Union Budget 2017-18: 4 issues Ambit feels the Budget has failed to address

Moneycontrol BureauA "credible holding operation" is how broking firm Ambit has described Union Budget 2017.On the positive side, the Budget has steered clear of anti-capital market measures and continued the fight against black money. Yet, it does not do much to boost economic growth or ease the stress in the banking sector, says an Ambit report.The report lists four major problems that the Union Budget has not addressed amid the "extraordinary" flux in the economy and challenges to growth.Excerpts from the report:1. Rapid shrinkage of informal sector will result in job losses

Demonetisation will lead to lower growth than would have been possible had the government not forcibly formalised the economy at such a rapid space.

With a lens on tax compliance, the non-taxpaying informal sector will shrink. This will cause demand destruction in a sector which accounts for more than 40 percent of the GDP and employs more than 75 percent of the workforce.

2.Building asset quality stress in the banking system Higher non-performing assets in the SME/retail segment will worsen the situation. Asset quality risks will increase because demonetisation has led to less income, pressure on cash flows owing to tax compliance, and decline in the value of real estate-based collateral. The quality of lending by PSU banks in the real estate/retail segment is suspect. The high growth and high reliance of PSU banks on the sector means a greater in-built risk. Apart from setting aside 0.07 percent of the GDP for recapitalising banks, the creation of a bad bank or banking sector reforms could have resolved these issues.

3. GST roadmap remains unclear

While the Finance Minister had earlier indicated that the Goods and Services Tax will be implemented from July 1, he did not allude to the same in his Budget speech. Had he done so, it would have created credibility about the government’s resolve to implement GST. In addition, the government has not tweaked the indirect tax structure in preparation for GST.4. No capital expenditure tilt in the budget.

The Budget did not step up capital expenditure despite sluggish private investment. It has only increased capex by 11% YoY from the revised estimates of FY17, which is the same growth rate last year. Also, the delta in capital expenditure as a percentage of GDP is 0.2 percent, similar to last year’s figures.