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The Budget has established an overall policy framework to spur growth via public investments while maintaining a tight leash on public spending, especially on subsidies, to facilitate fiscal consolidation. Having agreed to increase the States’ share in the divisible tax pool to 42 per cent from 32 per cent, the resource constraint on the Centre was going to more binding and, as a result, any major tax sops were unlikely. From a structural perspective, however, greater devolution of tax resources to the States would help immensely in smoothening the path of GST implementation, besides strengthening the States’ fiscal position. The onus of delivery of better infrastructure has also now shifted to the States, with the Centre acting as facilitator.
With lower tax revenues at its disposal in the next fiscal year, the Centre has reduced the size of the Budget (in terms of GDP) to 12.5 per cent from about 14 per cent last year, with a nominal increase of only 5.7 per cent y-o-y in the overall Budget size.
The subsidies bill has been restricted to below 2 per cent of GDP. The tax-GDP ratio remains low, at 10.2 per cent, underpinning the need for reforms to broaden the tax base. With the proposed reduction in the corporate tax rate, along with the removal of exemptions, the Government has taken a step towards reforming the direct tax regime. The new fiscal consolidation roadmap is also reasonable, especially as the Centre intends to push public investment, given the room created by a higher fiscal deficit.
The process of policy reforms and change is also visible in the acceptance of the RBI’s proposed inflation targeting framework and setting up of a monetary policy committee, revamping of the bankruptcy law and setting up of a national agriculture market. To attract household savings into financial assets, tax sops have been given to the National Pension Scheme, along with increasing efforts to monetise domestic gold reserves. Channelling savings into the infrastructure sector via tax-free bonds will also help garner resources for the infrastructure sector.
Overall, the Budget aims to buttress the macro-economic stability achieved over the last year and will drive a growth push.
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