New Delhi: The imminent challenge of Finance Minister Arun Jaitley will be to announce a credible roadmap for recovery, when deficient monsoon and oil shocks threaten to derail revival hopes. The projected growth rate of 5.4-5.9% will not be enough to provide jobs for 13 million young Indians who enter the workforce each year.
The government is planning to narrow fiscal deficit to 4.1% of GDP this year from 4.5% last year. The UPA government met its deficit target by rolling over subsidies to the current year and cutting down on productive spending. However, the Finance Minister will have to devise new plans to meet the deficit target and not hamper growth-related spending.
Jaitley is expected to take a tough stance on subsidies, which accounted for 2.2% of GDP last year. The new government may also revamp social schemes like Mahatma Gandhi National Rural Employment guarantee Act to link it to asset creation.
The government’s tax collections have fallen because of a sharp slowdown in growth. So Jaitley is expected to raise funds by selling government’s stake in state-run companies. The divestment target for this year may be the highest-ever set by any government in the past. Â
With a comfortable majority in Parliament, Jaitley will push reforms aggressively, especially in goods and services tax (GST), which is dubbed as the single-biggest fiscal reform in the country. The GST will widen tax base, improve tax compliance and reduce transaction costs of businesses. Reforms in coal and power sector are also anticipated.
The government needs to open up more sectors of the economy to attract foreign capital. Economists expect Jaitley to announce FDI liberalisation in defence, railways and insurance to 51% or higher.
Push to manufacturing sector: The manufacturing sector’s contribution to India’s GDP has remained largely stagnant at around 15% of GDP for many years. Jaitley is expected to announce plans to revive manufacturing, which absorbs a large part of India’s unskilled workforce.
The budget is likely to contain elaborate measures to revive infrastructure projects, which have been held up because of slow decision-making and factors such as delay in land and environment clearances. Projects worth Rs 6.2 lakh crore were shelved last year due to bureaucratic gridlock, according to CMIE, an economic think tank, the highest in the past 18 years.
Jaitley may double income tax exemption on long-term financial savings to ease tax burden on the middle class. Currently, the income tax exemption limit on such savings is capped at Rs 1 lakh. The move will incentivize domestic savings, which is an important source of low-cost funds for the government.