Tuesday, January 31, 2017

Budget 2017: Despite 7th Pay Commission, monsoon booster, economy in slow lane, awaits Arun Jaitley reforms drive

Given the economy is growing way below potential despite a much-expected boost to consumption from the jump in salaries of government employees and from higher farm incomes following a good monsoon, the budget allocations for capital expenditure need to be increased substantially.

 Even in terms of non-tax revenues, the government will need to pencil in a smaller amount by way of revenues from telecom companies. (Reuters) Even in terms of non-tax revenues, the government will need to pencil in a smaller amount by way of revenues from telecom companies.

(Reuters)Given the economy is growing way below potential despite a much-expected boost to consumption from the jump in salaries of government employees and from higher farm incomes following a good monsoon, the budget allocations for capital expenditure need to be increased substantially.

In the budget for FY17, the allocation was higher by a meagre 4%. While the state governments need to do their bit, especially since they are now eligible for a bigger share of the tax collections—between April and October, these were up 9% year-on-year—their finances are not in great shape. States have tended to be more profligate in the last five years; while the central government has reduced the fiscal deficit by 2.4% of GDP, during this time states have grown theirs by 1.6% of GDP.

More importantly, the quality of this deficit may not be quite what it seems given how the accounting for the UDAY bonds may not have been kosher—ideally, states should have accounted for this as a grant under revenue expenditure rather than a combination of a loan, equity or a grant which is what some have done. If their finances are not to deteriorate further, they have little choice but to rein in capex spends.

While that requires the Centre to take up the slack, given that FY18 will be a different and difficult year with GST being rolled out from July, it is not clear exactly how buoyant tax collections will be; a one-time loss from the switch-over to the new regime also needs to be pencilled in.

Also, unlike in the last couple of years when it has reaped a bounty from excise duties on petroleum products, the Centre’s ability to raise these will be limited given the nine hikes over a period of 15 months between November, 2014 and January 2016. As such, while direct tax collections could surprise on the upside with demonetisation bringing more companies and individuals into the tax net, the outlook on indirect taxes is somewhat hazy.

Even in terms of non-tax revenues, the government will need to pencil in a smaller amount by way of revenues from telecom companies—possibly R20,000-25,000 crore—compared to FY17 since their finances preclude a fresh auction in FY18. It is possible that disinvestments and strategic sales will bring in much more than they have in past years—just R30,000 crore of FY17’s target of R56,500 crore has been achieved so far—though this cannot take care of shortfalls in other areas.

Read at:http://www.financialexpress.com/budget/budget-2017-despite-7th-pay-commission-monsoon-booster-economy-in-slow-lane-awaits-arun-jaitley-reforms-drive/528474/