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Will Budget 2018 Be A Populist One? Know Here... - Outside View by PersonalFN

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Will Budget 2018 Be A Populist One? Know Here...
Jan 17, 2018

When expectations run high and the resources to meet all of them are scarce, disappointment is the only visible consequence.

The Union Budget 2018-19 is a big event-rather, it is perceived to be a big event. On February 01, 2018, the Finance Minister will unveil the fiscal roadmap of the Indian economy for the Financial Year (FY) 2018-19.

This being the last full-year budget before the Lok Sabha election 2019, many expect the government to go on a spending spree and forgo fiscal discipline.

But, will that actually be the case?

Will the government which has an inclination to stick with prudent fiscal policies part ways from its routine practices to win-over votes?

These are the discussions across media.

The complete focus of the upcoming budget is likely to be on the direct taxation and allocation of resources. The government has recently borrowed additional Rs 50,000 crore to meet the deficits. This excess borrowing may appear justified considering the extraordinary conditions the economy has dealt with in the recent past-demonetisation and the implementation of GST being prime examples.

On this backdrop, the government's stance on the fiscal deficit front has also assumed immense importance. The inadequacy of government's revenues-especially from the direct taxes, has curtailed its ability to spend even on developmental projects and reforms of national importance.

Will the government revive public-private partnerships? This remains to be seen.

There's a tough choice to make: allocate more funds toward education or toward defence-at the moment, India can't afford to compromise on either expenditure.

The government must give weightage to either of these- building infrastructure and improving rural incomes. These are difficult choices, since they not only affect a certain section of society, but set the tone for the future economic policies.

What's the wish-list?

  • Lower tax rates
  • No imposition of additional levies
  • Take measures to promote growth
  • A little or no divergence from the path of fiscal prudence

The wish-list of various sections of the economy can be consolidated to make one common list. It could be as short as the one given above.

But it's not going to be easy for the Finance Minister to fulfil these wishes. You see, the wish-list features mutually conflicting points.

Spending and direct taxes: major thrust areas

In the Budget 2015-16, the Finance Minister had assured to lower the corporate tax rate from 30% to 25% over four years. Nothing has happened on this front so far. And now the pressure is mounting to reduce corporate tax rates.

To make things worse for him, the US is determined to reduce the corporate tax rates to as low as 20%, thereby falling several places on the list of countries with higher corporate tax regime. This has sparked-off competition among global economies to provide incentives to corporate, making the domestic manufacturing attractive, and protect the export markets.

In this scenario, the Finance Minister may find it tough not to lower corporate tax rates.

Attracting global capital and improving the exports' share in the India's GDP has been the priority of this government. Recently, the Commence Minister, Mr Suresh Prabhu expressed the need for exports to contribute more in the GDP. To promote exports the government is considering various possibilities.

Talking about one of them, Mr Prabhu said, "We are thinking of ideas whereby we can incentivise the States which promote exports. I have mooted this idea before the States and asked them to give their ideas on this."

The capex cycle hasn't yet picked up and that's hurting the GDP. The Finance Minister has repeatedly appealed to the big corporate to kick-start capex plans. But, in the absence of incentives to invest and due to lack of demand, the private players are avoiding to commit big investments.

The government's push to infrastructure also seems to have reached its peak since it has limited scope to further increase its spending-in the wake of the rising fiscal deficit.

All these factors may make it compelling for the Finance Minister to encourage private players and present a Budget that shores up their confidence-a must to revive India's sagging capex cycle.

On the other hand, individual taxpayers expect the Finance Minister to lower tax rates or at least reshuffle the tax slabs upwards. If the Government chooses to concede to this demand, in addition to meeting the demand of the corporates to lower taxes, there would be a severe dent on the direct tax collections-something that the government can't afford at this juncture.

There have also been speculations about the government considering imposing the long-term capital gains tax on equity-oriented investments to shore up its revenues. As you may know, the GST collections have been dipping steadily for a last couple of months.

In the meanwhile, the government has a herculean task of recapitalising Public Sector Banks (PSBs) whose balance sheets are in terrible states owing to the problem of high Non-Performing Assets (NPAs).

Besides this, the government has to address the faltering performance of the agriculture and allied sectors since that acquires a great importance in accelerating economic growth and taming retail inflation.

How the budget may impact your investments in the capital markets?

Going by the market cues, the investors are hopeful that the government will do a balancing act between promoting growth and curtailing deficits. If the actual announcements deviate from this notion debt and equity markets would be negatively impacted.

On the contrary, if the government manages to does the balancing act right; the capital markets may cheer the Union Budget 2018-19.

What investors should do?

Don't speculate hoping that the budget will be populist. Instead, continue to follow your asset allocation plan.

When you invest keeping in mind your financial goals and risk appetite; temporary market movements should not make any difference to you.

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This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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