After the 'bold move' of demonetisation, this Budget played it safe – thank god for that

Among the many cliches used every year to describe the Budget, “missed opportunity” ranks right on top, followed by “mixed bag”. These are cliches for a reason – every year, we go into the Budget session with high expectations and then come away disappointed, or at best, relieved.

However, this year was supposed to be different. Was it?

Great expectations

The Budget came soon after the demonetisation exercise, announced on November 8, which wiped out 86% of the currency in circulation and threw the economy into disarray. It was expected that the boldness shown by the government in freezing 12% of India’s GDP overnight would be duplicated in the financial outlay, this time with a massive stimulus to kick-start the economy.

What the government started as a concerted effort against black money (primarily in cash) was expected to be followed by an assault against unaccounted-for wealth hoarded in physical assets, such as real estate and gold. Also, big cuts in income tax rates were anticipated, to bring relief to the poor and and lower-middle class – sections of society worst hit by the currency ban.

The Budget was presented days before elections in several states, including in the politically crucial Uttar Pradesh and Punjab, so an element of populism was also anticipated.

Finally, this was a Budget of many firsts. It was presented on February 1 instead of February 28; it included the Railway Budget; and the concept of plan and non-plan expenditure had finally been done away with.

Given these factors, expectations were riding high on the 2017-’18 Budget and ranged from the wild – abolition of income tax – to the reasonable – ban on high-value cash transactions. So how did the government fare on meeting these expectations?

Some of the proposals, such as the ban on cash transactions above Rs 3 lakh, a reduction in income tax rates for the lowest taxable slab and some elements of populism, were in line with expectations. However, there was nothing demonetisation-like bold or daring in this Budget. This is not necessarily bad though, because Jaitley seems to chosen fiscal prudence instead of profligacy.

A standout measure of the Budget is a move towards transparency in political funding. The finance minister announced a limit of Rs 2,000 on cash donations from individuals to political parties. Any amount above this will have to be given by cheque, or digitally, and therefore will not be anonymous. A bulk of the funds of political parties, including the Bharatiya Janata Party, often come from unknown sources.

Better tax administration

The demonetisation drive has helped the government identify large deposits of money, which can be traced back to their source. The State will, hopefully, use this information for better income tax administration. This data was mentioned in the finance minister’s speech:

“During the period 8th November to 30th December 2016, deposits between Rs 2 lakh and Rs 80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs 5.03 lakh. Deposits of more than Rs 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs 3.31 crores...This data mining will help us immensely in expanding the tax net as well as increasing the revenues, which was one of the objectives of demonetisation.”

This was probably the best news on the Income Tax front, since there was no major reform for direct taxes.

For those earning between Rs 2.5 lakh to Rs 5 lakh, the Income Tax rate has been cut to 5% from 10%. This was done to coax those outside the tax net to file returns. As Jaitley mentioned in his speech, just 3.7 crore people filed Income Tax returns in 2015-’16. How effective this reduction in tax will be known only when next year’s Income Tax assessee data comes out.

There were no significant changes in indirect taxes, given that most of these will be replaced by the umbrella Goods and Services Tax.

For the rural sector

The Union Budget forecasts a 12% growth in total tax revenues for the 2017-18’ financial year, led by an ambitious 25% growth in income tax revenues and a modest 5% growth in excise revenues. These are achievable numbers and any additional revenue as a result of demonetisation – by way of penalty on hitherto undeclared income, for instance – will be a bonus visible only later in the year.

On the revenue side, this growth is led equally by revenue receipts (sale of goods and services) and capital receipts (sale of assets).

On the expenditure side of the Budget, the Finance Minister forecast a total expenditure of Rs 21.46 lakh crores, an increase of 6.5% over the revised estimates for the 2016-’17 financial year. A significant part of this is the forecast 13% increase in centrally sponsored scheme expenditure, most notably, Pradhan Mantri Awaas Yojna, National Health Mission, Integrated Child Development Services, Swachh Bharat Mission and Green Revolution. Compared to these generous increases, the expenditure on Mahatma Gandhi National Rural Guarantee Employment Programme seemed almost unchanged at Rs 48,000 crores (compared to budgeted estimate of Rs38,500 crores and revised estimate of Rs47,499 crores in 2016-’17).

To put this increase in the rural sector in perspective, consider the government’s achievements with regard to rural roads, in Jaitley’s words:

“Pace of construction of PMGSY [Pradhan Mantri Gram Sadak Yojana] roads accelerated to 133 km roads per day in 2016-’17, against an average of 73 km during 2011-2014”

And in rural housing:

“I have stepped up the allocation for Pradhan Mantri Awaas Yojana - Gramin from Rs 15,000 crores in 2016-’17 to Rs 23,000 crores in 2017-’18.”

For the urban common man, there is nothing significant in the Budget beyond the cut in income tax rate for the lowest slab and sops for housing and real estate.

Fiscal prudence

Jaitley has set a fiscal deficit target of 3.2% of GDP for the 2017-’18 financial year, which seems achievable, given that the Budget’s maths is not overly ambitious.

With the worst of demonetisation now behind us, the government needs to deliver on the large increases in scheme expenditure and hope that pushes growth. Indeed, with manufacturing still stuck in a rut, kick-starting rural consumption seems like a better bet to achieve the higher end of the GDP forecast (7.5%) for the next financial year.

By sticking to sensible and achievable targets, the finance minister may have disappointed proponents of big-bang reforms. But there is wisdom in talking about achievable goals without risking India’s finances. After all, this country can only take one big-bang measure – or demonetisation – at a time.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.