For Finance Minister Jaitley, This Budget Is A Tough, Tough Task
Mr Jaitley is under pressure to offer tax giveaways He also has to step up capital and welfare spending to support economy This might put the fiscal consolidation process at risk
Prime Minister Narendra Modi's decision in November to scrap high-value bank notes has made next month's annual budget a challenge for Finance Minister Arun Jaitley, who is under pressure to offer tax giveaways and step up capital and welfare spending to help the economy spring back from demonetization. However, the economic disruption caused by the notes ban makes it a tough job to forecast next year's revenue. While indirect tax receipts grew by an annual 14.2 per cent in December, there was a marked slump in consumer spending along with a contraction in services and manufacturing.
The new national Goods and Services Tax that would replace a slew of indirect levies has also been delayed.
"It is an unprecedented budget," said a senior government official with direct knowledge of fiscal planning, to news agency Reuters.
Mr Jaitley plans to deliver his budget on February 1, just before voting begins in five states, the most significant of which is Uttar Pradesh, whose outcome will be seen as key for PM Modi's chances of winning a second term in 2019.
Seeking to shore up support, PM Modi unveiled incentives to the poor, farmers, women and small businesses in an address to the nation on New Year's Eve.
Finance Minister Jaitley is expected to follow those with tweaks to personal income tax allowances and a cut of perhaps one percentage point in the 30 percent corporate tax rate, said Sandeep Chaufla, a partner at tax consultancy PricewaterhouseCoopers.
The temptation to please voters risks straining public finances and inviting the wrath of investors and ratings agencies who have praised Mr Jaitley for his past fiscal prudence.
With that concern in mind, the government is debating the merits of expanding the size and scope of social security benefits, including the idea of a Universal Basic Income or a targeted jobless allowance or dole.
Funding such a scheme would make it harder for Mr Jaitley to keep his promise to narrow the fiscal deficit to 3 per cent of GDP in 2017/18 from the 3.5 per cent budgeted this year.
With corporate investments still weak, the Finance Minister would need to boost public capital spending to stimulate growth.
Proceeds from a new income tax declaration scheme, estimated by officials at up to $22 billion, could help Mr Jaitley meet some spending commitments.
Still, William Foster, a credit analyst at ratings agency Moody's, sees "limited" room to trim the fiscal gap to 3 per cent.
Officials at the Finance Ministry say an expected recovery in consumer spending that accounts for 60 per cent of India's $2 trillion economy, as well as better tax compliance, could avert any fiscal slippage.
But much depends on the pace of restoring liquidity to an economy where nearly 90 per cent of transactions used to be in cash.
"Any new big-ticket spending is possible only once there is clarity on the revenue front," the government official who spoke to Reuters added.
