In the aftermath of demonetisation, and the continued uncertainty over the implementation of the Goods and Services Tax Bill, all eyes will be set on Hon’ble Finance Minister Mr Arun Jaitley as he rises to present the Union Budget for the fiscal year of 2017-18.

There are some crucial and key questions that he will need to address. These are: What will be the impact on the fiscal deficit? With inflation under control, will the RBI support a government push to provide stimulus for growth? How will the government push for better tax compliance? Will Hon`ble FM deliver on the old promise of lower corporate tax?

Having asked these questions, growth is likely to be the key focus of the Budget. While this may seem very broad, the government has gotten its task cut out, as the move to demonetise the 500- and 1,000- rupee currency, which is seen as a positive for the economy in the long-term, may impact growth of the economy for the next one to two quarters.

The proposed GST introduction, due from April, may stop the government from pushing any major Indirect tax changes, except those that aim to smoothen the transition to a unified indirect tax regime. With demonetisation pushing the population towards non-cash payments, the government may promote technology start-up initiatives that aim to bring down the cost of electronic payments across systems. The government could also provide additional support to the Reserve Bank of India-led fund that aims to subsidise such payments. GST reform, along with digitisation of payments, will create buoyancy and transparency in the economy.

The recent moves to incentivise cashless transactions, will carry a cost, but will also encourage more transactions to the formal banking system. This will enable the government to better track spending activities of its citizens. If it is decided in the Budget to impose curbs on cash transactions beyond a certain limit, then there is a strong chance that tax compliance from those on the fringe will improve.

In the past, Hon`ble FM had said that, with more people coming under the tax bracket, the incidence of taxation will go down. With people bearing the brunt of lower growth, through possible lower salary hikes from companies having lower profitability, it is possible that on the personal tax front more money can be put in people’s pockets by reducing the tax incidence, but only if the compliance improves.  

On the corporate tax front, companies will closely watch whether Hon`ble FM lives up to his past promises of lowering corporate tax incidence over time, with specific focus on Make in India initiatives and smaller enterprises. This is an important factor as the government has gradually weaned away exemptions, and more could go away with GST coming in; and a more straightforward and lower tax regime will be crucial to improving the corporate sentiment in the country.

More than going for ‘Big Bang’ Budget announcements, the government is expected to focus on the basics – infrastructure and financing. This is important, as key economic reforms of the ‘Big Bang’ variety are already underway, namely, demonetisation and GST. With demonetisation aiming to weed out black money from the economy, sectors that are visible directly impacted are real estate and gold. A decline in prices in the realty sector will enable the creation of affordable homes and thus bring down the cost of housing and rent in the country.

There is an expectation that the government will utilise additional funds raised from the income disclosure scheme and demonetisation to support rural and social spending. A strong boost to this allocation will have a cascading impact on employment generation, the asset quality of lenders, and will also spur better connectivity and growth across various parts of the country.


Under the present government, the infrastructure sector has received special attention, with the FY17 Budget allocating Rs 970 billion for the road sector, including the rural roads programme. The standalone allocation for roads and highways was Rs 550 billion, with an additional Rs 150 billion that the National Highway Authority of India was expected to raise by bonds.

There is an expectation that FY18 allocations for such spending, will sharply increase. Such an increase will not only generate jobs but will also boost domestic demand for steel and cement, providing an additional boost for allied sectors. Additionally, the government choosing to scrap the Railway Budget and provide its spending in the Union Budget, will enable the government to look at this segment from an economic standpoint.

Profit-focussed private entities bring in better quality partners, technology, and other advantages, which is necessary to take the infrastructure sector forward. The government can provide tax breaks, holidays or initiate joint ventures with private players in the infrastructure sector through this budget. The government has already tasted success with its renewable energy initiatives, with specific focus on power generation from solar, wind, and non-conventional sources. Replicating this through the betterment of the broader infrastructure sector and encouraging private players, could be a game changer for this sector.


The government support to these sectors, will also have a positive impact on bank balance sheets, which have been under stress due to delayed approvals and repayments from steel, mining, infrastructure, power, and allied industries. Permissions for infrastructure-focussed non-bank lenders to issue tax-free bonds, and an increase in this bucket would help in not just increasing lending to this key sector but also to banks, as the burden of financing this long gestation will ease.

Last year, the government had taken a number of supportive steps on the asset quality front by enabling 100% equity holding in asset reconstruction companies, and also allowing higher foreign investment in papers issued by these entities. There are expectations that the government could go a step further and provide some tax or investment breaks for such stressed asset management entities, which will help deal better with bad loans that are burdening the banking sector. An important area will be how much capital allocation the government provides to state-owned banks and whether it takes any further steps to privatise or consolidate these banks. As the Basel III deadline of 2019 draws closer, Indian banks need to have a higher quantum of equity capital, with the government support to state-owned banks remaining a major factor.

The budget of Rs 250 billion for 2016-17 for public sector bank recapitalisation was not seen as adequate to meet the capital needs of the industry. Demonetisation has helped bring into the banking sector, cash deposits that were lying outside the system. Banks, will hope that the government provides a sectoral stimulus, especially to larger sectors, so that they can deploy these deposits as loans.

While there have been repeated reports from various media agencies on the government intention to merge many of the state-owned banks to create larger banks, the government is yet to communicate its views on this. The move to merge associate banks and Bharatiya Mahila Bank into State Bank of India is seen as a first step in this direction. As this is a political issue, the government’s statement of intent on this will be critical.

After the government move to increase foreign holding in pension and insurance sectors in previous budgets, there is a hope that this budget may increase the 20% cap on the foreign stake in state-owned banks. Such a move, would give more flexibility to public sector banks to do more issuances that attract foreign stakeholders.


Government has set up a panel to look at the fiscal deficit target for the Indian economy, and the report is still awaited.

RBI has also cut its growth forecast to 7.1% from 7.6% earlier for current FY, citing weak Jul-Sep growth and the transient impact of demonetisation, which is clearly a precursor to the government declaring muted numbers for FY17. However, RBI has managed to improve liquidity in the system, which will bring down lending rates, but also holds on to its policy rates for now. This gives the central bank additional space to cut the repo rate further; if the government and the RBI believe that inflation is under control and there is space for the central bank to push growth.

Text Box: RBI and other economists have already pegged India’s FY17 GDP at a lower level of around 7%. In order to boost growth for FY 18, there is a likelihood that the government may choose to keep the fiscal deficit target in the range of 3-3.5% for FY18    Mr Pankaj Rathi  Vice President & Head – Treasury, IL&FS Financial Services Ltd (IFIN)

If the government is unable to convince investors that this change is going to support growth that had been sacrificed during demonetisation, then it is likely to be seen negatively by rating agencies or global investors.

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