The Union Budget 2017-18 is here and is expected to announce measures to revive the economy after the government’s demonetisation exercise. The one positive of the cash ban was that it helped the government reap higher that estimated taxes for this fiscal so far.
Does that mean that the equity markets and the mutual fund industry can hope for budget goodies? A Balasubramanian, the chief executive officer of Birla Sun Life Asset Management Company says housing, road and railway infrastructure may continue to remain focus areas for the budget and the market will have reason to cheer if that does materialise.
In the previous Union Budget, the government had estimated about 12 percent growth in its gross tax revenue. From April to December, we have seen 22 percent growth in gross tax revenue. The non-tax revenue still has to catch up. What is your expectation on the fiscal deficit number for this year and what are estimating for the next financial year?
If you look at the roadmap that has evolved over the last two years, direct tax collections have been on the rise. That’s also mainly on the back of the following: 1) general compliance levels have been rising, 2) lower oil prices, the full benefit of which has not gone to the consumer at large, 3) the government also saved some money in the form of tax collections and 4) we have seen some success in the previous year’s divestment. This year, the demonetisation impact and Income Disclosure Scheme also weighed in. As a result of all these factors, we see tax collections rising.
One of the bigger impact we are seeing as we move forward is the impact of demonetisation. So while it’s the widely discussed subject in the country as a whole, that is one of the areas where we probably see an invisible kind of outcome that could come. It is very difficult for us to put a number to it. The bigger outcome of demonetisation could come effectively on tax-to-GDP ratio collection. One of the estimates I have shared in the past is that the number of people who are filling tax returns could go up about 4-5 times. If that number goes up 4-5 times, even if there is a marginal tax collection that comes from each of the individuals who are filling additional tax returns, then effectively the tax-to-GDP ratio from the direct tax collections also has to move up. The second impact is very difficult to predict at this point of time. In the short term I think GST once it’s implemented, as you move forward, may not be in the first half of the financial year or maybe the current year, but as time progresses, close to 2017-18 you will also see a larger compliance coming in from the large pool of trading community in the country added into the GST net. Therefore, in the overall tax to GDP ratio numbers, you can only actually see an uptick. And we are not counting any immediate kick-up that will come in the overall growth. So if that comes on the basis of good monsoon next year, and the rural economy picks up, then probably we will see an add-on benefit in terms of the overall GDP growth moving up which I think currently nobody is talking about it.
Where do you think allocations will go? There is some noise it will go to the small and medium enterprises, and to a certain extent, the infrastructure and agricultural space.
I don’t think there will be any big change in the stated policy of the last few years where the large pool of capital investment has been going towards roads, has been going towards railways in terms of building the right infrastructure. Third is the Make in India theme where you actually have schemes that revive the entire small scale industry in the country and even the recent announcements of cutting interest rates by giving a subvention for that segment of the market is also pretty big. Therefore, I think that’s where the major allocations will go. One of the sectors which is also being identified is housing. That sector that can employ a large pool of people in construction. Housing is the sector where the government is giving a push in terms of less than Rs 20 lakh housing scheme. A dose of benefits have already been given in the form of subvention. I think the budget would largely focus on how to create employment in the country through this sector which can employ a large pool of people and aid economic growth.
What sort of influence will the upcoming state elections have on the Union Budget?
I don’t think there will be any big impact. Having said that, for the last few years we have been keeping a very high focus on the fisc, keeping a very high focus on spending in the rural economy and also keeping a very high focus on public sector-led growth and and making sure some of the flagship schemes of government play their role in creating an impact on the broad economy as a whole. Therefore irrespective of the state election envisaged in the month of February-March, I think the budget will largely address the macro needs of the country.
You also said that you were expecting the tax-to-GDP ratio to move up. Do you have a quantum or any estimates which you are working with right now?
There is no number per se. Again, very difficult to put a number to it. We will only have to see the trend. Are we on an uptrend as far as the compliance is concerned? Are we going to see an uptick in tax collection numbers? Are we going to see an uptick in the tax-to-GDP ratio? From 14 percent now, are we going to get 14.5 percent or 15 percent? I think the trend will be more important. As long as the trend is good, which I think is going to be the case, we will probably see that reflecting on the fiscal numbers.
Last budget, we saw the equity markets bottom out. The budget before that, we had seen the equity markets peak. What is it going to be from here on, after the Union Budget this time?
This time around I think the impact of the Union Budget in general, or the expectations are not much. We have also seen interest rates dropping quite significantly. We will probably see the equity markets reacting positively, even post the budget. That’s my general assessment.