Finance minister Arun Jaitley
faces a tough task of balancing the needs of farm sector as well as the
industry when he presents his third Budget on Monday, even as he seeks to
garner resources to boost public spending for higher growth amid global headwinds.
On the income tax front, the
Budget may continue with the status quo on the tax slabs while it may tinker
with the exemptions.
Rising rural distress because of
back-to-back droughts has put considerable pressure on the finance minister to
spend more on social schemes, while at the same time he has to win back foreign
investors craving for faster reforms.
His difficulties have been
compounded by the huge payout of Rs 1.02 lakh crore that will become necessary
on account of the 7th Pay Commission recommendations for government employees.
How much he does this without compromising on the previously-announced goal of
lowering the fiscal deficit to 3.5 per cent of the GDP next year is to be seen.
Jaitley is also likely to fulfil
his last year's promise of gradual reduction of corporate tax from 30 per cent
to 25 per cent over four years. It is expected that he may begin the exercise
in the Budget tomorrow that may be accompanied by withdrawal of tax exemptions
to keep the exercise revenue neutral.
To shore up revenues to meet the
increased expenditure, the finance minister may need to increase indirect tax
rates or introduce new taxes. Service Tax, raised to 14.5 per cent last year,
may see a hike to prepare for the level of 18 per cent being envisaged in the GST.
Further, new cess to fund
initiatives such as Start-up India or Digital India and other programmes is
being speculated, similar to the Swachh Bharat cess levied last year.
On his agenda would also be the
revival of the investment cycle. While capital expenditure in 2015-16 increased
by 25.5 per cent over last fiscal, as a percentage of GDP it is still stuck at
1.7 per cent and needs to go up to 2 per cent.
He will have to steer spending
towards sectors like infrastructure and raise public spending in view of
private investment not picking up at desired pace.
It remains to be seen if Jaitley
will loosen his purse strings or continue to consolidate. In the event the
government decides to increase spending, it would be a challenge to ensure that
the funds are channelized into capital investments.
"Even if budgetary
consolidation continues, India's fiscal metrics will remain weaker than rating
peers in the near term," analysts at Moody's Investors Service said
earlier this month.
Foreign investors have sold a net
$2.4 billion in shares this year, the second-biggest outflows in Asia excluding
China.
The Budget will need to focus on
the commodity driven sectors by providing protection measures, since these
sectors are stressed due to the collapse in global demand and oversupply.
Jaitley has shifted the
proportion of expenditure toward infrastructure and away from subsidies in the
last two Budgets.
Besides implementation of the 7th
PayCommission, he also faces challenge of bank recapitalization.
With agriculture reeling from
drought and lower crop prices, the government is likely to retain spending on
the rural employment guarantee programme, expand crop insurance and boost
irrigation outlays.
On reforms, he may open more
sectors to foreign investment and give tax breaks for labour-intensive sectors
such as leather and jewelry.
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