There were high expectations from the budget 2017, as it was presented about three months after the biggest economic experiment in Indian history. The Finance Minister has taken the right approach to be responsive rather than reactive in this budget. All the macro-economic challenges including rising oil prices, protectionist measures globally, strengthening of the US Dollar and volatility in commodity prices have been rightly highlighted.
The budget for 2017-18 also comes with various structural changes to the budget making exercise. This includes (i) Removal of distinction between 'plan' and 'non-plan' expenditure (ii) Advancement of budget presentation by a month and (iii) Merger of the railway budget with the general budget.
It is appropriate to remove the distinction between 'plan' and 'non-plan' expenditure, provided the focus shifts to development expenditure and not just be limited to improving capital expenditure. India lags in its spending on health and education as compared to its counterparts globally and the capital expenditure on these areas should take priority over areas such as secretariat services.
Further, with the advancement of the budget, the parliament will have sufficient time to review, debate and ensure that the government starts spending as per the approved budget from April 1, 2017. Also, the merger of railway and general budgets will bring in administrative efficiency and save the parliament's time by now having to review only one budget document.
Some of the key highlights of the budget include:
Fiscal prudence: In 2017-18, the fiscal deficit is projected to be 3.2 per cent (deviating from the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) target of 3 per cent). The revenue deficit is projected at 1.9 per cent in 2017-18 and is projected to decline to 1.4 per cent by 2019-20. The government is committed to reduce the effective revenue deficit to 0.7 per cent in 2017-18 and take it to 0.2 per cent by 2019-20. This shows the intent of the government to direct more expenditure towards capital formation and tighten revenue expenditure. The FRBM review committee has recommended a 40 per cent cap on debt-GDP ratio for the central government to be achieved by 2023. The government of India has therefore projected the outstanding liabilities to GDP at 44.7 per cent for 2017-18 and 40.9 per cent by 2019-20 in alignment with the FRBM Review Committee.
Infrastructure development: The 2017 budget and performance in 2016-17 clearly shows that the government prioritises infrastructure development primarily through construction of national highways, housing and rural infrastructure. In this budget, the allocation for the infrastructure sector has increased from Rs 2.21 trillion to Rs 3.96 trillion. The capital expenditure last year was 13 per cent higher than budgeted figures, reflecting good grounding and progress in infrastructure projects. This is also a positive development from a quality of deficit perspective, wherein the revenue deficit has been contained while actual capital spends have gone up.
Revenue generation: On the revenue side, gross tax to GDP ratio has increased from the projected 10.8 per cent in 2016-17 to revised estimates of 11.3 per cent in 2016-17. Some of this increase could be attributed to various measures implemented to curb tax evasion in the last financial year including demonetisation. However, the gross tax revenues are expected to increase by 12 per cent in 2017-18 relative to 2016-17 revised estimates, compared to an increase of 17 per cent in 2016-17 over actual figures for 2015-16. This is surprising, given the expectations of higher tax compliance post demonetisation.
Overall, this budget is reform oriented and fiscally prudent with important announcements like abolition of FIPB and ease of doing business. This aims to attract investments and provide a cushion against the expected flight of capital with the increasing yields in the overseas markets. An efficient execution of the budget and the unfolding of global events and trends of oil and commodity prices would determine our ability to stick to the fiscal path outlined in the budget.
(The writer is Leader Public Finance and Economics, PwC India)