5 simple tests to assess India Budget 2017 due tomorrow

Over the last couple of weeks, we all Indians (many foreign nationals as well) discussed and debated the merits and demerits of demonetization, and how it helped or not curb black money, counterfeit currency, terror financing and promote cashless transactions. Whether it would hurt India's GDP growth or not? If yes, by how much 0.5%, 1% or 2%...and we all loved to agree and disagree. Now, most of us are bored of demonetization debates and would want to move on.

Upcoming Union #Budget2017 to be presented by India’s suave Finance Minister Arun Jaitely on Feb 1 provides that 'right and equally spicy' opportunity. It is likely to be our next big obsession for quite some time. We all want to know whether the budget will be – good or bad. Will it provide tax reliefs to salaried class or corporate sector? Will it be popular, populist or sensible? Nobody knows what Mr. Jaitely has in store.

Yet, most of us would want the budget to push reforms agenda forward, aim for faster (preferably double digits) #economic #growth and create many more new #jobs for youths. If this is what your wish for next India budget, your next question would be: how to assess whether Jaitley’s budget passes these key tests or not? Here are 5 simple tests to judge whether it’s a good budget or not. Even if you’re not an economist, you can judge and rate the upcoming budget without being biased or getting carried away by media headlines.

1.Does it incentivise #investment that’s in a free-fall mood? Investment as measured by gross fixed capital formation fell (yes, you heard it right) by 1.9%, 3.1% and 5.6% respectively in the last three quarters. India can’t keep growing at 7% for long unless investment especially by the private sector picks up. Well, private sector’s moves are guided by profit expectations. Indian corporates – big or small - are sitting on #capex plans more so after demonetization that has killed sales in the last three months and led to piling up of inventories.

India suffers because of its high corporate tax rates at 35% compared to 25% in ASEAN region and is one of the major reasons why India is still not the top choice of investors despite its high growth, relatively cheaper labor and rapidly rising purchasing power. India also has lots of #tax exemptions that gives discretionary power to netas (politicians) and babus (officials), and in turn breeds corruption.

In his last budget, Arun Jaitely promised to bring Corporate tax down to 25%. Now with Trump promising to bring it down to 15-20%, any move by Jaitely to reduce it from 35% will improve relative attractiveness of India as an investment destination, and that in turn will boost FDI inflows, and check outflow of FDIs that is something like moving jobs away.

2. Does Jaitley’s budget try to reward honest tax payers?

To boost household consumption and check tax evasion, direct tax (e.g. income tax or capital gains tax) rates need to be brought down. At the moment, 1.5% or so of Indians (mostly salaried class professionals) are paying any income tax. Those who can avoid e.g. doctors, lawyers, or rich farmers who also appropriate most of the subsidized fertilizers, seeds, power and irrigation, are avoiding it. 98.5% of citizens being out of income tax net impose limits on the Government’s ability to spend on education, health and creation of basic infrastructural facilities.

Thus, any measures to bring 'the effective income tax rates' down and more people into direct tax net will be a big positive. It’s like rewarding honest tax payers. Thus, it would be interesting to see if Mr. Jaitely delivers on this key parameter.

3. Has the proportion of #capital expenditure in total budgeted expenditure increased?

As we all are aware, capital expenditure creates productive assets and aids economic growth while revenue expenditure (e.g. on salaries and allowances of babus, subsidies on consumables and interest payments) is mostly wasteful expenses and often aids inflation or crowds out investment by private sector.

According to the estimation by National Institute of Public Finance and Policy (NIPFP), fiscal multiplier for capital expenditure is 2.5 while that for revenue expenditure, it’s less than 1. Thus, if government spends 1 rupee on capital goods, it will increase national income while 1 extra rupee on revenue expenditure will add less than 1 rupee to the national income.

In Jaitely’s last year budget, the share of revenue expenditure (e.g. on salaries & allowances of babus, subsidies or interest payments on government borrowings) was a whopping 88% while that of capital expenditure was 12%. To make it worse, in the last 3 fiscals, on an average capital expenditure has grown by 2.6% compared to revenue expenditure by 6.6% or so. Therefore, the higher the share of capital expenditure in total budgeted expenditure, the better it would be for the growth of national income.

4. Whether it gives a big push to India’s economic growth prospects? There are many sectors such as automobile, electronics & telecom, housing and infrastructure, textile and tourism that have high backward and forward linkages with other sectors of the economy and as a result have high multiplier effects. If these sectors grow fast, they will pull many other industrial sectors together with them, and propel the economy for a higher growth trajectory.

So, I would like to see whether Jaitley’s next budget incentivizes these sectors with the highest multiplier effects by helping them through lower taxes and supportive policies like removal of inverted duties in case of electronics and textile that discourage value addition within India and encourage exports of low value raw materials and intermediates.

Worse, such policies encourage import of high value items such as mobile phones and apparels. Removal of inverted duties is one surgical strike that's urgently needed but only Mr. Jaitely can deliver on this. The question is: will he deliver?

5. Will Jaitely’s budget help in credit #rating upgrade of India or not?

What Mr. Jaitely does or doesn’t do to stick to India’s long term fiscal path and keep fiscal deficit low? And, here the devil lies in detail. So please check how the fiscal math has been worked out –is it by cutting revenue #deficit or capital expenditure? If #fiscal deficit is somehow managed by compromising with capital expenditure when private investment is simply not happening, that will jeopardize India’s growth prospects and may not help India’s credit rating or at least mar any hope of its ratings upgrade that Modi Government has been trying for long.

Each criterion carries 20 points. For adverse movement, the points turn negative. Thus, if share of capital expenditure in the budgeted spending decreases, you can give – 20 to 0, depending upon the extent of decrease. In the end, you can add all your points and arrive at your rating for the #Budget2017 and can share your rating with whomever you feel like offline or online. Till then have fun.

Wishing you a 'sensible' India Budget 2017   

Please share your thoughts and ideas about how to judge upcoming Indian Budget on Feb 1. You can also tweet your suggestions or comments tagging me @RiteshEconomist . If we're not connected, it's time to get to know each other. 

A version of this post has also been published by quartz.com (The easiest way to rate Arun Jaitley’s budget: Just look for these five things)