Arun Jaitley attempts a clean-up job in Budget 2017

Presenting the Union Budget for 2017-18 on Wednesday, Finance Minister Arun Jaitley attempted a clean-up job across the board – including on macro-economic indicators, some troubled sectors, and on tax compliance. A major impact on the Budget-drafting process was quite evidently the decision by the government last November to demonetise high-value currency notes.

Jaitley chose to deviate from the exact path of fiscal consolidation slightly, budgeting a fiscal deficit of 3.2% of gross domestic product in 2017-18 instead of the previously projected 3%. However, he did still shrink the deficit, and promised to hit the 3% target in 2018-19. The six consecutive years of fiscal consolidation by successive governments add up to a visible and credible commitment to macro-economic stability in India.

Graph Jaitley stayed true to fiscal consolidation partly by keeping projected expenditure growth low, at only 6.5% – although overall nominal GDP growth has been projected at 11.75%. In order to finance union budget 2017 spending, Jaitley has relied heavily on personal income tax, expected to grow almost 25% in 2017-18.

This increase in personal income tax will come in spite of a halving in the tax rates payable by those with incomes between Rs 2.5 lakh and Rs 5 lakh, from ten to five%. This will be partly offset by an increase in the tax rates further up; a new slab of taxpayers has been created, with income between Rs 50 lakh and Rs 1 crore, who will pay a ten% surcharge on their taxes. Jaitley explained his tax cut as a “reward” for honest taxpayers, and presented statistics on the extent of tax evasion in India, which he called “largely a tax non-compliant society”. To reduce evasion, he banned cash transactions of more than Rs 3 lakh.

Other measures also bore the imprint of demonetisation. The FM said the Budget had been crafted to put a special focus on the rural and agricultural sector and the poor, among others – sections hit hard by the currency withdrawal. He declared an expansion of the electronic agricultural marketing mechanism for produce, and also of the funds allotted to irrigation. Over the year 2016-17, the rural employment guarantee scheme spent almost Rs 47,500, a 23% increase over the Budget allocations – a sign of possible rural distress. Jaitley allocated a similar amount to the scheme for 2017-18 as well.

The digital economy, also a focus of the demonetisation exercise, received further boosts from the Budget, with a regulator being promised within the Reserve Bank of India and specific tax incentives offered for digital payments. The last Budget provided some incentives to start-ups; this one relaxed the criteria for accessing them.

But perhaps the most important post-demonetisation political point in the Budget was a proposal to clean up the financing of political parties. The ceiling for individual donations in cash was proposed to be lowered to Rs 2,000 from Rs 20,000, and a system of “election bonds” announced which would both reduce the reliance on cash to fund elections and also preserve the secrecy of political donations.

Arun Jaitley attempts a clean-up job in Budget 2017

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