What could be the key themes of the Union Budget 2018 - Motilal Oswal
What could be the key themes of the Union Budget 2018 - Motilal Oswal

What could be the key themes of the Union Budget 2018

As the NDA government stands on the threshold of its last full budget of the current term, the question is back to the key expectations from the Union Budget. Before we look at what could be the Union Budget 2018 highlights and the theme of Budget 2018 India, let us look at some broad themes. Typically, budgets are classified based on themes like reformist, populist, pragmatic etc. The Union Budget 2018 is going to significant in more ways than one. We foresee 7 broad themes in the Union Budget 2018 and they could form the basis for the key features of budget 2018..

A brief halt to the reforms push
The previous budgets of the government were all about big bang reforms. There was demonetization, the GST implementation, ease-of-doing-business, FDI liberalization and Insolvency & Bankruptcy Code. Each of these was far-reaching reforms which made a tangible difference to the Indian economy. This budget will be more of an attempt to consolidate the merits of the previous reforms. It would be too ambitious to expect any big reforms on land or labour in this budget. Being the last year before the elections, the focus will be more on realizing the benefits of past reforms than foray into new reforms.

Delivering and communicate tangible solutions to the people
This follows as a logical corollary to the previous point on a temporary halt to the reforms process. The big challenge is to communicate the benefits of these reforms to the people through appropriate case studies. That could be the big theme of the budget. The combination of demonetization and RERA is bringing about an organized revival in realty. The GST is not only simplifying business processes but also forcing more of the unorganized businesses into the mainstream. That means more contributors to the national tax kitty. The IBC will finally activate the dead balance sheets of banks. These are far-reaching reforms and the government will focus on communicating this story.

Reviving growth without fuelling inflation
This will be the big challenge. CPI inflation at 5.21% is already at a multi-month high. It is nearly 121 basis points above the RBI comfort zone. So the government has a tightrope to walk. It needs to put more money in the hands of the people through tax sops but it should ensure that it does not end up in a consumption binge. That means more incentives for people to use the surplus money to invest rather than to spend. Look forward to a lot of new investment avenues for long term wealth creation.

Tax the rich a little bit harder and let the middle class have it a little lighter
Government could end up playing a bit of Robin Hood in line with its progressive approach to taxation. Look forward to higher surcharge on higher income groups, continuing the tax on dividends and plugging the loopholes on long term capital gains tax. At the same time, the budget will offset that with more liquidity in the hands of senior citizens and the vast majority of middle class tax payers. Additional tax burden on these segments is out of question but there could be an effort to bring more people into the tax bracket.

Higher borrowings but strictly not for consumption
It is now popular knowledge that the government has overshot on the fiscal deficit targets. It may end 2017-18 with fiscal deficit of around 3.7%; a full 50 basis points above the FRBM target. The budget will contain a strong communication that the additional fiscal deficit is actually to spur growth. Most economies follow the counter cyclical fiscal approach and hence that should not overly impact the recent rating upgrade by Moody’s. But the specific reason for the higher fiscal deficit is likely to be very clearly communicated across.

The budget will address farm distress in a big way
This is one area the government will want to focus on and the results of the Gujarat Assembly elections clearly showed a clear disconnect between the BJP’s performance in the cities as compared to the villages. The BJP government has a commitment to double farm incomes by 2022 and that will require a big push. A major investment in rural infrastructure, rural purchasing power and employment generation programs etc are likely. There may be a lot of focused tax incentives for specific agri support segments like hybrid seeds, agro chemicals, fertilizers, drip irrigation infrastructure, post harvest infrastructure etc.

End of the road for monetary stimulus
This budget may have a very subtle message in that the RBI may have already done its bit on pushing growth by cutting rates by 200 basis points. Bank rates are down by over 275 bps and the scope is now limited. The focus will now shift to fiscal policy consisting of the trinity of taxation, subsidies and public expenditure. The budget is also likely to underline that going ahead the focus of the government will be more on fiscal policy and not so much on monetary policy.

This budget could spring some surprises which we cannot second guess at this point of time. But we believe that this shift to fiscal policy and focus on rural theme could be the strong underlying messages of the Union Budget 2018.
 

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