh crore could over the medium term lead to more jobs at the bottom of the pyramid. On the fiscal front, despite halving income tax rates at the lowest end from 10 per cent to 5 per cent, Jaitley has managed to rein in the fiscal deficit to 3.2 per cent in 2017/18.

Business Today discussed Jaitley’s fourth budget with an elite panel that included Arvind Virmani, President, Chintan and former Chief Economic Advisor; D.K. Srivastava, Chief Policy Advisor, Ernst & Young, Jaijit Bhattacharya, Partner, Strategy & Economics, KPMG; Mukesh Butani, Managing Partner, BMR Legal; Shubhashis Gangopadhyay, Research Director, India Development Foundation; Abhijit Sen, former member of the Planning Commission; Ashu Suyash, Managing Director and Chief Executive Officer, CRISIL, and Rahul Garg, Partner and Leader, Direct Tax, Pricewaterhouse Coopers. Excerpts:

Q: What is your reaction to the Budget? What did you like and what disappointed you?

Arvind Virmani: The Budget meets the benchmark that I set for it post- demonetisation, which was to ensure that temporary gains from demonetisation in terms of black economy of real estate, better income tax compliance and corruption are sustained. D.K. Srivastava: I would rate it at 7/10. There is a clear support to growth by a marginal relaxation in the fiscal deficit target for fiscal 2018, keeping it at 3.2 per cent instead of 3 per cent of GDP but stronger support is needed. Paying heed to the recommendations of the FRBM Review Committee is the best thing and not providing a more aggressive growth for capital expenditure is by far the worst thing. Jaijit Bhattacharya: Overall the Budget with a 3.5 per cent increase in outlay over last year is well balanced between social and infrastructure spend. It has focused on infrastructure, digital infrastructure, increasing consumption, strengthening social sector and safety net including health and education. It has also managed to find a balance between public expenditure and fiscal management.

The key feature appears to be declared deadlines for outcomes such as elimination of tuberculosis by 2025, removal of unmanned railway crossings by 2019 etc. This makes the Budget more accountable and its impact and progress can be tracked over a period of time. It also has some surprising components such as the new electoral bond. The MSME sector will benefit from the low corporate tax rate and setting up of export infrastructure could provide an impetus to export units. Mukesh Butani: The Budget has an inclusive agenda with more good, less bad, and no ugly. The FM has presented a balanced and well-thought Budget, though, I do see an undercurrent of the move to redistribute income by alleviating the pain of citizens affected by the demonetisation and a corresponding surcharge on high net worth individuals and large businesses.

On the tax side, whilst there have been no big announcements, some proposals have been made to boost foreign investment and provide relief to middle class individuals and MSMES. Tax proposals on political contributions is suggestive of bold moves the government is keen to pursue. A proposal on the concessional rate of 5 per cent on external commercial borrowings up to June 30, 2020, is a welcome move. Similarly, the proposal to exempt certain categories of Foreign Portfolio Investors from indirect transfer provisions reiterates the government commitment to provide a non-adversarial tax regime. An unexpected announcement is the proposal to reduce holding period from three to two years for long-term gain on transfer of immovable property. This is going to boost investment in the real estate sector.

He has been modest on the estimate of the fiscal deficit of 3.2 percent walking the middle path, with a commitment to study the N.K. Singh panel on FRBM. On indirect taxes, no tinkering has been

“The Budget has an inclusive agenda with more good, less bad and no ugly. The FM has presented a balanced and well-thought Budget” MUKESH BUTANI, Managing Partner, BMR Legal

“I love the tax reforms because if one wants to increase consumption by increasing disposable income, this is a better way of doing it” SHUBHASHIS GANGOPADHYAY, Research Director, India Development Foundation

made with the excise duty and service tax rates. Possibly the FM would make a one-time increase at the time of implementing GST.

The good part is there are no shocks as was speculated with respect to taxation of capital markets transaction and possible introduction of inheritance tax. Clarity by way of explanation to non-applicability of indirect transfer tax to FPI’S calmed the nerves and you could see the cheer reflected in the Sensex. A material increase in capital expenditure is suggestive of the seriousness to drive growth in infrastructure and generate rural employment. Tax concessions to affordable housing will also add to push in growth. Not tinkering with service tax is viewed as a positive.

On the negative, an across the board reduction in corporate tax didn't fructify in addition to static slab rates for individuals other than the benefit of 5 per cent tax rate for low income categories. The tax revenue projections look over optimistic and banked upon one time windfalls, particularly on IDS. Abhijit Sen: It was an unexpectedly normal Budget in the sense that it was a normal Budget in abnormal times. What I liked about it is that the FM did not link it to numbers which he would have to defend. For example he did not actually project a very high rate of tax growth. He exceeded the fiscal deficit target only slightly. So it is a safe Budget and there are no shocks which is why the stock market is happy with it. People were expecting service tax and fiscal deficit to go up. They were eagle eyed about how he is dealing with tax revenue numbers or GDP numbers. He has been very safe on that. In that sense it is a Budget that is the best it could possibly be under the circumstances – an honest accounting Budget. Rahul Garg: It is a pro-growth and pro-poor Budget which has tried to attend to sectors that needed succour – infrastructure, rural and financial, being the major ones. Demonetisation was a watershed event. The Budget has tried to influence stakeholder behaviour by stressing on going the digital way. There was also indication of the stage being set for GST, which augurs well.

Ironing out creases on the direct tax law front especially regarding start-ups was a good move. Increased

allocation to infrastructure and rural economy is welcome. According infrastructure status to affordable housing was the need of the hour. I think the FM was delivering much less than promised when it came to reducing tax rates both on companies and individuals. Ashu Suyash: The Budget has done a good job of furthering the government’s agenda of inclusive growth, while being fiscally prudent. The focus on rural development, housing and infrastructure will enhance the longterm growth potential of the economy. One big miss was the lack of concrete steps to resolve asset quality and capital woes plaguing the banking sector. Shubhashis Gangopadhyay: My initial reactions are positive. I was worried the government would follow the Election Commission’s advice only technically and not make any populist statements specific to the states going in for elections, instead, take populist measures that affect the whole country and not the election-bound states only. The FM took the EC’S warnings in all seriousness. In this context, the fiscal prudence shown is commendable. The thing that has disappointed me is the obsession with doubling agricultural income without focussing on something that is crying out loud. Agriculture cannot be developed by focussing on the agriculture sector alone. Plans for the agricultural sector must be explicitly linked to generating income opportunities for the youth in the non-agricultural sector and through rapid urbanisation. Investments in agriculture will not increase farmer incomes; they will be fruitful only if the number of people in agriculture is simultaneously reduced and serious thought is given to developing the market for land.

Will this Budget spur economic growth in the country?

Arvind Virmani: The Budget will help minimise the negative effects of demonetisation and will help put it back on the growth trend from which it was disturbed. D.K. Srivastava: It will spur growth through three channels. First, it has relaxed the fiscal deficit norm marginally for FY 2018, keeping it at 3.2 per cent instead of 3 per cent of GDP. Second, consumption has been given a push by a small increase in disposable incomes resulting from the reduction in income tax rate from 10 per cent to 5 per cent in the lower income slab of `2.5 - 5 lakh. The marginal propensity to consume is relatively higher for lower income households. Third is a more direct support to demand from a planned increase in capital expenditure

“There is cheer for individuals as tax rates between ` 2.5-5 lakh have been reduced. The 10% surcharge on income between ` 50 lakh and ` 1 crore is a dampener. No change in capital gains tax will be a big relief to investors”

JAIJIT BHATTACHARYA - Partner, Strategy & Economics, KPMG