With the opposition claiming that Narendra Modi reforms have failed to deliver, the government is likely to redouble efforts to woo the Indian voter going into the Lok Sabha elections next year. Photo: Reuters
With the opposition claiming that Narendra Modi reforms have failed to deliver, the government is likely to redouble efforts to woo the Indian voter going into the Lok Sabha elections next year. Photo: Reuters

What the new fiscal year holds for Narendra Modi govt

The last year of Narendra Modi's stewardship, which ends with the 2019 Lok Sabha elections, promises to be an action-packed one. Mint looks at the challenges ahead for his government

New Delhi: Summer has set in early this year in Delhi. With the temperature nearing 40 degrees Celsius, people are bracing for gruelling heatwave conditions in the months ahead.

As if in step, the political temperature in the national capital is also soaring with just about a year left before people decide the fate of the Narendra Modi government in the 2019 Lok Sabha elections.

With political pundits saying that Modi’s re-election bid is no longer a shoo-in, and the opposition claiming that his economic policies have failed to deliver, the government is likely to redouble efforts to woo the Indian voter, particularly the poor.

While 2017-18 saw the Indian economy slowing after two back-to-back disruptions of demonetisation and the subsequent implementation of the goods and services tax (GST), the government will seek to end its first term with a better macroeconomic scorecard and addressing the widespread discontent arising out of rural distress and lack of jobs.

While 2017-18 saw the Indian economy slowing after demonetisation and GST, the govt will seek to end its first term with a better macroeconomic scorecard

To address these issues, finance minister Arun Jaitley’s last full-fledged budget on 1 February focused on farmers and poorer sections of the society. Jaitley promised minimum support price (MSP) to farmers at 50% more than the cost of production to address the declining profitability of farming, and a health insurance programme that has been dubbed “Modicare" on the lines of “Obamacare", the universal health insurance plan introduced in the US during Barack Obama’s presidency.

Modicare aims to target 500 million of India’s economically deprived people. While the higher minimum support price will be effective for the summer-sown crop, the government aims to make Modicare fully functional by October.

Radhika Rao, an economist at DBS Group, said while the political economy of providing a floor to the price of foodgrain has long distorted India’s food inflation dynamic, after a few years of policy restraint, 2018 may turn out to be a year when MSP hikes add to inflation.

“The budget proposal to increase minimum support prices to 50% above the production costs in FY19, in a bid to boost farm incomes and address the larger discontent amongst the agricultural community ahead of key state elections, will complicate the inflation picture," she added.

Ahead of the general election due before May next year, states including Karnataka, Mizoram, Chhattisgarh, Madhya Pradesh and Rajasthan will go to polls between this May and January next year where the Bharatiya Janata Party, or BJP, will aim to either retain or grab power.

State of the economy

The Indian economy, Asia’s third largest, is forecast to expand 6.6% in the year to March, the slowest pace in four years, partly the result of demonetisation and GST-related implementation issues.

The World Bank has, however, projected the economy to rebound to 7.3% in 2018-19, reaping the benefits of past structural reforms.

India’s factory output has grown at a robust pace of more than 7% for three straight months till January, raising hopes of a stronger-than-expected rebound.

Non-food credit, which reflects consumer demand, has also remained above 11% for three consecutive months till February.

Capital goods, which point to rising investment demand in the economy, recorded positive growth for the sixth straight month—growing at 14.6%—signalling a revival in private investment.

However, lower capacity utilization of Indian firms at around 72% may delay a sharp recovery in investment activities.

Though the retail inflation rate surprisingly slowed down for two consecutive months to 4.4% in February, analysts expect the relief to be temporary.

Though slower inflation may also dissuade the central bank from taking a hawkish stance in the first monetary policy review of 2018-19 on 5 April, analysts do not rule out a rate hike if inflation reverses the trend. In February, RBI kept interest rates unchanged but projected an inflation range of 5.1-5.6% in the first half of FY19.

External risks

The key risk to the Indian economy at this point is the spate of trade wars triggered by the unilateral actions of the Donald Trump administration in the US and the wave of protectionism across the world that could significantly impact India’s exports, considered key to sustaining higher economic growth.

The US has also dragged India to the World Trade Organization (WTO) on its export subsidies, the abolition of which could impact competitiveness of India’s shipments in the short run.

While rising global interest rates may modestly push up the cost of external borrowing for Indian companies, it could also ease fund flows to the Indian equity market.

Elevated oil prices, despite the recent corrections, is expected to double India’s current account deficit, or CAD, from 0.7% of gross domestic product (GDP) in FY17 to 1.4% of GDP in FY18.

“The uncertainty over the price of crude oil will continue to be a concern," said Kalpana Jain, senior director, Deloitte India.

Any sharp spike will also force central and state governments to lower taxes on petrol and diesel, possibly hurting their non-GST revenue.

Over the past 10 months, the price of Indian basket of crude oil shot up 58% from the $46.56 a barrel monthly average seen in June 2017 to $73.73 a barrel on 24 March.

This will keep margins of state-owned refiners under pressure as they seek to absorb some part of their cost from being passed on to consumers, in the process impacting the central government’s dividend income.

“Market conditions seem to be tight at present. Crude oil price is likely to stay above $70 a barrel for some time before it may retreat. Some expect that if a trade war eventually results in slower global economic growth, it may have a softening impact on commodity prices, too," said K. Ravichandran, senior vice-president and group head-corporate ratings at ICRA Ltd.

Domestic challenges

2018-19 will be a crucial year for GST.

Though it was rolled out on 1 July, the tax authorities had deferred implementing many of the anti-tax evasion measures waiting for the tax regime to stabilize.

Most of these measures are now expected to be rolled out in FY19 as the government looks to shore up tax revenues to fund its ambitious infrastructure and rural sector funding plan.

The first anti-evasion measure to be rolled out from 1 April under GST will be a mechanism to issue electronic documentation—to track the movement of goods between various states—known as the e-way bill.

GST and banking reforms will be particularly in focus in 2018-19

This will ensure that there is no under-reporting of transactions by the buyers and sellers.

Other anti-evasion measures that are expected to take effect during the year include a system to match the tax returns filed by the buyers and suppliers as well as a plan to ask big buyers to pay tax on purchases from small, unregistered suppliers.

The government is also planning changes in tax laws governing GST to remove some of the teething issues.

These anti-evasion measures, along with the changes in tax laws, are likely to cause some disruption initially as taxpayers adjust to the changes in compliance requirements.

FY19 will also test the government’s commitment to adequately capitalize state-run banks in a fiscally tight year.

Balance sheets of state-run banks are expected to take a hit from the rising instances of frauds as well as due to the requirement to keep aside more funds to meet the new RBI regulations of dealing with stressed loans.

Besides the Rs12,636-crore fraud reported at Punjab National Bank, the country’s second largest lender, other banks have also reported frauds to the federal investigating agency.

This means that the Rs2.11 trillion bank recapitalization plan announced last year may not be sufficient to meet the demands of state-run lenders.

The external challenges and domestic vulnerabilities will keep the government on its toes in a pre-election year.

Another change that will come into effect from the new fiscal will be the levy of long-term capital gains, or LTCG, tax at the rate of 10% on the sale of listed shares. So far, LTCG tax was nil on sale of shares.

To be sure, this will be applicable only on capital gains exceeding Rs1 lakh annually. Also, the gains accruing to investors till 31 January will be protected and, effectively, the tax will be levied on gains from 1 February for any sale of shares after 31 March.

The provision will also apply to equity oriented mutual funds.

Another key area to watch will be the roll-out of e-assessment, wherein the tax payers and the taxmen will have no face-to-face interactions.

Sudhir Kapadia, national tax leader at EY, said the new fiscal year will see greater reliance on digital tax administration.

“After the introduction of a fully digital GST (especially with the upcoming introduction of e-way bills and transaction-wise matching of input and output taxes), we will see a far greater reliance on digital tax administration for direct taxes in the entire spectrum of reporting and audits. This will be accompanied by the increasing use of data mining and analytics to maximize revenues and minimize income and tax leakages," he said.

He added that the draft of the new direct taxes code that seeks to replace the existing Income Tax Act will be another key factor to watch out for.

“Further simplification and rationalization of capital gains taxes can be expected in the new direct taxes code. Also, a significant streamlining and pruning of various kinds of exemptions and deductions is likely in the new code," he added.

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