1. Lower Oil Subsidies
We have three major subsidies – oil, food and fertilizer. The food subsidy is likely to continue, in the form of funding the Food Corporation of India (FCI) to buy large amounts of grains from farmers in Haryana and Punjab and letting most of the food rot. This is, they say, very good for our GDP.
While they might restructure the FCI, the larger Food Security Bill might require us to increase food-related subsidy expenditure. They'll have to buy more, distribute more for a low cost, and hope there isn't a drought next year in which case they'll buy even more. Fertilizer subsidies will continue as well, by giving money to fertilizer companies to ensure lower costs to farmers.
But there may not be a need for an oil subsidy of gargantuan proportions. Petrol and diesel prices have been freed, and LPG subsidies have been moved to a direct transfer mode, so they may not be as high (leakages in the traditional system are higher). Even then, we may save about half the Rs 85,000 crore spent last year on oil subsidies.
2. Higher Taxes!
The government has to raise taxes. The math is simple – as an economy that's slowing, we expect about 6 per cent real growth. Inflation will probably be 4 per cent. That's a nominal growth of about 10 per cent. Taxes grow at approximately the same rate as nominal GDP growth, so tax growth will be 10 per cent under normal circumstances. Revenues last year were about Rs. 12 lakh crore.
Expenditure will move to at least Rs 20 lakh crore (considering a 10 per cent increase, which is way lower than recent times).
A 10 per cent GDP growth number will take us to Rs 1.35 lakh crore. The fiscal deficit needs to be 3.6% of that, which is 4.86 lakh crore. For expenditure of Rs 20 lakh, subtract the deficit, and so revenue will have to be about Rs 15 lakh crore, about 25 per cent higher than the previous year.
Natural growth will only give them 10 per cent. Where will they get the remaining 15 per cent from? My view: higher taxes. (We have started seeing this already thanks to a higher tax on crude oil, giving us a higher retail price of petrol and diesel).
3. Higher Defence Expenditure
It's been ages since our defence equipment has been upgraded, and much of it because the previous government had very little money. (Even though it was allocated, it was not spent). You can't postpone this kind of thing forever.
The Obama visit brought to light a closer military partnership with the US, which can mean only one thing: we buy more arms from them.
The overall increase in belligerence at the border with Pakistan will also require India to move fast if matters escalate, and a state of readiness will mean higher expenditure.
4. Sops for Affordable Housing
In recent speeches, the government has been talking about "housing for all" and "100 smart cities". This is likely to be addressed in the budget by offering sops for low-cost housing, and for property in the new cities.
Urban housing prices have been falling, and home loan interest rates have remained high. Housing gets a large number of sops already – from concessional interest rates to tax-free interest and principal repayments to even the ability to offset other income from losses. In that respect, we expect the government to specifically incentivize lower cost housing (Rs 25 lakh or less) and residential investment into the new smart city ventures.
But I believe this is a disaster – what low cost housing needs is falling house prices, not tax incentives. What we might need is legislation that ensures you can easily move your loan from one bank to another (whoever offers a lower rate) with big financial penalties for delays.
5. "Make In India" Impetus
The budgetary support for a "Make in India" campaign can come through lower taxes (either by a tax holiday for new units or for accelerated depreciation for investment). However, lower taxes only skew the picture for others – you will make in India only if it's profitable to do so, if your labour laws are not so complicated, and if you can just as easily export as you can import.
Plus, the new Companies Act even disallows companies from borrowing from its own shareholders or from their relatives, and doesn't allow you to issue new shares at a premium (you must "justify" it to a tax officer). The Finance Minister may approach some of these anomalies in the budget.
There may also be a carving out of certain geographies as "special zones" where our labour laws will be diluted and our tax schemes changed. You can expect a hissy fit from all sorts of "socialist" parties but since that was a word added by Indira Gandhi during the Emergency it's not something we should strive to be either.
To conclude, here are five things we will not see in Budget 2015:
- A black money amnesty scheme. It would be political suicide for this government.
- The Goods and Services Tax, even if everyone's okay with it.
- A big hike in education and healthcare spending – because, after Make-in-India and Defence, we will have no more to spend.
- Any importance to NREGA.
- Respite for the IT export industry, though "Make for India" technology companies could be encouraged.
Predictions are worth little more than the paper they're printed on, sometimes not even that. While I can wax eloquent about my research and reasons for saying what will happen, some parts of it are figments of my imagination. What happens depends on factors I have no control over, like what the BJP thinks, what the cabinet desires, where the global economy takes us or even what Mr. Jaitley's team had for dinner the previous night. The next month promises to be exciting, and the last Saturday of February will give us the real deal.
Deepak Shenoy has founded Capital Mind (capitalmind.in) which provides financial market analytics and insights online. Deepak lives in Bangalore.