BackBudget 2017: A three-pronged mission
Within rural development, improving the long-term sustainability of agriculture seems to be a key mission
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Rural development, housing, and infrastructure are the standout themes of the budget for next fiscal. The think-through seems to be increased spending in these areas would hopefully provide some kicker to consumption in the medium-term.
Indirect taxes haven’t been tinkered with, and that’s understandable given the imminent implementation of the goods and services tax (GST) in the second quarter of next fiscal.
Within rural development, improving the long-term sustainability of agriculture seems to be a key mission. To wit, there is a substantial 25% increase in MNREGA spending and an Rs8,000 crore jump in allocation for rural housing to Rs23,000 crore. Then spending under the Pradhan Mantri Krishi Sinchai Yojana will increase 40%, the corpus of the long-term irrigation fund set up in NABARD will double to Rs40,000 crore, and a separate Rs5,000 crore fund focussed on micro-irrigation is being set up.
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Additionally, the proposal to enhance the coverage of the National Agriculture Market (e-NAM) will, in the long run, help farmers secure better prices for their produce. Also, the increase in coverage of the Pradhan Mantri Fasal Bima Yojana from 30% of cropped area this fiscal to 50% by fiscal 2019 would help make farm incomes more predictable.
The granting of infrastructure status to affordable housing, change in the definition of area from built-up to carpet area, relaxation in the area limit for regions in the peripheral areas of metros, and extension of period for claiming tax deduction for affordable housing projects from 3 years to 5 years should make affordable housing projects more attractive to developers. That, in turn, would increase supply and work towards the objective of achieving the vision of ‘Housing for All’ by 2022.
On the downside, investment demand for houses would be hit further by the move to restrict set-off of loss under income from house property to Rs2 lakh for any assessment year.
On the infrastructure side, overall budgetary spending is proposed to be increase by 10% to Rs3.96 lakh crore. The budgetary support towards highways has been significantly hiked to Rs64,900 crore compared with the revised estimate of close to Rs52,500 crore for the current year. This step-up in spending would improve award of road project and their execution.
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The 22% rise in budgetary allocation will drive investments in railway infrastructure projects. The creation of a new fund to augment rail safety also tackles a much-neglected area. The proposed move to take up select airports in tier-2 cities for operation and maintenance under the PPP mode is also directionally positive.
MSMEs also had something to cheer from the budget, as the corporate tax rate for units with a turnover below Rs50 crore in fiscal 2016 was reduced by 5% to 25%.
On the downside, the budget lacked big ideas to boost consumption, which would be a disappointment for consumption-oriented sectors. The reduction in tax rates for tax payers in the lowest tax bracket should put an additional Rs15,500 crore in the hands of consumers, but this, by itself, is unlikely to give a material boost to consumption. Larger corporates would be aggrieved as they have not been granted any tax relief. The lack of announcement of specific steps to tackle the twin balance sheet problem (banks saddled with bad assets and firms struggling with high leverage) was also bit of a letdown. The reduced allocation to key schemes focused on urban rejuvenation – AMRUT and Smart Cities – was surprising, considering the imperative to develop cities.
All in all, the budget does a good job of further driving the inclusion and sustainability agenda of the government with the limited fiscal leeway available. The policy focus on affordable housing, roads, and MSMEs, should also help in boosting employment as these sectors have a high labour intensity. Creating jobs is a key worry for the government, as ~1.5 million people are entering the labour force every month, with most of them seeking jobs.
One would watch out for further steps over the next few months to fix critical issues constraining the economy – such as the twin balance sheet problem – and develop mechanisms for tracking outcomes from schemes announced in the past 2-3 years.
Nagarajan Narasimhan is Senior Director at CRISIL Research. CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services
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