By Prof. D. M. Deshpande
The countdown for the FY 27 budget has begun. It will be presented on February 1 by the Finance Minister for the third time (full budget) in 3.0 of the Prime Minister, Narendra Modi’s government.
There is no budget that does not have expectations from multiple stakeholders. Generally speaking the middle class in India tends to be more vociferous and its voice and views figure prominently in the media. This time, however, the expectations are rather muted, probably because just last year the FM gave a virtual bonanza by raising the income tax limit under the new regime to Rs12 lakh. After standard deduction, it translates to a tax free annual income of Rs12.75 lakh.
Further income tax slabs, too, were revised upwards giving higher relief to tax payers at all levels. After a year of big concessions Indian governments are not known to continue the same trend in the next few years.
Moreover, like always, the government does face constraints despite the fact that the nation’s economy is a leading performer among large nations. Yet, rising geopolitical tensions, raging wars and high tariffs have created uncertainties and heightened business risks. Governments, not just India, have to cope up with the challenges of managing the economy in turbulent times. The security environment has worsened not only in our neighbourhood but also elsewhere in several parts of the world. Per se, the Indian government is compelled to enhance its defence allocation in the budget. After all, it is, as it should be, our top priority. Hence, experts believe that while the government’s capex allocation will go up by 12% to Rs.12.5 trillion, defense capex will rise by 25%.
The government has done the heavy lifting in terms of capex expenditure for the last few years. It will have to shoulder the burden for the coming fiscal too, as private investment is not picking up probably due to heightened external uncertainties and risks.
The FM will continue with the fiscal consolidation process. The debt to GDP ratio is still above the pre-Covid levels. The target is to reduce the debt by 5% to FY 31. Tax revenue growth for the next year is projected at 8%. It marks the third successive year of below two digits growth in revenues. The projected rate of inflation is around 4% for the next fiscal year. Though it is within the RBI’s tolerance limit, it is expected to jump from the current low of around 1%.
The rupee continues to fall mainly due to external factors such as hostility in Greenland, Iran and other places. Costly imports will abet home inflation. The only good thing about the INR depreciation is that the RBI will earn a substantial surplus. Experts believe that the Apex bank will transfer around Rs.3 trillion to the government as dividend, an increase of 10 to 15% over the last year.
This will help greatly in the fiscal management and restrict the deficit to around 4.2%. This means that the government is going slow on consolidating the deficit by about 15 to 30 basis points. If the government chooses to spend more with an eye on boosting near term growth, it may take the deficit to around 4.4%. This will be good for equity markets as higher public spending would boost demand, consumption and employment.
The government employees are keenly watching the developments on the new pay commission’s front.
It is a big macro-economic swing factor for the government which may cost the government around Rs.1.8 trillion. After a delay the Commission has been formed and members including the Chairperson have been appointed. Elections are due to be held in March in UP, the largest state in India. Obviously stakes for major political parties and their alliances will be high. Hence, the government may provide for the major part of expenditure for salary enhancement of employees in the coming budget.
It can leave the salary arrears part to the budgets after FY 2027. The decadal pay rise is likely to widen the fiscal deficit by 20 to 30 bps initially and when other states reset their employees’ salaries, it will be a hit of a neat 100 bps over next two years. One positive fall out would be that salary hike of employees who are earning Rs 10 to Rs 20 lakhs per annum will boost consumption and demand for consumer goods and automobiles.
The budget, in all probability, will focus on three broad themes-increased capital expenditure, targeted social sector spending and structural reforms. The capital expenditure will consist of spending on defence needs and creating further infrastructure like railways, roads, ports and the like, especially the latter with an eye on job creation. This is important from the point of view of mitigating distress among the poor and lower middle class. The government may not relax on social spending given both economic and political realities.
While the demand for raising the tax exemption limit may not be acceded, there is a stronger case for easing capital market taxation. The long term capital tax was raised to 12.5% which is considered to be on the higher side. In addition, there is a demand from investors as well as brokerages to enhance the tax exemption from the present Rs.1.25 lakh to Rs 2 lakh on long term capital gains. Similarly, there are some genuine demands for enhancing tax concessions on purchase of real estate property.
Since the prices have jumped up exponentially in metros and urban areas, they are increasingly becoming prohibitively expensive. Hence a fiscal incentive is sought even in the new tax regime. The salaried class is also waiting to see the fate of the old income tax regime given the preference of the government on the new regime.
Above all, prudent fiscal management is in the best interests of all stakeholders. On this the FM is more likely to deliver given the past record and the present thinking of the ruling dispensation.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
