The Budget Puzzle


Budget numbers reveal that there is some semblance of “Big Picture” behind the seemingly boring one.

For long-time budget watchers, few things are fairly straight. One, budget is progressively becoming a non-event, notwithstanding the boisterous media buzz ahead of the event and second, the responses from various constituencies are far more predictable. Pressure to be politically right (in their response) outweighs the urge to be out-spoken. Hence, much of the responses are guarded and sugar-coated. This budget was no exception. Media got tizzy around the budget, only to get disappointed with a drowsy one. Much expected cut in corporate tax and personal tax (across the spectrum) did not materialize. Usual hyperbolic statements-of-intent on various rural and infra schemes with throw-in here and throw-out there, dominated much of the budget speech.

Certainly, the budget was a disappointing one (for the immediate short-term at least), given the huge expectations. Beyond the regular ritual, is there a big picture that is popping?. Buried deep, some budget numbers, on closer look, offer hope of a structural shift, if not a grand design.

Central Theme : Broadening the Base by Operation Cleanup and GST

  • The spurt in income tax (personal) numbers over already a high base of last year, seen in conjunction with the upcoming GST, may have clues to the widening tax net in the coming years that will lead to higher fiscal space over time, pointing to structural downward shift in inflation / interest rates and hence changing the structural capacity of economy for higher growth.
  • To understand this, let us start with the basic budget assumptions. The underlying GDP growth assumption in the budget hardly inspires. Govt. expects growth to suffer in FY18 on two counts. First, the lingering effect of DeMo will keep a lid on growth for a while. Second, hiccups in GST implementation can hurt growth in the short-term. Hardly a surprise that the budget has assumed a muted growth of around 6.75% for FY18, much less than RBI’s forecast.
  • With such a sluggish sub-7% growth assumption, subdued tax numbers have been subsumed in the tax arithmetic in the budget, be it excise, service or corporate tax, but with one exception.
  • That exception is on the personal tax numbers. Govt. has assumed a robust 25%+ growth over a high base of last year, in which the personal income tax is likely to have grown over 21%+. Much of this is expected to flow directly from the effects of Operation Cleanup that will be rolled out using demon data mining. This would add up to over 50%+ surge in Income tax over two year period of FY17-FY18. Ref below chart that captures the changing tax mix brilliantly.



  • Add to this the rollout of GST, it is not difficult to decipher that the central thrust for this year is, widening the tax net on both direct and indirect taxes. Former from operation cleanup (DeMo data drive) and later from GST that is likely to galvanize tax compliance from the expected shift from unorganized to organized, gradually though. Proposed limits on cash transactions in the budget will further accelerate this shift from informal to formal economy.
  • Now, let us move forward by one year to FY19. This is when things will turn interesting. Economy would have come out of the clutches of DeMon and would be ready to leap-frog on stabilizing GST implementation. With much delayed capex recovery (private investment) in place by then, growth will gyrate to near 8% level and much more in the subsequent years. Precisely then, widening tax base will work wonder, boosting tax buoyancy and tax-GDP ratio. With huge headroom in fiscal space, macro will move into a much stronger position with inflation and interest rates trending structurally lower.

In summary, the dual reforms of this Govt. (DeMo and GST), when they play out over next few years, have the potential to have a dramatic multiplier effect to push the economy structurally into a higher growth-orbit, leave alone the potential political gains for the current administration on fiscal windfalls (thro’ seductive schemes for poor like the universal income scheme etc). Exciting times ahead for India macro!