Mumbai: With the real estate market beginning to adjust to various reforms like demonetisation, GST and RERA, most Indian metros witnessed recovery with sales improving, while property prices corrected or maintained status-quo, a survey said. According to the survey by property portal 99acres.com, most of the metros

What are the highlights of the Indian Union budget 2017-2018?

The 4th & penultimate full Budget of the National Democratic Alliance government is over & it’s time to analyse its impact on all concerned stakeholders. This was a balanced & focussed budget instead of a populist one & the narrative of this budget reminds me of a quote from Louis Gerstner’s book Who Says Elephants Can’t Dance? – “Sometimes in life it is better to under promise & outperform rather than over promise & underperform”. Budget 2017 has focussed on setting realistic targets & achieving them instead of making grandiose announcements. This budget was unique & crucial in several ways; hence the backdrop of the economic scenario needs to be looked into for a holistic assessment: –

  • Firstly, the Railway Budget was being folded into the main Budget after a long hiatus.
  • Secondly, the Budget gets out of the Plan & non-Plan expenditure format followed traditionally, instead create framework for revenue & capital expenditure classifications.
  • This budget, came just 3 days ahead of the latest round of elections, which included major states like U.P & Punjab. Thus Govt needed to adhere to the election code of conduct & refrain from announcing any sops linked directly to these states.
  • The Budget exercise was advanced to Feb 1st instead of Feb 28th, which meant less data available with the Govt & they had to rely on projected figures for planning. Impact of demonetisation was not captured by the Advance Estimates of national income, a fact that complicated the process of budgeting.
  • The other major reform, GST is planned for the coming financial year, which meant that revenue during the year will exhibit an analytical discontinuity with what has gone before.
  • The global economic scenario is uncertain & still recuperating from the double whammy of Brexit & the protectionist stance adopted by new U.S president Trump.
  • Last but not the least, this budget was presented post the demonetization exercise, without sufficient data available to analyse its impact on the economy & markets.

Background & Expectations

Finance Min had to ensure that all the 4 engines of growthdomestic consumption, private investment, exports & public investment deliver simultaneously. The performance of any Govt is judged historically basis the GDP growth rate it has delivered with very few actually accounting for the inflation figures (which is the primary concern of the Central Bank). Post demonetization the economy is in a deflationary mode, which provided Govt ample legroom to usher in big-bang reforms & push expenditure. The common man expected this budget to be a favourable one as Govt was under duress to project that all was hunky dory post the woes of demonetization.

Demonetization objectives were pointed towards flushing out the black money economy, tackle the menace of counterfeit currency & move towards a sustainable cashless economy. But the impact of demonetization is unravelling & experts are still trying to decipher the actual benefits of this momentous decision by the Govt. The debate in economic & corporate circles is on the degree of demand destruction that withdrawal of high denomination currency has caused; also, on the extent to which the postponed purchases will return as pent-up demand, once the cash infusion into the system is complete.

There are 2 ways to revive growth: either through consumption or through investment. Domestic consumption & exports are in doldrums post demonetization so the only option left in the present scenario is pushing growth through public investment which might stimulate private one in due course. This involved slight deviation from fiscal tightening & increasing expenditure.

But according to the fiscal consolidation road map, Govt needed to bring down the fiscal deficit to 3% of GDP in FY18 from the current year’s target of 3.5% of GDP. The Govt had to avoid any divergence from the fiscal road map as India is rated just one step above junk by S&P Global, Moody’s & Fitch, who cite Asia’s widest budget deficit as a drag on the sovereign rating. Any erosion in credit quality risks scaring investors who’re already net sellers of Indian bonds & stocks this year, can push the rupee toward a record low & stoke inflation. Finance minister’s challenge was to look for ways to revive investment, boost rural & infra demand while keeping in mind the fiscal constraints.

This year, pushing digital economy & accelerating the adoption of financial savings were likely themes in the budget. Moreover, a boost to agriculture & infra would not only have helped alleviate the rural & economic distress but also be a short-term palliative.

Economic Survey

The Economic survey 2016-17 presented a day before the budget, outlined the performance of last fiscal year & broadly predicted the course of the forthcoming one. Early budget meant lack of sufficient data, which compelled CEA Arvind Subramanian sticking to wide ranging estimates like predicting GDP growth in FY18 in range of 6.75%-7.5%. The CEA who had been conspicuously reticent on the issue of demonetization stated that this move shall have “short term costs for long term benefits”. Eco survey warns that note ban will adversely impact cash-intensive sectors such as agriculture, real estate & jewellery.

As per CEA follow-up actions to minimize the costs & maximise the benefits include: fast, demand-driven, remonetisation; further tax reforms, including bringing land & real estate into the GST, reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration. Once the cash supply is replenished, which is likely to be achieved by end of March 2017, it is expected that economy would revert to the normal.

CEA outlined 3 risks to India’s growth in FY18 – note ban, pricey oil, global trade tensions, the first of which is a self-inflicted risk. Current account deficit narrowed in the 1st half of 2016-17 to 0.3% of GDP, net FDI flows of US$ 21.3 billion recorded a growth of about 29% over the corresponding period of last year. CPI inflation for the year 2016-17 is expected to be below the Reserve Bank of India’s target of 5% which should give ample legroom for RBI & Banks to cut interest rates.

CEA said GST, Bankruptcy Bill, Monetary policy Committee, Aadhaar Bill, FDI liberalisation, UPI & promotion of labour-intensive sectors are major achievements of last year. According to the Economic Survey, the indirect taxes grew at 26.9% during April-Nov 2016. While the Govt spent a lot on the implementation of the 7th Pay Commission recommendations, the overall revenue was robust.

The Economic Survey advocated the concept of Universal Basic Income (UBI) as an alternative to plethora of social welfare schemes in an effort to alleviate poverty. The Survey points out that the 2 prerequisites for a successful UBI are: functional JAM (Jan Dhan, Aadhar & Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary & Centre-State negotiations on cost sharing for the programme.

The Economic Survey is clear that there won’t be a revival of investment demand within the next fiscal year. It says, “Since no clear progress is yet visible in tackling the twin balance sheet problem, private investment is unlikely to recover significantly from the levels of FY2017”. It is far more optimistic on exports, believing that a global recovery will result in exports contributing to higher growth in FY18 by as much as 1%.

As per CEA the transition to the GST is so complicated from an administrative & technology perspective that revenue collection will take some time to reach full potential. Now that the GST deadline is postponed to July-18, one might wonder if it was prudent to pursue demonetization exercise prior to implementing GST.

On the taxation front, India’s tax to GDP ratio is between 10-11% compared to over 30% in high income nations. Post demonetization, if the tax base increases by even 2% of GDP, the additional tax collected would be Rs 1 lakh crore. Another confidence booster expected from the Budget was reduction in the corporate tax rates especially for Medium sized firms.

If there is one commodity which can alter the fiscal dynamics in 2017, it has to be oil. Since 2014, the dramatic fall in crude oil prices has helped India contain her twin deficits (Fiscal & Current account) besides taming inflation. But with oil exporting nations planning to curtail supply, there is a lurking possibility of increase in prices which shall be a major pain point for the Govt to tackle given its widespread ramifications.

Budget Outcome

The Narrative

This Budget presented by FM was a restrained & calibrated one instead of a populist one, as was expected by many keeping the state elections in mind. It’s extremely likely that the FM shall take a more public oriented approach in the next budget prior to central elections by rolling out sops & subsidies. In tone & tenor, Budget 2017 is aimed at the most vulnerable sections of the population, in rural as well as in urban areas. It provides tax breaks to the least-paid segment of the working population & lays out a series of steps that should incentivise the creation of markets that can provide the goods & services the marginal segments of the population need. It was a budget which was perhaps least criticized by the opposition as the Govt had all their bases covered in addressing the concerns of the underprivileged sections of society & stimulating investment simultaneously. Govt clearly wants to depend on the 2 Ds- Demonetization & Digitalization—to expand the individual & corporate tax base while the GST when implemented could help in indirect tax collections. This Budget takes a genuinely long-term view of the economy’s abiding problems, from delivering lasting fixes to alleviating rural distress, providing inclusive growth, and ironing out the pain points faced by all stakeholder’s post demonetization.

The Macros

FM widened the FY18 fiscal deficit target from 3% to 3.2%, with a commitment to adhere to the NK Singh panel on FRBM. The CEA had already scoffed at the standards adopted by rating agencies, still this deviation should be within their acceptable range. This also signalled that FM was willing to deviate slightly from the fiscal path in an effort to push growth. FM chose to stimulate the 2 engines of growth which were feasible under the circumstances- public investment & domestic consumption. In an effort to push private investment the proposal to abolish FIPB – a bold move, expected to reduce M&A timelines & create new investment opportunities for foreign investors. Since the inflation levels are in a comfort zone & Govt has not deviated much from its fiscal path, central bank is expected to oblige by cutting rates in subsequent monetary policy review.

The Income & Expenditure

FM’s TEC India (Transform, Energise and Clean India) roadmap seems to be a prescription in the right direction. The Budget, apart from addressing poor & underprivileged, lays emphasis on the farm sector, infrastructure & also pushes forward the initiative towards a digital economy, among other things. The flagship NREGA programme, a UPA pet project panned by PM earlier, ended up getting one of its biggest allocations ever of Rs 48,000 crore – but with additional emphasis on steps such as geo-tagging for transparency and priority to drought-proofing.

Tax rate cut to 25% for companies having less than 50 Cr turnover, income tax relief for salaried class, increasing capital expenditure by 11% & increasing the fiscal expenditure threshold by 0.2% are indicative of FM’s impetus to growth. Lowering tax on MSMEs is a welcome step that would provide a much needed fillip—by creation of jobs & putting more money in their pockets in all sectors.

The Govt is banking on the highest-ever receipts of Rs 72,500 crore from disinvestment in PSUs to finance social & infrastructure spending and rein in the fiscal deficit at 3.2% of GDP in FY18. All options are being explored to meet the disinvestment target: minority stake sales, strategic sales & listing of general insurance companies.

Govt Capital expenditure raised 25% to compensate for lower private sector capex & adverse effects of Demonetisation. Public investment of as much as Rs3.96 lakh crore in creating & upgrading infrastructure in the next financial year was announced. Also allocation of Rs2.41lakh Cr for roads, railways & ports in 2017-18 was earmarked with a proposed amendment in the Airports Authority of India Act to monetise surplus land for the development of airports.

There was an expectation that the rate of MAT will be reduced in line with its goal of reducing the headline corporate tax rate to 25%. However, instead, the rate has been retained & a higher period of 15 years for carrying forward for future credit claim has been provided, from existing 10-year period. On personal taxation front those who are within the income bracket of Rs 2.5-5 lakh will now be taxed at 5%, down from the earlier 10%, salaried class with earning less than 3 lakh are exempted from tax. On the other hand, those in the annual taxable income bracket of between 50 lakh-1 Cr will have to shell out additional surcharge at the rate of 10%. FM has also outlawed cash transactions above Rs 3 lakh & for political party’s max amount of cash donations has been capped at Rs. 2000 from any one source in line with the Govt war on black money.

An allocation of 1.31 lakh Cr for the rail sector was made, that included budgetary support of 55,000 Cr. Emphasis is on to improve the operating ratio of the Railways, while adding that the tariffs would be fixed, taking into consideration costs, quality of service, social obligations & competition from other forms of transport.

But the budget fell short of expectations for the real estate sector as most of the wish lists raised by stakeholders remain unfulfilled, it mostly catered to the low cost housing segment & the impoverished sections. It gave industry status to affordable housing & reduced holding period for immovable assets reduced from 3 to 2 years.

An interesting but dicey announcement has been the creation of an integrated PSU oil major, this could lead to consolidation of existing oil PSUs & possibly look at international markets for funding and/or possibility of leveraging on larger balance sheet for bidding for upstream assets, given India’s thirst for oil.

Major misses in the budget included paltry provisions towards banks’ recapitalisation, persistent high divestment targets, selective cut in corporate tax rates, no moves on long-term capital gains tax for equities & GAAR.

PM Modi had sought time till 2019 to face the people with his report card. For that to look good, the economy should be buoyant- creating jobs, delivering inclusive growth, containing inflation & attracting investments. With the GST regime now round the corner and a digital push to the economy well under way, PM will be hoping that FY18 & beyond would see the foundation being laid of a new, more transparent economy, with the multiple engines of growth gradually coming back into operation.