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The budget is prudent and pro growth

Monday, February 05, 2018
By Manish Gunwani

Manish Gunwani, CIO, Equity Investments, Reliance Nippon Life Asset Management Ltd.

The FY19 budget is pragmatic given the dual challenges of stimulating growth while adhering to a reasonable fiscal consolidation path. Its pragmatic because it attempts to revive the economy mainly the rural economy without jeopardizing fiscal consolidation.

A pre-election budget typically compromises macro stability by focussing on short-term gains. However, this budget has been quite prudent on that front. The undertone has been to bring much needed balance within the economy by addressing both social and physical infrastructure challenges. A good mix of soft spending primarily in areas like health, sanitation and healthcare as well as hard spending on infrastructure makes it a balanced budget. Hard infrastructure spending has an immediate multiplier impact on the economy while investment in human capital is a pre-requisite for improving medium term productivity levels in the economy.

Certainly the focus is on rural and social sectors with thrust on improvement in rural productivity via investments in agriculture, health, housing and electricity. Simultaneously, there is substantial increase in infrastructure spending on key areas like urban housing, railways and digital infrastructure. Steps are also been taken to boost the growth and confidence in MSME segments which have been relatively more impacted by GST and demonetisation.

On revenue side, overall assumptions are credible. After what Government has achieved in FY18, Divestment target for FY19 at 80k Cr INR should be achievable. No major changes in direct taxes as such. On the indirect tax revenue front, there wasn't much tinkering possible after the GST implementation. However, revenue assumptions are slightly aggressive on indirect taxes.

What's heartening to realize that the tax compliance in the system is on the rise. In FY18, we saw significant jump in effective new tax payers by 85 Lakhs. In FY19 this trend is likely to strengthen further both on direct and indirect tax front. Particularly on GST, there is a big hope of better compliance after relaxations in initial months of its implementation.

Lastly on capital markets, LTCG tax on equities is introduced at 10%. This change will bring revenue gain of about 20,000cr to the Government in the first year. Given the high growth potential of the Indian economy the modest LTCG tax should not be a big concern to investors.

Overall, the budget is prudent and pro growth. The focus would now be on the implementation of the proposed schemes. There is some compromise from earlier fiscal consolidation goals. However, formal adoption of the FRBM target of debt reduction is a positive, partially neutralizing the near term fiscal slippage. Overall fiscal arithmetic looks reasonable. In terms of risk, oil prices is a major risk both for the budget math as well as for the economy.

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