The big focus of next year’s Union budget will be spending on infrastructure and the rural sector, finance minister Arun Jaitley said on Thursday.
“Whatever is the additionality of resource we have, a lot is going to be spent in these areas (infrastructure and rural sector),” he said.
Jaitley disclosed this in a chat with Jahangir Aziz, head of emerging market economics at JPMorgan Chase and Co., at the 15th Hindustan Times Leadership Summit 2017.
While spending on infrastructure would help revive investment, the extra focus on the rural sector will help alleviate prolonged rural distress—a politically sensitive subject. Since the 17th general election is scheduled for 2019, the Union budget for 2018-19 will effectively be the last one to be presented by the Bhartiya Janata Party (BJP)-led National Democratic Alliance (NDA).
Jaitley said tectonic changes have taken place in the economy in the past one year and the government will now focus on infrastructure and the rural sector in the budget.
Jaitley will start holding his pre-budget consultation meetings with different stakeholders starting on 5 December.
This will also be the first budget after the goods and services tax (GST) was implemented from 1 July. Since the revenue proposals in the budget will now be restricted to customs and direct taxes, the expectations are that the focus of next year’s budget will be on the quality of expenditure.
N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, expectations are that the government will announce measures to boost job creation in both rural and urban areas in the budget.
“This government will be assessed by the electorate on how much employment is generated. There is an expectation that there will be a large focus on employment generating sectors like construction and the rural sector,” he said.
Jaitley has already said that he will stick to the glide path for the fiscal deficit announced in the last budget.
The government aims to contain the fiscal deficit at 3.2% of GDP in 2017-18 and 3% of GDP in 2018-19. However, given the expected revenue shortfall and the additional burden of public sector bank recapitalization, the government is expected to revise its fiscal consolidation roadmap.
On the recommendations of the N.K. Singh committee on fiscal responsibility and budget management on creating a fiscal council, Jaitley said this needs further debate on whether more power should be vested in non-elected institutions.
“I think there is considerable merit in the glide path for fiscal deficit laid down by the committee. Whether you need to create a new institution, particularly when all accounts of the government are accountable to Parliament, is a question that needs to be debated,” he said. On the privatization of state-run banks, the finance minister said such a move needs political acceptability. “I am pragmatic to realize that political opinion is not ready to take that decision,” he said.
Jaitley also hinted that tax rates under GST could be rationalized to three slabs as revenues stabilize.
“We started the rationalization (of GST rates) ahead of schedule. Future rationalization will depend on how the revenue moves. We have thinned down the 28% bracket. Going ahead, we will rationalize it further to probably tax only luxury and demerit goods at 28%. We have to maintain revenue neutrality,” Jaitley said.
“Do you have scope of merging 12% and 18% and come to an interim rate? You have 5%, then this ‘X’ rate after merging 12% and 18% and then the very thin slab of 28%. Eventually that will be the direction,” Jaitley said, adding the speed of the rationalization will depend on how the revenues pick up.
Earlier this month, the GST Council brought down the number of items that are taxed under the 28% slab to 50 from 227.
At present, GST has five tax slabs—0%, 5%, 12%, 18% and 28%. A cess is levied on some sin and luxury goods over and above the tax rate of 28%.
Asked whether India can achieve double-digit growth, Jaitley said it was challenging as it will not depend merely on domestic factors. “It will also depend on how the world is moving. We managed a 7-8% growth rate at a time the world was moving slowly. We effectively used that period to bring a series of structural changes in the economy. Structural reforms have their own short-term impacts. Certainly it will help us in the short- to medium-term to help expedite growth itself. But I am realistic that to reach double-digit growth you need to have a kind of boom period that you had between 2003 and 2008,” he said.