India’s Union Budget. Will it steer economic growth?

Close up of businesswoman hands using calculator.

Budget 2017 is right around in the corner.  News channels and various websites are buzzing with expectations and opinions.

India is facing many unique situations (due to both internal and external factors).  While team Modi have generally been rated high on delivery (especially by corporate India); they needs to pull a trick or two to get pass the horror stories from demonetization.  Thus, I do expect some sweeteners being showered in this budget.

From a political perspective this also ties in well with the upcoming State elections and the fact that the Union election is also not too far.  While the global sentiments continue to be jittery, given political developments in the West, I don’t see that coloring the thinking of Indian policy makers for Budget 2017.  But of course they can’t be ignored.  Increase in interest rates by US Fed and its impact on the balance of trade (due to a stronger dollar) may surely be one aspect that requires some cushions.

Like in most budgets, taxation is likely to hold a prominent stage.  No one is expecting much on indirect taxes, given that the Government is so determined to get implement the GST (July 1, 2017 as of now).  At best the rate for service tax may go up from 15% to anything between 16 to 18%.  I do foresee some action on the direct taxes, wherein India has been trying hard to shed its image of being an aggressive jurisdictions.  On this front also, there may be some goodies for salaried individuals and the common man in general (lets not forget demonetization).

For Indian Corporates, it will need to be seen, what all industries are identified as potentially steering economic growth.  We saw last year’s budget focusing on start-ups.  As regards the foreign investors, tax certainty continues to play high on wish-list.

India will need to walk a tight rope to align itself to global standards of taxations through implementation of Base Erosion and Profit Shifting action plans and at the same time ensuring that tax disputes are kept under check.  April 1, 2017 is also expected to see domestic rules on General Anti-Avoidance Rules and Point of Effective Management rules to set.  These rules can translate into a lot more litigation, if not managed properly.

As regards transfer pricing which accounts for a substantial quantum of tax disputes, there has been talks to bring in Version 2 of safe harbors.  Digital economy businesses may worry about an expanded net of the not so popular equalization levy.  In between all these complex Income tax regulations, there is also an expectation that the corporate tax rate may come down.

India Budget 2017 may more be about fine tuning rather than carrying out lots of radical reforms.  PM Modi needs to continue on the path of increasing the ease of doing business in India and attract more FDI.  At the same time it needs to provide a push forward economic reforms  by identifying strategic industries / avenues so that domestic consumption picks up again (post demonetization) and of course keeping in mind the approval ratings for the Government and maintaining fiscal discipline.

In the end what will be in the Budget of 2017, we will know very soon and business need to be geared up spot the opportunities and action upon them swiftly.

Sanjiv Malhotra, Director of Economics will be discussing how both policy and industry capability will drive a rising India on the global plane at our Doing Business Globally India event.