New Delhi, January 24: After massive economic disruption was caused by Prime Minister Narendra Modi led demonetisation drive in the last quarter, forecasting next year’s revenue outlook is a stab in the dark for FM Arun Jaitley reported Reuters.
With annual budget slated just a week ahead, Jaitley has a double whammy to meet. He is expected to step up capital and welfare spending and offer tax give-aways to support an economy overhauled by noteban shock since November 8 while at the same time he has to take care of mounting fiscal deficit at 3.5 percent.
“It is an unprecedented budget,” said a senior government official who has a direct knowledge of fiscal planning.
After the whole gamut of noteban on economy to curb black money and counterfeit currency went berserk, PM Modi on New Year’s Eve unveiled incentives for poor, farmers, women and small businesses in an address to the nation. The opposition slammed the center for running a budget speech, instead of revealing numbers on demonitisation and termed noteban a scam.
FM Jaitley is expected to follow Modi’s sweeteners with tweaks to personal income tax allowances and a cut of perhaps one percentage point in the 30 percent corporate tax rate, said Sandeep Chaufla, a partner at tax consultancy PricewaterhouseCoopers.
There is certainly a high temptation to please voters ahead of assembly elections in 5 states just three days after the budget announcement.
EC has already barred Central government from boasting off government’s achievements in the budget speech.
If FM opts for raising public spending in the union budget, it would break his earlier promise to pull fiscal deficit to 3 percent of GDP in 2017/18 from current 3.5 percent. William Foster, a credit analyst at ratings agency Moody’s, also sees “limited” scope for India to trim the fiscal gap to 3 percent after noteban.
As per the report, finance ministry officials have admitted that an “expected recovery” in consumer spending and better tax compliance, could control this deficit dilemma. Consumer spending accounts for 60 percent of India’s $2 trillion economy.
With scrapping of 86 percent of the cash in circulation consumer spending is hit hard as supply chain in all the industries is being affected due to cash shortage.
The finance ministry needs to boost public capital spending to stimulate growth.
But much of this depends on the pace of restoring liquidity to an economy that relied heavily on cash transaction before jolting on to sudden bumpy plastic road in the mid way.
“Any new big-ticket spending is possible only once there is clarity on the revenue front,” the government official said.
It was estimated that new income tax declaration scheme fetched up to $22 billion and this would aid FM Jaitley in meeting up with his spending commitments.
FM also claimed earlier that indirect tax receipts have grown by an annual 14.2 percent in December, besides a slump in consumer spending and contraction in services and manufacturing and cited a rosy economic outlook.
But on the hind-side, there is a big delay in Goods and Services Tax that would replace a slew of indirect levies. The International Monetary Fund (IMF) has trimmed growth outlook for the fiscal year beginning in April to 7.2 percent from 7.6 percent previously, citing the blow to the cash-reliant economy.
India certainly has a bumpy road ahead and with a steering in hands of Jaitley, expect the unexpected hiccups on the way.