After the Government’s demonetisation intiative, what the economy needed most of all from the Budget was an absence of further shocks. The aspect of uncertainty - domestic as well as international, must also have weighed on the Finance Minister’s mind during the preparation of the Union Budget 2017-18. This is reflected in this budget, which conveys a message of stability and predictability. The path towards fiscal consolidation has been consistent and gradual. Fiscal deficit has reduced for the sixth year in row.

Mr. Jaitley has positioned his fourth budget for long term growth with measures focusing on 10 key areas. He reiterated that demonetisation has paved the way for reduced corruption, widespread digital inclusion, increased access to credit and unhindered infusion of savings in the formal economy. The FM has sustained his focus on rural development from the previous budget. Allocation for rural,

agriculture and allied sectors has been fixed at Rs 1,87,223 crore, showing an increase of 24 percent from last fiscal. Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has received its highest allocation ever at Rs 48,000 crore. Besides, the lending target of Pradhan Mantri Mudra Yojana has been doubled. These announcements will spread positive sentiments further as India witnessed a good monsoon last year.

Allocations for poverty alleviation show that Prime Minister Narendra Modi-led government is committed to improve the living conditions of the underprivileged. Mahila Shakti Kendras will be set up with an allocation of Rs 500 crore in 14 lakh ICDS Anganwadi Centres. This will provide one stop convergent support services for empowering rural women with opportunities for skill development, employment, digital literacy, health and nutrition.

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A slew of announcements has been made to boost the Railways. In this FY, 3,500 km of rail line will be commissioned and a new metro rail policy will be announced. Also, by 2019 all coaches of Indian Railways will be fitted with Bio-Toilets. State-run companies like IRCON and IRCTC will be soon listed on stock exchanges bringing in much-needed transparency.

When it comes to building a country’s education infrastructure, it is not the allocation, but planning and execution that matter. The FM did not address the challenge of building the right education infrastructure, especially with regards to teacher training. However, the budget has some good news for teachers who are often overburdened by administrative responsibilities.

A national testing agency will be set up to conduct entrance exams for higher education institutions. An Innovation Fund for Secondary Education has been proposed to encourage local innovation for ensuring universal access, gender parity and quality improvement across 3479 educationally backward districts. As part of this budget, the FM also addressed the vexed question of political funding. Going forward, a party cannot accept more than Rs 2000 in cash from one source in the name of funding.

In a major relief to individual tax payers, the existing rate of taxation of those with income between Rs 2.5 to Rs 5 lakh has been reduced from 10% to 5%. There’s good news for the MSME sector as well, which has been hit severely by demonetisation. Income tax is now reduced to 25% for companies with turnover up to Rs 50 crore. There is no good or bad news on corporate taxation for big companies, though.

Both Sensex and Nifty rose post the Budget presentation. While Sensex rose from 27,655 pts and soared beyond the 28,000 mark, Nifty too, showed an exceptional growth as it crossed the 8,700-mark from 8571. While the merger of the Railways Budget with the General Budget was called a historic step, the bigger advantage for the government is the extra time it has to fine tune its execution strategy ahead of the beginning of the next fiscal. Also, doing away with the plan and non-plan classification of expenditure will facilitate optimal allocation of resources.

Since the objective of this budget – in the words of FM - is to “transform, energise, and clean India”, the government must keep a close watch on the pace of recovery, especially in the first two quarters of FY 17-18.

“The budget will empower the poor and live up to the expectations of all. It will provide an impetus to infrastructure, strength to the financial system and a big boost to the development. The budget has provisions to fulfill the expectations of everyone- from construction of highways to expansion of I-ways, from the cost of pulses to the data speed, from the modernization of railways to simple economic constructions, from education to health, from entrepreneurs to industry, from textile manufacturers to tax deduction.”

- Narendra Modi, Hon’ble Prime Minister of India

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A Challenging Year Ahead for the Government The budget presented by Union Finance Minister Mr Arun Jaitley leaned towards being a populist one primarily because it focuses on the ruling party’s focus areas, which is the poor and rural India. While promising to maintain “the best standards of fiscal prudence”, the Minister announced reduction in the tax rate in the income tax slab of Rs 2.5 lakh to Rs 5 lakh to 5% from 10%. The government is also likely to spend more in rural areas, which is being seen as a restorative action after the steep slowdown triggered by demonetisation.

A record Rs 10 trillion have been announced in loans to farmers in the year beginning April. The agriculture credit will bring under-served areas in focus, while also putting pressure on the banking sector because of increased outgo. The FM has announced a Fasal Bima Yojana and boosted allocations for a guaranteed rural jobs program and an irrigation fund. Hopefully, agricultural activity will increase boosting seeds, fertilisers and pesticides companies. A dedicated micro-irrigation fund with an initial corpus of Rs 5,000 crore has been proposed. This is likely to have a positive impact on farm productivity and will reduce monsoon dependency. The Finance Minister also spoke of circulating a model law on contract farming among states. If done well, it could bring greater connectivity between industry and the farmers, consequently helping them get better value for their produce. The government’s earlier goal of bringing in more regulated agriculture markets on the electronic National Agriculture Market (e-NAM) platform was also reiterated.

The funds for Mahatma Gandhi National Rural Employment Guarantee Act (MGNRGEA) has been increased Rs 48,000 crore from Rs 38,500 crore, as the demand for work in native villages of migrant workers was said to have increased after demonetisation. The silver lining in such high government expenditure is the chance of increase in consumer activity, which is beneficial to the overall economy. The finance minister also announced a reduction in tax rates for small and medium sized companies as part of an earlier promise to gradually reduce these corporate tax rates and phasing out of exemptions given to companies. The tax rate for companies with an annual turnover of upto Rs 50 crore has been brought down to 25% from 30%. This is likely to benefit a substantial majority of companies, but only among the MSME. This is a clear signal that the government has taken this step to make India competitive globally; although, Indian corporates are better placed currently than countries like US and Japan that have higher tax rates. It will also be the beginning of reforms of one of India’s complex tax systems that had become mired in layers of exemption and sops over the years, making it difficult to administer.

The move to do away with the Foreign Investment Promotion Board (FIPB) is a step towards cutting down red tape, as almost all sectors attracting FDI will move into automatic approval route. However, it will need to be ensured that the rest

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of the sectors, which are not part of the automatic route, are able to get clearances under a single window mechanism. A promise on further liberalisation of Foreign Direct Investment (FDI) policy has also been made. It will be expected that concrete measures are taken towards it rather than mere tokenism.The government has also focussed on skills development in the budget. It proposes to extend the number of Pradhan Mantri Kaushal Kendras from current 60 to cover more than 600 districts across the country. A hundred India International Skills Centres will be established across the country. These centres would offer advanced training and courses in foreign languages.

This will help those of our youth who seek job opportunities outside the country. Apart from that, the Government proposes to launch the next phase of Skill Strengthening for Industrial Value Enhancement (STRIVE) at a cost of Rs.2200 crore. STRIVE will focus on improving the quality and market relevance of vocational training provided in it is and strengthen the apprenticeship programmes through industry cluster approach.

With this budget, the government continues to provide big impetus to infrastructure. The government has granted infrastructure status to affordable housing, a long-time demand from the industry. The new status will augment resource allocation for the sector, which in turn will rev up housing supply and reduce huge demand backlog.

Overall, the budget has made a start, and if done well, India may finally see an economy that will grow inclusively. There has been consistent movement towards fiscal consolidation over the last few years of this government. The Economic Survey also emphasized the need for fiscal prudence as there is increasing talk of greater fiscal activism in the developed world. Next year will be a difficult year for fiscal management as the government will need to push capital expenditure. This year is critical for the government, as it will need to accomplish a lot economic reforms. The next two budgets are likely to be more populist, given the fact that 2019 is the election year.

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Major Announcements

Government Will Rely on Public Expenditure; Social Sector Spend Could Have Been More Ambitious

Breaking away from tradition has been the key theme of this budget. Not only was this observed in the clubbing of the main budget along with the railway budget, but also with the advancement of the budget speech by a month. Another big departure in this year’s budget was the clubbing of planned and non-planned expenditure. More time was devoted to explaining the governments’ aims and building context ahead of key announcements, rather than talking about increase in excise of various products.

The FM noted that global financial headwinds, a slowdown of the world economy, and a potential rise in oil prices may put the domestic economy in some stress, but generally India will continue to outperform most developing economies. The fact that India is now the sixth largest manufacturing economy and FDI grew by 45 percent, bodes well for the next financial year. Net receipts have gone up to 11.38 lakh crore, which is a 17 percent increase. Capital expenditure, which is the erstwhile planned expenditure, will go up by 25 percent. This is a huge increase in public expenditure, although we will need to wait for clarity as to how this will be allocated. A major share of this will certainly go towards railways and defence, which will result in job growth.

In the aftermath of demonetisation and a stagnation in private expenditure, the government has chosen to focus on public sector and infrastructure spending for revitalising the economy. However, this seems to be at the expense of social sector

spending, as the amount of money recovered from demonetisation is insufficient for major allocations. Allocation on MNREGA has gone up to Rs. 48,000 crores from the previous year’s allocation of Rs. 38,500 crores. While this is being projected as an increase, it is in fact lower than last year’s actual spend, which stood at approximately Rs. 50,000 crores.

Allocation towards various social sector programmes in this fiscal, such as the National Rural Drinking Water Mission (Rs. 6,050 crores, up 0.8% against revised estimate of the previous fiscal), National Social Assistance Programme (Rs. 9,500 crore, in the next fiscal, down 32 percent.

Dr. Amirullah Khan

Development Economist Center for Civil Society

Allocations for Major Schemes

INR (Cr.) INR (Cr.)

Pradhan Mantri Mudra Yojana 2,44,000 Pradhan Mantri Awas Grameen Yoajan

29,043

Rural employment (MGNREGS) 48,000 National Health Mission 27,131

Scientific ministries 37,435 Pradhan Mantri Gram Sadak Yojana (PMGSY)

19,000

National Education Mission 29,556 Swachh Bharat Mission 16,248

BharatNet Project  10,000 Pradhan Mantri Fasal Bima Yojana 9,000

There has been an increase towards the National Health Mission, which stands at Rs. 27,131 crores, up 20 percent – but this will be woefully short if the Finance Minister wants to achieve his stated objective of eliminating diseases like Kala Azar (black fever) by 2017, Leprosy by 2018, Measles by 2020 and, more importantly, Tuberculosis by 2025, which is a major public health concern.

While the increase in the National Education Mission (Rs. 29,556 crores, up 4.6%) is also modest, there is a suggestion to use technology for universal access to secondary education, which should help to increase productivity and lower costs.

There have been major job losses in the construction sector because of demonetisation. Giving infrastructure

status to low income housing and a consequent increase in allocation towards the Pradhan Mantri Awas Yojna (Rs. 29,043 crore, up 39%) will only yield results if the labour force is redistributed and reskilled. This can only happen if the private sector re-calibrates its operations to serve the affordable housing segment.

In conclusion, social sector spending could have been higher and more reforms for women and child, promoting gender parity and alleviating hardship of adversely impacted groups like poor farmers, could have been further specified. Ministries like Health and Family Welfare, AYUSH, Drinking Water and Sanitation may not have much leg room to affect major changes and will need to be more efficient in programme implementation.

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