What to Expect in Budget 2018

BT’s panel of experts takes a close look at what to expect in Arun Jaitley’s last big Budget

FINANCE MINISTER ARUN JAITLEY is all set to unveil the fifth and last Union Budget of the Narendra Modi-led NDA government. There are finally some signs of a turnaround in the economy post demonetisation and GST. While small businesses were hit by demonetisation, it helped the BJP win elections in Uttar Pradesh, Uttarkhand and Goa. The focus of the discussion at the pre-Budget panel discussion at

Business Today was on the stress in rural India and lack of employment opportunities. The discussion moderated by BT Editor Prosenjit Datta included Abhijit Sen, former member, Planning Commission; D.K. Joshi, Chief Economist, Crisil; Rahul Garg, Leader, Direct Tax, PricewaterhouseCoopers; Bidisha Ganguly, Chief Economist, Confederation of Indian Industry; Ashwani Mahajan, National Co-convenor, Swadeshi Jagran Manch; Sunil Sinha, Principal Economist, India Ratings and Mukesh Butani, Managing Partner, BMR Legal. The panel was clear that the focus of the Budget would be on agriculture and could also include out-of-the box ideas to reduce rural stress. Excerpts:

“WE HAVE DONE BETTER THAN THE WORLD ECONOMY FOR SOME TIME NOW. WHEN IT HAS BEEN GOING UP, WE’VE BEEN GROWING FASTER. AFTER A LONG TIME WE ARE GOING IN THE OPPOSITE DIRECTION” ABHIJIT SEN

BT: What is the state of the economy?

Prosenjit Datta We will take a quick stock of the economy and options before the finance minister (FM) given that there is angst in the rural economy. How do you see the economy after the CSO announced advanced GDP growth at 6.5 per cent?

Abhijit Sen: The advanced GDP numbers show a certain amount of optimism, and some reservation. Optimism means the first half was 6 per cent and the second was 7 per cent – that’s a pretty significant jump. However, 6.5 per cent I think is below expectations of a lot of people, certainly not mine. If we go deeper, the CSO said things might be even worse. If you take out errors and omissions the rate of growth will be 5.5 per cent. It is the errors and omissions which is driving it to 7 per cent.

As the world economy is looking up, the Indian economy is not. We have done better than the world economy for some time now. When it has been going up, we’ve been growing faster. After a long time we are going in the opposite direction. Exports of countries in our neighborhood are picking up, while our exports average is pretty low. There are sectors – auto and some parts of FMCG – who are quite optimistic. A very large number of our traditional exporters are not optimistic. They see the woes of demonetisation and GST continuing.

Finally, it is assumed that inflation in the second half will be lower than in the first half. That would fly contrary to what has been happening up to now. Inflation is trending a little bit upward. These numbers tell you that the CSO expects it to come down. The second is that the indirect tax realisation, the difference between GDP and GVA (gross value added) figures, is actually going to increase quite sharply – from around 8 per cent to about 13 per cent per annum. This means indirect tax collections will start booming in the second half. That is contrary to what we are observing with GST collections. So, there is optimism built into both these things.

Ashwani Mahajan: I agree with Dr. Sen on numbers, but I am more optimistic about future numbers. Last year, and earlier, we have been making structural adjustments be it demonetisation or GST. Indirect tax collection numbers are not very encouraging, but there is optimism on the future. We are getting ` 90,000 crore of GST collections a month, but it has to be raised to ` 1 lakh crore. This year, I’m optimistic because the PMI Index is showing better results. When we compare it with previous three-four years, we find better performance in the industrial sector which indicates better demand and manufacturing output. These are the drivers of economic growth. Yes, farm output is not good, but, as far as future numbers are concerned, as Dr. Sen rightly pointed out, we have picked up from 6 per cent to nearly 7 per cent in the second half. In the coming year, if the government is able to encourage demand by increasing its own capital expenditure, encouraging private investment and improving private consumption demand, I will look at the future on the brighter side. I don’t think the next year there should be any problem. If all goes right, we can reach up to 8 per cent growth.

Bidisha Ganguly: This 6.5 per cent for the full year is reflex reality. But it masks the fact that growth actually bottomed out in the first quarter at 5.7 per cent. Second quarter was much higher at 6.3 per cent; and going up from 6.3 to 7 per cent, I don’t think is a difficult task. There are indicators that the economy has been doing well in the past few months. The core sector has been showing good numbers. So I’m a little surprised that manufacturing is estimated at a fairly low rate of growth for the full year. I think manufacturing would do better. What we see in different sectors is that capacity utilisation is going up. As it reaches 80-85 per cent, people will start investing. One can’t say when, but at some point in the next financial year, you’ll start seeing investments being put on the ground. There are ifs and buts. But, overall, I don’t see any reason why the economy should turn down further from this point onwards.

Sunil Sinha: The current view is that have we reached a stage from where the economy will take off. In other words, essential structural reforms have been carried out. So the economy should take off from there. While it is difficult to say when that would take place, various commentators are expecting the economy to do very well, maybe next or next to next fiscal. They are pinning their hope on this kind of take-off.

I believe that the pick up will be gradual for several reasons. On expenditure, out of four engines, only two are firing. Investment and exports are just not firing. To be optimistic on exports is somewhat misplaced, particularly when protectionism has gained ground. The kind of play you could’ve had during

2004-2009 is unlikely to be there from here onwards. Growth has to come from the domestic sector, but consumption is a worrisome area. We had tried to finalise the balance sheet of roughly

500 Indian companies and found that in most, a process of deleveraging is taking place. The most optimistic scenario tells us that this will take another two years or so. As this process will be gradual, so will be the pick up.

Mukesh Butani: The debate is whether you see the glass half full or half empty. I echo Sunil’s view that the pick-up, if any, is going to be fairly calibrated. I

“MUCH OF THE FISCAL DEFICIT CAN BE HANDLED IF SOMEHOW WE CAN MAKE BANKS SELF FUNDED ... UNLESS WE HAVE INNOVATIVE IDEAS TO GET MORE REVENUE, IT WON’T HAPPEN. ” RAHUL GARG

do recall, whether it was the budget of 2016 or 2018, we were hoping to touch this magical figure of 8 per cent to go straight into 2019. I see the probability of levels of 8 per cent in 2019, are to be less likely. In opportunities, India would gain from the growth in the global economy. The biggest challenge before the government is holding back any expenditure because my feeling is that when the design of the budget for 2017 was laid out, the thinking was that let there not be a let-up insofar as public expenditure is concerned. Given where private sector lies, growth will come from the public sector. I hope the government does not let up as far as public expenditure is concerned. There seems to be a contradiction. Is the government going to resort to incremental market borrowings or is it going to hold back some of the expenditure because it wants to stick to the 3.2 per cent fiscal deficit target as it fears rating agencies may climb down on India insofar as our ratings are concerned. There would be an increase in the fiscal deficit attributable to the rise in petroleum prices. That could impact inflation figures, so policy makers find themselves in a tight spot. I feel confident tax collection figures would settle down. So you would see a far more stable and less overtiring tax collection in fiscal 2019 than in 2018. I see stability in tax collection and exports.

D.K. Joshi: 2017 has been a year of repair. It has been a year of reforms because we had GST and it has also been a year of disruption. These things create headwind for growth in the short run but over the medium run things will continue to improve because of the reform pay off. The biggest disappointment has been trade. If you look at the GDP data, exports are projected to grow at 4.5 per cent in 2017/18, exactly the same as last year. Imports however, have shot up from 2.3 per cent to 10 per cent. Now, we have a global environment wherein GDP picked up significantly from 3.2 to 3.6 per cent. World trade growth is projected at 4.2 per cent.

This is the first time in six years that world trade is growing faster than GDP. So while trade intensity of global growth has increased, we have not been able to take advantage because domestic disruptions did not allow us. I think that there is a temporary setback to that. I would be optimistic on the trade front next year. World GDP is expected to grow and trade is expected to do well. Since demonetisation problems are almost over and GST glitches are getting sorted, next year we will be able to take advantage of that. Net trade will contribute much better. Also, there has been certain rebalancing taking place. Earlier consumption was going very fast. Now consumption has slowed and investment has started picking up. But investment as a percentage of GDP is still falling. Unless that starts rising there’s going to be no decisive pick up in investment. Companies are using their profits to cut debt. They are still in a deleveraging mode.

It is reflected in the improved credit rating of companies despite the economy slowing down. Since spare capacity in manufacturing is still quite high, the private entrepreneur will not put money in investments. There is investment in roads and renewable energy because that’s policy-led and the private sector is quite active there. But capital heavy sectors are still not moving. I would be more hopeful for 2018/19 as a result of this. But changes like E-way bill are coming which can be somewhat disruptive. In a nutshell, 2018/19 will be a better year because we will be in a better position to take advantage of global growth. Domestic production

THE BIGGEST EXPECTATION IS THAT POLITICALLY YOU WILL SURVIVE IF YOU ADDRESS THE PROBLEMS OF THE RURAL SECTOR SUNIL SINHA

will benefit because issues that have plagued it this year will get ironed out. Putting these two things together, 2018/19 looks to be better. Inflation will be higher next year, the current account deficit will widen and fiscal stress will be there. My worry is that in the zeal to meet targets, government could slice capital expenditure, which will be unhappy for the economy.

Prosenjit Datta: Based on what Sunil Sinha and Mukesh Butani said, is it going to be a slow pick up or a quick rebound?

D.K. Joshi: It is going to be a quicker rebound since your base is low. But how will it proceed after that? We expect GDP growth at around 7.5 per cent, but that is still below the average of the last 13 years. Even with a quick rebound, you are below the trend.

Rahul Garg: Last year employment generation has not been great. Everybody talked about GDP and trade numbers, but stock indices are rising. The indices and the fundamentals of the economy reflect something else. Much seems to be driven by sentiment. Private investment is not as visible as people are cleaning up, leveraging or sorting out balance sheet issues. You may not see great corporate earnings but there are decent cash flows from corporates being used to deleverage themselves. Once that is reasonably stable, you would get private investment into sectors where capacity utilisation is over 80-90 per cent. So I think there should be a quicker rebound in terms of growth in the first half of the next year.

Prosenjit Datta: Many assets have changed hands rather than fresh investment. People are buying steel, cement companies in distress. There are companies in distress and there are companies which have cash or the financial strength to buy. Lot of investment we see now, which is already low, goes into brown field projects rather than green field ones... Sunil Sinha: It’s not that private corporate investment is not happening, but much of that is called maintenance capex. It’s not incremental capex. Even when you look at the data, you will see some amount of investment happening. But those are essentially maintenance capex. They are not incremental capex or going for green field projects. That’s cause of worry.

Rajeev Dubey: In 2017 we had the highest amount of money – ` 1.61 lakh crore – raised from capital markets. So where does it all go if not into capex?

Rahul Garg: The stock exchanges are fuelled not by FDI or money from abroad. Most money is put in locally by investors, so companies are able to deleverage themselves. The cash flows can be deployed because demand can be spurred and it already exists to some extent – the brownfield interest that you see is higher in all the bids. So bids come in for brownfield projects only when you see optimism that the business cycle could take up the investment that you are going to make.

Prosenjit Datta: Mergers and acquisitions have actually risen. I think they’ve moved up in the last year.

Ashwani Mahajan: First, there is no dearth of incentives for private investment but it’s not happening. The reason is the high rate of interest, because there is an incentive for private sector to keep money in financial assets. This is because the RBI has kept the rate of interest high. All their expectations about inflation have proven wrong. I would rather call it adamancy of the RBI to keep the rate of interest high and incentivising private corporate sector not to invest in real assets. With money being injected into the banking system, they may be able to lend more money. That would encourage private investment.

Abhijit Sen: One change in the last two or three interventions is that the capital market is doing well, despite being domestically driven. So, domestic money going into capital markets is doing very well. However, private investment figures from the capital formation side are pretty bad. I think there are many small businesses, even medium businesses getting out of business and parking their money in the capital market, or in banks. In FMCG, for example, where suddenly the corporate sector will discover that demand has grown because much of the competition has disappeared will get a quick response. But in other sectors, this will

“IT’S ECONOMICALLY AND POLITICALLY CORRECT TO SPEND MORE ON THE RURAL SECTOR. THIS HAS TO BE DONE NOT BY LOAN WAIVERS, BUT BY EMPOWERING FARMERS SO THAT THEY ARE NOT IN DEBT IN FUTURE” ASHWANI MAHAJAN

be a drag. And directions are not always clear. In part because we ourselves stop thinking about the small guys and come to the capital market and talk about the corporate sector. But they hold a fair amount of capital now, not in their own business, but in somebody else’s business.

Abhijit Sen: Earlier when corporates didn’t do well, banks were willing to lend and they would do better. There was an inward relationship between corporate growth and the extent to which the private guy could invest. Now small guys are realising that it is not worth being in business anymore. The investment rate as projected in the second quarter is less than 26 per cent. For the year as a whole it is about 26 per cent. That divided by four, which is the capital output ratio, is 6.5. To get to 8 per cent, we need to go up to 32 per cent. That’s where we are in terms of numbers.

Bidisha Ganguly: On the trade side, are we losing competitiveness? That’s a very important question for industry. Our exchange rate has appreciated significantly, and the cost of power, land and labour makes us an expensive place to do business. We are losing out on investments and exports as many developing countries have been able to get these things in place. In power, we added a huge amount of generating capacity but distribution is not doing well. Since it is the domain of states, there is nothing much the centre can do. The degree of competence varies from state to state. So much needs to be fixed at the state level.

D.K. Joshi: The worrying part is we have surplus labour and the sectors where we are losing competitiveness are labour-intensive. It is being picked up by economies like Vietnam and Bangladesh. In labour intensive sectors we have lost competitiveness. This is a long term trend and has nothing to do with recent disruptions. That needs to be reversed. As far as investments are concerned, interest rates do matter, but when there is too much debt and spare capacity, interest rates are not very effective in pushing investments. Only once you exhaust spare capacity and deleveraging will interest rates play a role in incentivising investments.

Ashwani Mahajan: I think the rate of interest just got another role to play, to pick up the demand side also. So that should also be taken into consideration. I don’t think the appreciation of rupee has anything to do with it because had it been, then it would have been a gradual process. In one month you are having 26 per cent growth, another month you are down to minus, and so on.

Bidisha Ganguly: In the last several years we have done badly.

Ashwani Mahajan: But in all those years we have been depreciating our rupee.

Abhijit Sen: Not in the last three or four years.

Sunil Sinha: If IPOs are doing very well, where is the money going? I think one of the plausible explanations could be that the last time when a lot of capex was undertaken, it was essentially debt funded. Now those channels are no longer available to corporates, barring few highly rated ones. So these IPOs are essentially being used for deleveraging past debt.

Rajeev Dubey: Some have also been for exits, and some of it has been for financial sector.

Sunil Sinha: Exits, exactly, absolutely. So this cannot be taken as a signal that the economy is doing well.

Rajeev Dubey: Some IPOs have been of insurance companies which will not show in project investment.

Rahul Garg: If you look at the employment scenario, you have skilled and semi-skilled people, it boomed when BPOs were set up. Look at manufacturing. Anything you want to do as a contract manufacturer for a large company overseas, the policy does not support it from the tax and FEMA perspective. It doesn’t support that you do toll manufacturing in India, where you

“THE MOST WORRYING PART IS THE EXPANSION IN REVENUE DEFICIT. IF IT IS RISING VERY FAST, YOU ARE SPENDING MORE ON THE REVENUE SIDE THAN ON THE CAPITAL SIDE. THAT NEEDS TO BE REVERSED” D. K. JOSHI

IT IS IMPORTANT TO BUILD INFRASTRUCTURE, NOT JUST THROUGH PUBLIC SPENDING AND PUBLIC SECTOR COMPANIES BUT ALSO THROUGH PPPs BIDISHA GANGULY

don’t expose the foreign company which is getting the tolling done here. You pay taxes from the toller who is getting the manufacturing done here, but don’t expose the foreign company. Unless we allow a situation where people who are customers and want to get toll manufacturing done, if they are having to pay taxes because they are using me as a toll manufacturer in India, it’s a no-go.

The second thing is happening in services. We have a tax law that says if management services are provided from India to 30 overseas companies, then those companies could be treated as tax resident in India and expose them to taxes in India. If you look at the ASEAN, I find there are fewer white skin expatriates now than before. You have an opportunity to create India as a service hub for the global economy and global corporates. We are unable to do that because if they create a management services portfolio here in India, they expose all service recipients to taxes in India.

Mukesh Butani: I dismiss the theory that there is a bubble waiting to burst. We are doing extremely defining moments insofar as maturity of capital markets is concerned. This optimism coming from people investing from outside. Foreign Institutional Investors derive confidence from governance. They feel India has made strides in governance. Now for them, deemed steps such as demonetisation, much as we may criticise and beat it to death over here, or GST, which in my view is not perfect, are viewed as major strides in governance. That’s one degree of confidence. Please bear in mind that we had a tranche of investors called private equity (PE) investors, who had challenges in the last 10 years to get into the normal IPO cycle. They busted timelines they had because economic conditions were not favourable. So there was a crowding impact of PE investments that we saw, where investors were either not being able to exit or promoters were getting secondary PE investors to help them. That crowding seems to be going away and 2017 was the year when we saw that getting addressed.

If you look at the impact of demonetisation, one has seen domestic mutual funds garnering investments. There is a 14 per cent rise in assets under domestic mutual funds in 2017. Now all of this had to be deployed in capital markets. There is a significant maturity insofar as corporate debt market is concerned. There is high degree of confidence that Foreign Institutional Investors are seeing, insofar as investment in government securities is concerned. The figure that you look at, investments in secondary markets say securities, and government securities, they are clearly playing it out. I feel that this is an area where we have done well and 2017 in my opinion would be remembered as a year in which we have taken important steps to bringing the confidence. Also, despite the subdued growth in exports, the rise in imports, you still have a currency that appreciated by 5-7 per cent.

BT: The challenges facing the FM

Prosenjit Datta: The FM’s worries would relate first to revenue collection and the fiscal deficit. Second, any changes that will take place will be in direct taxes. Arun Jaitley has also signaled that he intends to do things about the rural economy and farm incomes. We also have imperfect data on revenues since not all GST data has come in. He is making budget projections based on less data than in the last few years. Last year, the budget was pulled back by a month, so, we have one month less data so, this time he has two months less data.

Abhijit Sen: Yes, because of GST.

Prosenjit Datta: Yes, because of GST. He has two months less data and because GST has not settled down. So, what are the challenges facing the finance minister leading up to the budget?

Bidisha Ganguly: I think the biggest challenge lies in bond deals. We just had an announcement that they’ll borrow another ` 50,000 crore (revised to ` 20,000 crore) which has had an impact and bond deals have moved up quite sharply. So it’s unlikely that they will move on to borrow any more. They will try to keep it within whatever excess has happened till now.

Prosenjit Datta: Does that mean expenditure cuts?

Bidisha Ganguly: Could mean but we don’t know what is happening on the revenue side. That will become clear only in the next few months and the biggest shortfall has happened over non-tax revenue, not so much on tax revenue. And non-tax revenue is because the RBI did not give the dividend it was supposed to give, and which they have said that they might make up for, over the next few months. So, I think with that and a few disinvestments they might be able to make up this.

There are a lot of challenges as state deficits rise. Though the centre does not directly address that, I think things like farm loan wavers, discoms earning a loss, being taken up by state governments need to be given some direction by the finance minister. In every Budget the FM does address the rural economy. Many measures like crop insurance were talked about last year. This year they should report on what has been the outcome on these measures.

Prosenjit Datta: One of the FM’s challenges is the NPA problem which will probably take a bit longer for banks to sort out. He started the process and is recapitalising banks but I think next year’s projections are also higher NPAs…

Bidisha Ganguly: Yes, indirect taxes will not change much. On direct taxes we hope that he reduces taxes because this was an indication made two years ago in the budget speech. Today we have a tax system which has many incentives and it means the effective tax rate is far lower than the stated tax rate. So it would make sense to lower the rate and remove incentives.

Sunil Sinha: I think the FM would be looking at challenges which are not easy to navigate. If it is a gradual pick up in growth that means tax revenues growth will also be gradual. One is only hoping that the teething problems with GST are over and it will provide a fillip to the overall indirect tax collection. Let’s hope that happens but otherwise on the direct tax collection front I doubt much can happen in terms of revenue growth.

There is a case for reducing, both corporate and individual. If that happens, it will take its own time to play out in terms of higher tax collection. So, his revenue collection will remain constrained. On the contrary, given challenges the economy is facing especially in the rural sector, he will have

“IN EVERY BUDGET THE FM DOES ADDRESS THE RURAL ECONOMY. MANY MEASURES WERE TALKED ABOUT LAST YEAR. THIS YEAR THEY SHOULD REPORT ON THE OUTCOME OF THESE MEASURES” BIDISHA GANGULY

to address those. But, does he have the leeway to really address those issues in a significant manner. So don’t worry much about the fiscal deficit, and somewhere the N.K. Singh Committee can be invoked and he can take recourse to that to readjust fiscal numbers.

Ashwani Mahajan: I feel the FM missed the bus last year. He could have easily invoked the N.K. Singh Committee and increased the fiscal deficit. Now, looking at the slippage on revenue, both on account of expected GDP numbers and expected revenues from GST, he expects that finally this figure will be about ` 1 lakh crore a month.

This time he should not miss the bus on various accounts. The country needs capital expenditure, and if you are sticking to 3.2 or 3 per cent, then, that would get hard. Secondly there is rural distress. It’s economically and politically correct to spend more on the rural sector. This has to be done not by loan waivers, but by empowering farmers so that they are not in debt in future. For that, the government has to come out of the thinking that giving remunerative prices is too much of a burden on the budget.

If they can do that, inflation can also be curbed. In pulses, the government announced the MSP and prices came down. If you offer a good price, then pulses production will increase and we can take care of the foreign exchange part since we are too dependent on importing pulses and oilseeds. The government needs to spend more on the rural sector. They have been doing good on irrigation and rural roads. But, we have to address problems of farmers by offering them better MSP. Even if you are not able to provide MSP, then institutional mechanisms can be developed, whereby farmers are offered better prices.

Today, agriculture is in bad shape. Urban GDP is nine times rural GDP. So, we have to address this, otherwise it is not going to be a politically and economically correct budget. Prosenjit Datta: Mukesh, what are the challenges before the FM?

Mukesh Butani: The question is whether you will meet your fiscal deficit by increase on the revenue side or curtail expenditure. There are lessons to be learnt from what happened in UPA II, which saw growth slowing down and curtailed expenditure rather than grow revenues. I think this government will follow the path of revenue mobilisation, if fiscal deficit is on top of their agenda. I see GST revenues stabilising. I don’t give enough credence to the non-revenue part of the budget exercise simply because whether we set up a divestment target at ` 60,000 crore or ` 70,000 crore, it really doesn’t matter. When market conditions are appropriate and with political will, we will do something be it divestment. Barring one year, we have never met divestment targets. The FM’s focus is really going to be on the tax side of revenue.

On the tax side, we should not do any further tinkering to our core. We have already seen the impact of GST, all we need is administrative reforms. I do hope the FM takes up some recommendations and implements them with a degree of rigour. I have always maintained that India is possibly the only country that has tax policy makers and people who recover those taxes, on the same level, coming from same services. It is very difficult what United States has, IRS collects taxes and treasury comes up with a tax policy. I think there is fundamental flaw in the manner in which we all organise ourselves in the department of revenue. There is so much adversity, between the taxman, tax collector and the tax payer. .

“THERE ARE LESSONS TO BE LEARNT FROM WHAT HAPPENED IN UPA II, WHICH SAW GROWTH SLOWING DOWN AND CURTAILED EXPENDITURE RATHER THAN GROW REVENUES ” MUKESH BUTANI

D.K. Joshi: Every budget is a challenge and this one a little more challenging. The most worrying part is the expansion in revenue deficit. We are talking about fiscal but if revenue deficit is rising very fast, that means you are spending more on the revenue side than on the capital side. That needs to be reversed. How you reduce the revenue deficit next year is an issue. As far as invoking the N.K. Singh Committee report is concerned, they need not be very rigid because as per the FRBM the fiscal target for 2018/19 is 3 per cent of GDP, maybe they can retain 3.2 per cent and that will give them some ` 40,000 crore extra to spend. Also, we can’t accept just one recommendation of N.K. Singh giving you an escape clause and forget about others. It has to be done in total. On expenditure there is hardly any leeway and I agree that they have to focus on revenue generation and I think this year the balance is tilted towards direct taxes, in the sense that direct tax

collections look better. Next year I think indirect taxes should do better.

Abhijit Sen: Since this is the last budget before elections, it has to address a political problem too. All discussion on the rural side fits into that, but employment is what people are talking about. So he’s going to be looking at the rural sector and employment. There is the expectation that at least something has to be done on corporate tax, and that combination of lower corporate tax revenues, with higher expenditure for employment and the rural sector, and a stable GST does present him with a problem. I believe they will do their best through disinvestment much of which transfers from the public sector to government and government transferring assets to other public enterprises. I think they will meet the 3.2 per cent target, but will relax it for next year.

If he does nothing on the corporate side, and does only on the rural side, people will say it’s a populist budget. If corporate tax cut is held back, there are consequences as markets won’t react very easily to that.

Mukesh Butani: The budgets of 2016 and 2017 presented an excellent opportunity for corporate tax cuts. Given the larger message that the US tax reforms are sending, it will have an impact on many economies. That may force the FM to rethink on corporate tax cut, and I hope I am wrong but I don’t think the fiscal situation gives him adequate room to look at corporate tax cut in the budget.

D.K. Joshi: Oil can spook the budget. What the government did was smoothen the decline in impact of oil prices. Domestic prices did not see as sharp a decline of crude prices so that the reverse could be expected. Suppose they shoot up to $100, then what happens? Oil could be the joker in the pack.

Bidisha Ganguly: One point which is being missed in corporate tax reduction is that it should be accompanied with removal of exemptions. The impact on revenue should not be as much as it is being assumed.

Ashwani Mahajan: I agree, because in the budget before the last year, he did mention he is willing to reduce corporate tax next year. Maybe he’s not very happy about it but the effective rate of corporate tax is hardly 22-23 per cent. Therefore in any case, corporates are not losers so far as competitiveness in corporate tax rate is concerned.

Prosenjit Datta: The other side of corporate tax is that everybody wants tax cuts, but not removal of concessions.

Bidisha Ganguly: CII has said you can remove exemptions and reduce tax.

Rahul Garg: If you look at the kitty of direct taxes, and the revenue impact of exemptions, what has been done over last three years in exemptions and some incentives etc., and tinkering with the depreciation. The whole kitty gives you hardly 0.7 per cent of the total tax kitty. So if you are looking at moving the rate from 33 to 25, and therefore the effective rate from 25 to 21, there is hardly any play within corporate tax. If you remove all exemptions, you won’t get more than 1 per cent. And if you continue with surcharge, this adds a 33 per cent tax rate, then effective tax rate, even if today it is 23.5 to 24 percent, it will have a play of hardly 1 percent.

However, if you were to play it out to say that if we know today, that 23 percent is the effective tax rate, and that is consistently year-after-year we see, why don’t we abolish everything else in the tax, and say that let everybody pay taxes on 23 per cent of profit. If you still want to give incentives, give it by way of subsidy. This will simplify the corporate tax structure, administration and litigation if we were to suddenly recognise that we are a 23 per cent corporate tax country, not a 33 per cent corporate tax country.

When we compare ourselves with countries where it is sliding down because of the competition, they have a fine tooth comb reading of their taxes. What kinds of income do those countries tax and we don’t? You would find there are some exemptions which may not be treated as an exemption given by the Act etc. So, some innovative taxes could come into play merely studying what things we don’t levy taxes here.

Much of the fiscal deficit can be handled if somehow we can make banks self funded. If you look at large banks, the properties they have is

amazing. Look at SBI, LIC or Air India. These organisations have large properties and doing a disinvestment through that route is one aspect, but making these institutions self funded for deleveraging and capital restructuring is another. You save some ` 4050,000 crore by doing property investment of these. Put it on the market and get the money out of it.

You need to innovate to get the revenue from somewhere else. This is the time to look for innovative ideas.

There is no going back from three things. One, public expenditure would continue to drive the economy. Second, the rural sector needs more allocation. Third, the banks crying need is to fund them. And, employment generation has to happen. These are not negotiable. Unless we have innovative ideas to get more revenue, it won’t happen.

Prosenjit Datta: Any last points?

Sunil Sinha: One route the previous budgets of the FM have followed is trying to raise resources outside the budgetary process. In FY 2017 they said around ` 33,000 crore will be raised from the market by state-owned entities. That doesn’t sit in the balance sheet of the government, but in the balance sheet of these corporations. But the different thing that they did is that the servicing of those debts will not be done by those entities which are borrowing from the market. It will be done through the budgetary process. So if there is a crunch on the revenue side, they may again use it.

BT: Expectations from the Budget

Rahul Garg: The expectation is in reducing corporate tax while the second relates to continued public spending as the prime mover of the economy. The two recommendations will be: look at revenue collection in an innovative manner on whatever you are not taxing now. Look at the innovative methods of raising funds where you need to deploy out of budgetary resources.

Sunil Sinha: The biggest expectation is that politically you will survive if you address the rural sector. The other is to focus on how quickly can you stabilise the GST process.

Ashwani Mahajan: My suggestion would be to create more jobs. That is not going to happen by speaking out of six pages of budget speech on the farm sector but by doing something. There should not be any thinking of the corporate tax cut because it will take longer for different countries to come out with corporate tax rates. We should think of more expenditure without reducing corporate tax rates. Why not give more concessions for more job creation? Suppose you have a company employing 10 people. If next year you are willing to provide jobs to 25 people, why not give subsidy for job creation for the next 50 people. The second is we should increase spending on the capital sector and the social sector expenditure.

D.K. Joshi: Expect the budget to have a rural thrust. Don’t do it in a populist way because you can always give sops and push up the rural economy. But, do it in a way which can make economic and political sense. Focus on areas which can generate employment, be it road construction or rural housing. The construction sector has much less share than manufacturing but employs more people. The second expectation is that they will cut or relax the fiscal deficit target. My sense is they will go with 3.2 per cent. Bidisha Ganguly: The expectation is on corporate tax cut and rise in rural spending. The recommendation will be to see ministries spend money they are allotted. It is important to step up spending on education and health. The other is build infrastructure, not just through public spending and public sector companies but also through PPP.

Abhijit Sen: Since it's the last Budget of this government, I think it will be an out of the box budget in certain places. I have a suspicion the out of the box ideas will quickly turn the mood in rural areas. Now the way you can turn the mood around in rural areas is not necessarily the best way of doing it. In the long run, it would be combination of what Haryana & Madhya Pradesh have done in terms of MSP (Minimum Support Price). If prices fall below MSP, you give the difference, a sort of deficit payment. And you commit the government to make deficit payment without actually thinking that we have to take MSP. That will create a problem in subsequent years. In North India where PDS (Public Distribution System) works very badly, remove it and do direct payments. In UP & Bihar this will sell. These big policy things will come from either Amit Shah or Narendra Modi. And I think that’s where you’ve got to look for, in the Budget.

Rahul Garg: Ashwin did point out that corporate tax will be quite competitive. Just want to bring to attention that with corporate tax and the GDP rate, even if we consider our effective tax rate as 23-24 per cent, we are at 40 per cent tax rate. It is far too high, given the kind of social security system we have and given the kind of the government support we have both on the infrastructure side and the social side.