The presentation of the annual budget on February 1, first implemented last year, has already had an impact on expenditure patterns. The objective of advancing the budget day was to complete all budget-related legislative approvals by the end of March so that the funds can be released immediately in the next financial year. Hitherto, the budget approval process got pushed into May and first quarter allocation were made on an ad-hoc basis and were limited.
The salutary effect of this change is evidenced by the fact that expenditure patterns have got more front-loaded, improving both quality and efficiency of government expenditure. This year the impact of the implementation of the goods and services tax (GST) will have its own impact on budget-making.
UPPING THE ANTE
The importance of the annual budget in India’s economic calendar received a boost after the major trade and regulatory reform in manufacturing which took place in the early nineties in the background of a severe foreign exchange crisis. Before that, budget-making did not quite catch the glare of publicity and was viewed as a normal annual statement of government expenditure and revenue.
The early nineties saw the big bang announcements which was presented in part A of the budget speech of the finance minister. In the last decade, economic reforms became more incremental, as also many of the major policy announcements. In some sense, part B of the finance minister’s speech containing the taxation proposals acquired greater importance.
The implementation of GST would now mean that earlier announcement of changes of central excise and service tax would now move out of the central budget as these central taxes have been merged into the CGST. Policy measures relating to GST (rates and exemptions) would now be decoded by the GST Council outside the budget process. Both the Centre and the State would jointly formulate the policy measure pertaining to GST and therefore change would happen throughout the year. Therefore, in the annual budget to be presented on February 1, the announcement on the indirect tax side which is normally contained in part B of the budget speech would now be confined to measures related to customs duty and taxes on other items like petroleum which are presently outside the GST.
One can, therefore, now expect the taxation measures to be mainly focused on direct tax reforms and customs.
The importance of direct tax reforms has already been emphasised by the Government through the constitution of a committee headed by Arbind Modi, member (legislation), CBDT. This committee will look at the entire gamut of the Income tax Act and draw up a new direct tax code.
With growth rates tapering off, the budget would have to look at measures to lift the growth rate, and here trade and investment policies are going to be critical. No country in the post-world war era has grown consistently at more than 8 per cent without an export growth of at least 15 per cent annually.
Similarly, one can expect measures to boost investment both through further liberalisation of foreign investment policies. There would be deeper financial and capital market reforms and broadening of the corporate debt market to shift infrastructure financing patterns from banks to the bond market. Greater use of long-term pension and insurance funds would also be very important.
All these announcements would come as part of part A of the budget speech. Therefore, the budget would probably see a return to what we saw in the early nineties when big policy announcements were announced in part A of the and provided a boost to the importance of the annual budget.
With greater devolution of finances to the States and a cutback on centrally-sponsored schemes, a lot of programme formulation and implementation has to be done by the States. Therefore these details would also go out of the annual budget. Therefore, it would not be any surprising if GST in some ways brings back the importance of part A of the budget speech. This is welcome because what economic policy now needs is to see more signs of the architect and less of the plumber.
A DEGREE OF UNCERTAINTY
The implementation of GST has also created uncertainty in the tax collection. The monthly revenue collection for November fell well short of the ₹92,000 crore that would be required to meet the budgetary targets.
Tax experts are attributing this shortfall to a number of reasons such as greater payment of export refunds, higher amount of transitional credits and the reduction in duty rates on a number of items announced with effect from October 1, 2017. The silver lining has been a pick-up in the growth of personal income taxes. Some of this could also represent the bump effect of GST implementation leading to higher turnover being declared in the income tax return.
There is also the hope that the disinvestment target of ₹72,000 crore will be exceeded especially if the ONGC-HPCL merger goes through. Therefore, budget-making this year will confront the dilemma of either meeting the fiscal deficit target or slipping up in order to boost growth. Whatever be the outcome, GST has certainly queered the pitch. The Government response could be either an ‘aggressive drive’ or a ‘defensive push’. We will know, come budget day.