Demonetization comes as a well-timed pleasant shock in a country where everything is available but hope. The monumental move by the Indian Prime Minister, Mr. Narendra Modi polarized the national opinion (as expected) - one camp is vociferously up in arms against the move while the other is lauding its necessity as it was a Black Swan Event (an unpredictable event).
Revitalize a sagging economy
FULL COVERAGE: UNION BUDGET 2017-18
Indian Banks of late had been running on fumes due to huge NPAs, which amounted to a massive Rs 6 trillion as of March, 2016. But after demonetization, reports say that up until 13th December 2016, almost Rs 12.4 trillion has found its way to back to the banks. This means that there is a fairly good possibility of recapitalization of banks through the money that came in through the IDS(Income declaration Scheme).
And the collection through demonetization now becomes a monetary surplus for the government, which can be well utilized during this budget, to solve long standing and important issues like housing infrastructure and rural consumption. As we have ample liquidity in the system, we must also focus on introducing some solid agriculture reforms that can benefit our economy and while we are at it, a good amount should also be pumped into making the 'Make in India' campaign a success.
FULL COVERAGE: RAILWAY BUDGET 2017-18
Also, some part of the unaccounted money that is making its way back to the formal channel can be used to aid the 'Direct Benefit Transfer' program launched by the government and relieve the burden on the rural and agrarian economy, which has been reeling under the effects of a massive cash crunch post demonetization. In case of a delay, the government can try and address the challenge that the Q4 GDP presents. If the government adopts these measures, one way or another the money will be in circulation, which is not the case in the current scenario. All these initiatives will positively impact the money flow in our economy and give it the much needed boost.
Clarification and simplification of Tax Rate
Since the banks have been revitalized, a lot of good things maybe in store for the Indian taxpayer. It is expected that the government may increase the tax exemption slab from the current Rs 2.5 lakhs to Rs.4 lakhs for individual taxpayers. With a view to boost savings, the government is also likely to raise the Rs 1.5 lakh limit under section 80C. Tax bracket for affordable housing may also be a highlight of this year's budget. Pension Income for the senior citizen to be entirely tax-free is another distinct possibility.
This is on the top of every citizen's list. Higher tax exemption slab and reduction in tax rates will definitely encourage more and more people to file their taxes and not evade it. It comes across a major shocker that currently, only 3 per cent of India's population files their taxes.
The current low level of spending is driven by less liquidity in the market and by slashing the Tax rate and restructuring the income tax slabs, middle-class spending will get a boost and that in turn will help in reviving the Mid- Consumption Economy and lead to higher and a more stable growth.
India is an emerging economy and is in desperate need of a tax framework that supports its start up ecosystem. Let's learn from our more developed counterparts like Canada and the USA, who have a tax friendly ecosystem for start-ups willing to set up businesses. The Indian government should increase the tax break period for start-ups as soon as possible or it is likely to hurt our economy in the long run.
A new timeline to implement GST should be proposed and all efforts should be made to get it done within that deadline. The impact of GST is felt only after two financial years so any delays in implementing it, will only prove to be detrimental to our economy.
To cast a wider net for more and more financial inclusion, the budget could unfurl a slew of additional benefits to enable cashless transactions. The government's recent announcements about offering incentives on digital payments like a complete waiver of Service Tax below transactions of Rs. 2000 transaction and waiver up to 0.75 per cent for making digital payments at the petrol station are a good move in that direction. With a vision to move towards a cashless economy, Government should act on more such measures.
Restructuring of existing tax saving instruments
Most of the existing pension plans, Fixed deposit and ULIP( Unit Linked Insurance Plan) are not a good fit in the current ecosystem. The major problem with these instruments is their rate of return, which is no more than 6.5-7 per cent. It is considered a very poor rate of return as it does not account for inflation. With such low returns, individuals cannot even maintain their current standard of living, which essentially makes these investment schemes pointless. It is high time that the government becomes a little more progressive in their thought process and try to improve these.
If the government increases the exemption limit under Sec. 80 C, it may increase the equity participation and an individual can expect upto 12 to 15 per cent CAGR return. If the current limit is raised from Rs. 1.5 lakhs to Rs. 3 lakhs, individuals would greatly benefit from it.
Capital Gain Tax on Equity Investments
Speculation around LTCG (Long Term Capital Gain) Tax implementation is in the air and if introduced, it will be a big disappointment for an emerging economy like India. Currently, there is no tax implication for gains made from equity investment or Mutual Fund (65 per cent equity holding) that have been held for a period of one year. There's a rumor that the government may change the LTCG Tax rule and increase the tenure to two years, which means that the current short-term capital gains can be modified by 15-20 per cent. There is ample liquidity in the ecosystem and the government stands to gain from substantial tax collection from initiatives like IDS, Demonetization and Implementing tax on Jan Dhan Accounts. It would be not be a prudent decision to make any changes to LTCG Tax rule. If that is done, a lot of FII(Foreign Institutional Investor) will roll back their emerging Market allocation from India and that can cause considerable damage to the economy.
Upcoming budget: In my eyes
Demonetization has set a positive tone for the upcoming Indian Budget, which is to be announced one month in advance on the 1st February 2017. A rate cut from RBI is expected due to ample liquidity in the market. The interest rate is bound to fall as some banks have already reduced their interest rate.
Besides those, I feel that the absolute necessities of this budget should be - timely implementation of GST as per a proposed timeline, implementation of direct benefit transfer, infrastructure spending and tax restructuring - all these should be done keeping in mind the long-term growth for India Inc.
Historically, when culture cleans up their acts, get more efficient and take care of their people, businesses thrive. It's not an accident; one causes the others. Demonetization, IDS, GST etc. by Mr. Narendra Modi has installed guard rails in an economy, which was prepared to drive itself off the cliff. Guard rails always seem like an unwanted intrusion on personal freedom. Until we get used to them. Then we wonder how we lived without them.
(Pranav Kumar is an ISB alumnus and Founder and CEO of Plus Capital, a financial advisory firm with pan India presence.The company gained India wide presence well within its incubation years when it was awarded the CNBC best financial advisory for managing a significantly positive portfolio for its clients amidst the turmoil and bloodbath in the financial markets of 2008)