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Budget 2017: Popular Or Populist?

27/01/2017 5:07 PM IST | Updated 30/01/2017 9:08 AM IST
Ajay Verma / Reuters

The upcoming Union budget which the Honourable Finance Minister Shri Arun Jaitley will announce is going to be historic on several counts. First, the announcement has been advanced by a month. Second, the British era legacy of a separate Indian railway budget has been done away with, and it will now be part of the Union budget itself. This is a good move, and intended to align India with global best practices.

Expectations are of a transformational budget—one which will address structural issues. The key focus areas will be tax rationalisation and simplification, thrust to infrastructure development, boosting investment and consumption, generating employment and measures to put the Indian economy on a trajectory of double digit GDP growth rate. We are likely to see a new tax structure in line with the government's vision of a broad-based, moderate and simple taxation system.

There could be a focus on putting more money in the hands of the common person and give consumption a boost.

Digital is the buzzword. Digital adoption is likely to get an extra fillip this budget. There could be many incentives to push various segments of the economy to adopt digital modes of transacting. The move will not only boost financial inclusion in the country, but also address transparency, and move a large part of the transactions to the formal economy. It will boost growth, financial savings and investments. It will also broadbase the banking system, widen the tax base, and eventually lead to direct and indirect taxes rates coming down.

The transformational move which the Prime Minister and Reserve Bank of India initiated with demonetisation could eventually extend to cover real estate and gold, the historic methods of investments in the parallel economy. Whether measures towards this will be tackled in the budget or separately, remains to be seen.

On the indirect taxes front, the FM has set the date of 1 July to roll out the Goods and Service Tax (GST). We may not see much change in indirect taxes, except for the fact that FM could align the excise duty or service tax rates for certain goods and services with GST.

"Make in India" has been the larger objective of the government to encourage investments and generate employment in the country, which in turn will lead to GDP growth. There could be some sops for India Inc. in this area. The government has already stated its policy to implement a simplified taxation system for companies to boost economic growth. It has announced its intention to reduce the basic corporate tax rate to 25% by FY2020, and we can expect this rate to be lowered by around 2% this year.

The rural economy is likely to be in focus and many measures are expected to give an uplift to the farm and agricultural sector.

There are expectations of some measures with respect to long-term capital gains and perhaps even estate duty. However, while there could be elongation of tenor for purpose of eligibility on capital gains, these measures may be seen in future.

There could be a focus on putting more money in the hands of the common person and give consumption a boost. Thus, slabs in direct taxes paid by individuals could see some changes.

The government is likely to stick to the path of fiscal prudence even while ensuring public investments. Fiscal deficit will perhaps be pegged closer to 3.3%.

Union budget FY2018 is likely be a popular budget with measures for many segments of the economy. Whether it borders on populist remains to be seen.

To summarise, tax simplification, boost to investment and consumption, fillip to digital transactions, widening of the tax base, measures to encourage investment and thus GDP growth keeping in mind a prudent fiscal trajectory will be the highlights of Union budget FY2018. Further, if implementation of GST happens on 1 July, it will streamline the indirect tax structure and bring the entire country on a single platform.

Union budget FY2018 is likely be a popular budget with measures for many segments of the economy. Whether it borders on populist remains to be seen. All in all, it will certainly be the most interesting budget from this government.

Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Bank Ltd.

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