The document discusses several challenges facing the Indian economy, including uncertainties from developments in the US and Europe, rising commodity and oil prices, and short-term effects of demonetization. It analyzes pros and cons of cash vs. digital transactions and suggests the budget should aim for 8% GDP growth, lower taxes, increase infrastructure investment, reduce subsidies, and support SMEs and individuals affected by demonetization. It also proposes creating a Railway Infrastructure Development Fund through passenger fares to mobilize ₹720,000 crore over 10 years for rail projects.

1. Union Budget – Challenges and Options – F 18
India is entering a phase of lot of challenges today, arising from developments
around the world and in the Indian Economy. The New president assuming office in
US has created lot of uncertainties for our IT , Pharma sectors and investments from
US to India and India’s Exports to US.
The UK’s likely exit from Euro zone poses challenges for corporates which are
operating in Europe.
The increase in commodity prices and oil price is a risk. Every $ increase in oil price,
will increase the trade deficit by $ 1.4 bn and the government has to give an
additional subsidy of Rs.1500 cr for every $ increase. If the Customs and Excise
levies are kept at the present levels, this will increase the consumer inflation.
The demonetisation is a bold and progressive step by government but in the Short
and Medium terms, the potential growth of the Indian Economy has come down and
this year as per estimates China will regain the position of fastest growing large
Economy in the world.
The advantages of demonetisation / digital economy are : Higher Tax collections,
small Black Economy , less terror Funding, less fake currency , Higher Value Added
for reporting ( GDP ) , Prevention Cross border Crimes , reduction of domestic
crimes will come down and protection of environment.
The advantages of Cash transaction are It is the most common way of payment
around the globe .1)cash does not involve third-party action for its immediate
conversion into other forms value, 2)Cash requires no authorization for the person
who carries it 3) Easy to make small payments,4)Feel Secure having cash , 5)Major
form of Working capital for small firms 6) Accepted by Any one, any time, any where
7) Most liquid form 8) alleviate the risk of identity theft. 8) The use of cash does not
involve any transaction fees 9) can foster good spending habits 10) Cash is 'easy-to-
carry' form of payment 11) Cash payment does not require additional knowledge .
The fact is that, cash transactions in large economies are very high in China and
Japan more than 90% and in US more than 50%. In countries around the world , the

2. investment in sectors, where returns from investments are sub par, are supported by
the cash economy where ROI is not the major consideration.
For a balanced growth of the economy both Digital and Cash transactions are
required.
The demonetisation has already affected most of the sectors in the economy and
SME’s are the most affected in a big way. The banks received higher deposits and
they are in a comfortable position to lend . They had already reduced the interest
rates. But the new NPA’s are likely to come from SME’s.
Government has seen a good increase in tax collection and this is likely to continue.
Demonetisation has already had an effect, similar to the one which could have been
achieved by GST.
The form of GST which is being talked about is one different from the initial concept,
and many rates are being discussed and many exemptions are being considered. In
the revised form, it may not fulfil the intended objectives and on top of
demonetisation, it could reduce the growth rate further.
In the light of above, Government could consider the following while preparing the
budget.
• The GDP growth objective for the year could be 8%.
• Higher Tax collection could be focussed on those who are still not on the tax
net and focussing on the top 500 industrial / trading centres, the objective for
higher Direct and Indirect tax could be achieved.
• Since already more have come into taxation net after the new measures by
government, the corporate and Individual tax rates could be reduced to 28%.
• Through increased efficiency in tax administration , set a target to increase
the tax collection by 20%.
• Due to increased level of Digital transactions, the banking model will undergo
a change. Banks will lose one of the fee based incomes. Further, new
exposure norms to large corporates will restrict the exposures to large

3. corporates. The banks could focus on Government employees ( whose
purchasing power has gone up due to pay commission recommendation
implementations ), Retail customers and Micro Finance Institutions ( right now
banks mostly lend to MFI’s and MFI’s in turn lend to groups. Instead of that a
provision could be made for banks directly to MFI’s through creating a new
SBU for MFI’s within Banks).
• The capital expenditure in the Corporate Sector and Infrastructure is yet to
take off. Special incentives could be considered for kick starting the Capital
investments, investments in Mining and other infrastructure sectors. Already
lot of initiatives were taken in the Road sector. On the similar lines, enabling
mechanisms could be created.
• To generate , more non tax revenues, as one option, The share holding in
PSU’s , PSB’s above 75% could be sold in small lots through secondary
market for the PSU’s / PSB’s which are listed and those who are not listed
and have basic conditions for listing could be listed and 25% of shared could
be sold.
• In each PSU / PSB through demerger, create Real estate subsidiaries. In the
case of listed entities, even the other share holders will get the share. Then
through sale / sale and lease back, lease , Invit, Reit, capitalise the value of
the real estate properties.
• Create provisions for easy issue of Municipal bonds in India.
• Consider sale of Central government properties in prime areas with a target to
mobilise at least Rs.20,000 cr through this route.
• Target a reduction of 25% in overall subsidies through Direct Benefit Transfer
and micro – targeting of beneficiaries. Within a period of four years, set a
target to stop all the subsidies.
• Since Individuals and SME’s are affected in a big way, measures to support
these segments including increasing tax slabs , introducing more incentives
for investments could be considered.

4. • Since the investment requirements for Infrastcuture and Industry growth are
very high, the incentives available to Foreign Investors and Indian Investors
should be continued. Any change in policy in this regard , will further increase
the uncertainity.
Railways
• This year, the railway budget would be merged with the General budget.
• The government can consider creating a special fund and the tariff
structure could be restructured in such way that, on an average for each
journey, Rs.10 for investing in the equity capital of Railway infrastructure
corporation could be earmarked. The fund could be called Railway
infrastructure development fund.
• The amount collected would be Rs.8150 cr a year. This can be used to
invest in additional capital of IRFC.
• When it is routed through the fund, the fund has multiplier effect. That is
the Corporation can borrow at least 6 times the additional capital. That is
48,900 cr.
• The total amount mobilized would be Rs. 57000 based on the present
numbers.
• Assuming a growth of 5% every year, the total fund which could be
mobilized for the next 10 years could be Rs.7,20,000 cr.
• For the next five years, Rs.250,000 cr could be mobilized through this
route and the remaining will come from other funding sources.
• After the demonetization, there is an increased interest by pension funds
to invest in India. Hence, IRFC can issue development bonds and SWF’s
and Pension funds from abroad will invest in these bonds.