It will be the last full budget of the Modi government before the next general election in 2019. For the finance minister Arun Jaitley, it will be a challenge to present a pro-people budget that is not populist.
He may adopt a different approach to woo voters that generally other political parties do. Though some sops may be distributed by him, he will try to restrain fiscal deficit to 3.5%.
Before we begin to estimate what can be introduced or scrapped in the budget this year, it is important to understand the challenges for the Finance Minister.
Inflation is becoming a prime concern as it crossed the 5% mark in December 2017, breaching the threshold level of 4% set by RBI in its monetary policy.
There is rising problem of income inequalities which is indicated by the Gini coefficient that places India with a value of 47.9 far above the simple world average of 37.3, and at second place in Asia, just after China as per the estimates of the Standardized World Income Inequality Database (SWIID). One percent people hold 73% of the wealth in India.
Soaring oil prices, consolidating fiscal deficits, unemployment and low economic growth are other major challenges for the government. There is a positive entitlement in the international markets with respect to the growth story of India.
Global Economic Prospects 2018, a report by the World Bank estimates the economy to grow at 7.3% in 2018 and 7.5% in 2019 and 2020.
India is the fastest growing economy with US growing at 2.5% in 2018, Euro Area growing at 2.1% and Japan growing at 1.3 in 2018. China is likely to grow at 6.4% in 2018 and 6.3% and 6.2% in 2019 and 2020.
However, the economic growth could not be converted into jobs, higher incomes equity and women empowerment while settling Disruptions caused due to GST, Demonetisation, digitalization and pre-election (2019) political strategies.
Digitalisation has been incentivized but lack of basic infrastructure facilities like telephone line, internet, banking penetration with lack of financial and basic literacy has made the impact of digitalization limited.
The structural reforms initiated by the government are likely to give the requisite push to the economy in coming years.The economy has been struggling with low IIP numbers which needs the requisite push with greater incentivisation to the industry through new schemes that motivate production in specific sectors like renewable energy, waste management, Green financing and others.
Last year budget decreased the Corporate Tax rate of small and medium enterprises to 25% giving the requisite push. It is much in expectation by the corporates that the same may be extended to the other corporates to give a greater push to the industries struggling to meet the ends.
The government is faced with the challenging task of mounting NPA’s of over Rs 10 lakh crore and recapitalization of banks to comply with the BASEL III norms. Infusion of Rs. 80,000 crore in state run banks would put pressure on fiscal deficits.
With rising fuel and vegetable prices and retail inflation, it is unlikely for RBI to cut the interest rates which is less likely to give any impetus to the already leveraged corporate balance sheet to secure more loans or restructure their loans for investments.
With the roll out of GST in July 2017, the power to effect different indirect taxes is no longer with the Finance Minister as it rest with the GST council. The items outside the GST can observe some changes in taxes like tobacco and alcohol may face higher taxes.
The Budget is likely to give impetus to the economic growth and development by making enhanced allocations to infrastructure, education, healthcare, agriculture and rural development.
Reallocation of subsidy expenditures for development of the poor, underprivileged and women is likely to be focus of Budget this time. Scheme focusing on developing women entrepreneurship, greater education and skill development are likely to be in the offing.
There is a need to revolutionizing the productivity in the agriculture sector which generates the need for another Green and Protein revolution in the path of doubling farmers’ income. Research in the field is ample but has not reached the farmers where there is a greater need for training the farmers and agriculturist about higher productivity options.
Cooperative schemes that unite farmers to plough their lands together need to be incentivized by the governments – both centre and state. Capital intensive investment in facilities like warehousing, cold storage needs to be provided to the farmers at reasonable rates.
Cooperative bodies need to be established that can purchase farm produces and sell them in the urban or other needed markets.
There is also a need that a National Logistics Company may be established which communicates with the states with respect to their needs of agricultural produces and bridges the supply demand gaps of the agricultural produces.
To overcome the problem of unemployment the government may consider establishing National Labour Exchange (NLX) as proposed by Indian Institute of Finance in their lead Study in Finance India that would remove information asymmetries in the labour market.
Areas where there are Kuccha houses, the government should introduce affordable housing schemes with special incentives to be given to Army personnels, teachers, farmers and trader with income less than Rs. 10,00,000 per annum.
Railway Stations may be modernised with public private partnerships, where the government can seek more revenues by making advertising spaces available to corporates on these stations.
It is also the demand of the salaried class to reintroduce the standard deduction and to increase the minimum exempted income from Rs. 250,000 to Rs. 300,000.There is no doubt that macro-economic parameters have increased recently.
Industrial Output showed a growth of 8.4% in the month of November in 2017. The World Economic Forum (WEF) has ranked India at 30th position on a global manufacturing index, below China's 5th place but above other BRICS peers.
The Nikkei India manufacturing Purchasing Managers’ Index (PMI) rose at the fastest rate in five years in December to 54.7 from 52.6 in the previous month which indicates expansion as against contraction in the economy.
Bilateral Talks with the different countries are also likely to yield better trade and capital flows. India's cumulative equity FDI inflows have increased 40% to reach US$ 114.4 bn in FY 2015-16 and FY 2016-17.
PM Modi's Make in India initiative from 2014-2016 has attracted FDI flow of Rs. 9,933.87 crores or US $1.54bn. India has ranked 100th in the Ease of Doing Business jumping from 130th place and Moody has improved India's credit ratings.
It is expected that the finance minister will present a pro people budget that will generate more jobs.
(The writer is professor (Finance) at Indian Institute of Finance)