Pre-Budget Expectations 2017-18: A Sop To Elections Or Real Reforms In The Making?

The Budget 2017-18 is widely believed to have a populist overtone. Ahead of upcoming legislative elections in seven major states next year, representing ~25% of LokSabha seats, in all possibility, electoral management is expected to assume top priority in the forthcoming budget session.

The segments that have been most affected due to the ongoing demonetisation drive may find special attention in this budget. Also, given that this government understands that in the backdrop of weak global demand relying on domestic demand is critical to meet growth targets, it would like to take all necessary measures to bring domestic demand back on track.

Providing Low Cost Funds To The Ailing Micro, Small & Medium Enterprises (MSMEs)

In the wake of demonetisation, MSME production has dropped significantly as they have a heavy dependence on cash.

Given that the MSME sector accounts for 45% of India’s manufacturing and 40% of total exports, it is most likely to be offered the olive shoot in the form of budgetary sops.

We expect benefits to the sector to be provided by giving access to low-cost funds for growth. Besides, the Government may even consider extending some direct tax sops to the sector that can spur demand on an immediate basis.

Rationalising Income Tax Slabs

Rationalisation of the Income Tax slabs, whereby the highest personal income tax rate of 30% is levied at an income tax bracket of INR 20 Lakhs and above as against the present slab of INR 10 Lakhs and above, will go a long way in not only widening the tax net, but also in harnessing the overall consumption-led demand.

The multiplier effects of the same will ensure strong employment, kickstart the much-needed private sector capex and bring about an overall buoyancy in the level of economic activity spanning – agriculture, manufacturing, and services. Summing up, the demonetisation move now needs to be followed up with stronger reforms on the taxation side as well as with concurrent steps to improve the private investment cycle by boosting domestic demand.

Reviving Rural Demand

Semi Urban and rural India (70% of India’s population base), which is almost entirely dependent on cash, has witnessed sharp disruption due to demonetisation. The Government is, therefore, expected, to announce some major populist measures to appease the rural electoral masses. It may increase the spend towards social sectors including schemes like MANREGA, Pradhan Mantri Gram Sadak Yojana (PMGSY), Sarva Shiksha Abhiyan, Midday Meal Scheme, National Health Mission, etc. in order to boost its ‘pro-poor ‘or ‘pro-farmer’ image and in the process provide a major thrust for rural demand revival.

Public Sector Capex Revival

The Government has ambitious plans to scale up public infrastructure, including building roads, ports, modernisation of railways, power generation and T&D capacity addition, setting up urban mass transport, etc. In Budget 2016-17, it made a record allocation of INR 221,246 Cr ($ 33.07 Bn) for several infrastructure projects. While the thrust on higher spends towards infrastructure development is expected to be maintained in the forthcoming budget as well, the Government should deepen and widen funding channels to ensure long-term fund availability for infra projects.

Housing-For-All To Get Its Due

In the past one year, there have been a few potentially long-lasting changes drawn up in the Indian real estate sector that includes passing of RERA (Real Estate Regulation and Development Act 2016), and the Benami Transactions Act and now the demonetisation move will ensure that the transparency in the system improves,tremendously boosting demand from genuine home buyers.

In this budget, therefore, the Government is expected to announce further sops to encourage investments towards its Housing-for-All scheme that aims at providing ~60 Mn houses to the economically weaker sections of the society by 2022.

Positive Budget For The Equity Markets

In conclusion, focus on demand revival through budgetary measures is expected to be a key positive for the stock markets.

In fact, post demonetisation, the Government may consider providing a special stimulus package aimed at increasing the share of financial savings vis-à-vis physical assets such as gold and real estate. Notably, equities hitherto

Notably, equities hitherto were losing out to real estate and gold, because they was not able to offer any tax amnesty/shelter as opposed to the physical assets like real estate and gold. Now, with a level playing field created, logically speaking, equities will stand to benefit the most and share of financial savings in equities will considerably increase in the coming financial year.

About The Author

[The author of this post is Manish Goel, founder – Director, Research & Ranking – a serial entrepreneur specialising in creating successful businesses from scratch.]

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