The 2017-18 Union Budget is poised to be a significant budget. While demonetization dominates the news, reports of India’s economic growth slowing and its effects on the population, significant attention should be paid to the budget as multiple other variables will be affected. The state elections in Uttar Pradesh, the state with the highest number of Vidhan Sabha seats, loom large and so do four other state elections slated for this year. The highly anticipated National Goods and Services Tax (GST) has been deferred to July from its earlier date of April. The convergence of all these factors make the 2017-18 Union Budget a significant one. Here’s a look at how these factors may shape the 2017-18 Union Budget.
The Indian Economy as Things Stand
Demonetization has been the obvious factor that has impacted the last quarter of India’s economy in 2016 and it has had an adverse effect on India’s economy in the short term. The IMF has cut India’s growth rate by 1% to 6.6% for 2016 compared to its earlier estimate of 7.6%. And it’s not only the IMF that’s been cutting India’s growth forecasts. The Reserve Bank of India has cut its growth forecasts to 7.1% from 7.6%, the Asian Development Bank has cut their projections to 7% from 7.4% and Fitch from 7.4% to 6.9%.
The real estate market across major cities has also taken a major hit in the last quarter of 2016 according to a report by real estate consultants Knight Frank. Notably, the Delhi-NCR market has seen a drop in real estate sales of 53%, Mumbai a drop of 50% and Bangalore a drop of 45%. This, despite the month of October being unaffected by demonetization, which was announced in early November. And it’s not just the real estate market either. According to the Society of Indian Automobile Manufacturers’, automobile sales in India have plummeted to rates last seen in the year 2000, with vans, two wheelers, and three wheelers being the vehicles most hit.
Investment in the Indian economy has also taken a hit in the last quarter of 2016, owing to demonetization, according to the Centre for Monitoring Indian Economy. According to them, until the November 8th announcement of demonetization, the last quarter of 2016 saw 227 investment proposals worth Rs 81,800 crore. However, In the seven weeks post demonetization, only 177 investment proposals were made, valuing up to just Rs 43,700 crore rupees.
Meanwhile, the All India Manufacturers’ Organisation claims that, according to a survey conducted by them, the small and medium services sectors all across India are estimated to have seen a 30-35% reduction in jobs, and that they expect to see that reduction jump to an eye watering potentially 60% by March 2017.
What That Means for the Union Budget?
This brings us to the crux of the matter, which is not an argument on demonetization, but more on the fact that the Indian economy has seen a slowdown, resulting in a major reduction in consumer demand over the last quarter of 2016. This drastic reduction is evinced in the major decline of real estate, automobile, and even retail sales. The drastic reduction in two wheeler and retail sales, especially the reduction that small kirana stores have seen suggest that rural and semi-urban India, the demographics that make up the bulk of India’s population, have been hit hard.
This is bound to have an impact on Prime Minister Narendra Modi and Finance Minister Arun Jaitley’s plans for the Union Budget for 2017-18, especially considering that the elections loom large in states such as Uttar Pradesh and Punjab. Hence, expect the 2017-18 Union Budget to include measures that target rural and semi-urban areas, such as increasing funding for MGNREGA, subsidies for farmers, a national agri-market to make selling crops easier for farmers, unemployment benefit schemes and initiatives for the spread of digitization to rural India to ease their demonetization woes.
The Union Budget will also target spurring consumer demand from the urban middle class. The cutting down of personal income taxes should be expected from the next Union Budget, to not only achieve increased consumer demand but to score political points as it is a popular political move. The budget will also look to spur on investment from the private sector, so expect a reduction in the corporate tax rates.
The highly anticipated National Goods and Services Tax (GST) has been deferred to July and this too will have an impact on the 2017-18 Union Budget. The motive behind the GST is to streamline the existing indirect taxes on services at both the central and state levels. While Parliament has agreed to the implementation of the GST, the reason behind it not being implemented is that the GST council, comprised of representatives from state and central governments, have not been able to hash out the details as of yet. The Modi government might look to the Budget to implement tax changes as an alternative.
Lastly, the education and healthcare sectors have been ignored by the Modi government’s budgets ever since the current government took power. In case the Modi government does move ahead with major welfare, subsidies, and investment projects, the money will probably be lifted from the education and healthcare sectors. The only other major area where the government could lift money from is the defense sector, but that would not be astute politically.
In a nutshell, expect the 2017-18 Union Budget to be one with populist leanings. This, owing to the sluggish economy and reduced consumer demand as of late as well as the upcoming elections throughout states across the country.