Tax cuts, higher spending & maintaining fiscal deficit
After the huge disruption caused by the demonitisation, brokerage houses are now expecting finance minister Arun Jaitley to play the role of a magician to get the economy back on the growth path.
Many feel that the domestic economy reeling under the ‘shock and awe’ of the surgical strike on black money needs innovative measures to regain the momentum.
The expectations are building up on measures to boost consumption and increase government spending. The government will have to manage three things. First, it will have to cut tax rates so that consumers have money to spend. It will also have to spend money for infrastructure development as private investment is falling behind. At the same time the government will have to honour its commitment to maintain fiscal deficit.
On the one side, tax rates have to be cut and then spending increased with the goal ahead to manage deficit – it will be a huge balancing act. It is quite a daunting task for the finance minister.
The Union budget for 2017-18 set to be announced in the first week of February is likely to be dramatic due to the GST rollout as indirect taxes will no longer exist.
Most brokerage houses are pinning their hopes on a slew of measures to boost the economy through higher spending, cut in tax rates and at the same time balance the fiscal deficit.
The expectation is that the budget is going to see large allocations to the rural and urban infrastructure as well as huge investment in railway infrastructure.
There has been a long-pending demand to raise the exemption limit for income tax from Rs 2.5 lakh to a level of Rs 4 lakh and also hike the tax exemption limit for housing loans.
While there is no surety that this tax shift may take place, experts say there is some hope. As economic growth momentum, especially consumption and production has been hit hard by demonetisation and the private sector is not in a condition to revive growth, the government has to step in to stimulate economic growth most aggressively by higher spending.
Brokerages are expecting the finance minister to target a fiscal deficit of 3.5 per cent of GDP – the same as last year, in FY18. That would give him more headroom for infrastructure spending.
But some fear that there will be little headroom for a major fiscal stimulus if he sticks to FY17’s fiscal deficit target of 3.5 per cent of GDP and the RBI ‘special dividend’ will largely be utilised to step up social sector schemes.
Ashwin J Punnen