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The upcoming Union budget will be the last one for the Modi-led government, before the general elections in 2019. Therefore expectations are high for final reforms push, and at the same time there are fears that it could be a bit populist. Given that we moved to GST, and the GST council has been regular meeting and tweaking the rates, this budget is no longer going to be of importance from indirect tax point of view. The focus of this budget is going to be mainly on fiscal deficit, capital expenditure—to revive growth, and direct taxes.
Due to likely slippage in FY18 fiscal deficit, we believe now that FY19 target would be ~3.2%
The impact of the GST and demonetization were absorbed fully in FY18 in fiscal deficit. Fiscal deficit for FYTD 18 (April – November) came in at 112% of Budgeted Estimate (BE), compared to ~86% in the year ago period. The higher fiscal deficit was due to lower revenue receipts, with this year being the GST implementation year. We believe that as the tax regime stabilizes, tax revenues will improve gradually and the benefit of that will be seen from FY19 onwards. Also, on the non-tax revenue front there was a shortfall of revenue collection due to lower dividend from RBI and lower telecom revenues. On the positive side, due to buoyant capital markets, the disinvestment target of Rs. 72,500 crore will be surpassed. Based on additional borrowing for this year, the fiscal deficit is likely to be ~3.4% of GDP vs budgeted estimate of 3.2% of GDP.
As per Fiscal Responsibility and Budget Management (FRBM) Committee of Mr. N.K. Singh, the fiscal deficit should be brought down to 2.5% of GDP by FY2023, and the roadmap suggests 3.0% for FY19. However, due to the hiccups in change in tax regime, and also due to higher crude oil prices, and the government’s focus on pushing for growth—we believe that the FY19 fiscal deficit target would be about 3.2% of GDP. This would still enable us to stay on course for the FRBM target.
Reduction in corporate tax rate is still awaited
As outlined by Finance Minister, during Union Budget 2015-16, corporate taxes were to be brought down in phased manner from 30% to 25% and there would also be a phased elimination of exemptions. Since then, in Union Budget 2017-18, the finance minister has cut the corporate tax rate for smaller companies with annual turnover up to Rs. 50 crore for to 25%, from 29% earlier. However, for larger domestic companies, the corporate tax rate presently remains at 30% (plus surcharge and education cess as applicable). We believe there could be some reduction in corporate tax in the current budget for large corporates. Given that the US government is bringing in sweeping tax reforms, where corporate tax rates could be brought down from 35% to 21%, we believe a substantial reduction in corporate tax rate in India can also be a possibility over the medium term.
Also, there are fears that government may tweak long term capital gains tax for equities. There is a possibility that the government may extend the holding period for long term capital gains to more than (>) 3 years, from the current >1 year, to make it similar to that of fixed income investments. However, we expect that the long-term capital gains tax would continue to be zero for equity investments.
Spending on infrastructure and rural initiatives would continue to be high priority
Given that government has announced Bharatmala, Saubhagya and Sagarmala schemes over the years, we believe a significant allocation and road map for implementation for these infrastructure projects will be part of this budget. Through these projects, government would like to increase its spending on capital expenditure, to push for growth and employment. As per the Medium Term expenditure framework of the government, capital expenditure for road construction is projected to considerably increase over the next two fiscal years.
Rural distress is a big topic of discussion right now. Various state governments have already announced loan waivers to farmers to deal with the burgeoning situation. Therefore it is likely that the central government will announce some relief and increase in expenditure for the agriculture and rural sector. As per the Medium Term Expenditure Framework statement of the government, the expenditure towards agriculture sector and rural and social development is projected to increase.
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