Union Budget 2016-17 Fine Balance between Growth & Fiscal Prudence

Union Budget 2016-17
Fine Balance between Growth & Fiscal Prudence
 

Jayanta Roy Chowdhury

The Union Budget for 2016-2017, which many analysts described as a fine balance between the imperatives of pushing growth and maintaining fiscal prudence, promised larger spending on the farm sector hit by two years of poor rains, a spate of financial sector reforms and foreign investment rule changes. 

The budget promised a 44 per cent increased spending at Rs. 35,984 crore on the farm sector, a new revamped crop insurance scheme, a plan to double farm incomes by 2020 and a Rs. 2.84 lakh crore allocation to Village Panchayats, to be funded in part by a new farm development cess of 0.5 per cent on all service taxes and an increase in surcharge from 12 per cent to 15 per cent levied on Super-rich tax-payers who earn more than Rs 1 crore.   

The budget announced that the central government will spend Rs.17,000 crore on these projects next year, and Rs.86,500 crore in the next five years. Besides, the budget created a dedicated long-term irrigation fund under NABARD (National Bank for Agriculture and Rural Development), with an initial corpus of Rs.20,000 crore.

“We need to think beyond ‘food security’ and give back to our farmers a sense of ‘income security’,” Finance Minister Mr Arun Jaitley told the lower house of parliament while presenting his third budget . He also increased allocation for MGNREGA, the rural job guarantee scheme, by 11 per cent to Rs 38,500 crore in 2016-17 and allocated Rs 97,000 crore, the highest ever, for development of roads, with a third of the outlay earmarked for rural areas. “We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor and the vulnerable,” Mr Jaitley said.

The allocations for the social sectors with emphasis on health and education, rural development  and energy infrastructure have remained at the same level in real terms as in the last two years – 1 per cent of GDP, 0.7 per cent of GDP and 1.5 per cent of GDP respectively.

In the Budget, the Government placed its faith on the path of fiscal prudence and capped fiscal deficit in the budget for 2016-17 at 3.5 per cent of gross domestic product (GDP), overriding a contrarian view among Economists who had argued that relaxing the fiscal prudence could spur growth even if it did raise inflationary expectations.

Finance Minister Mr Jaitley said that his financial plan was to create “firewalls against global risks through prudent fiscal management , rely on domestic demand and continue with the pace of reforms.” The move to stick to the path of fiscal prudence seems to have been prompted by a bid  to allay fears of investors that Government borrowing could crowd out industry’s need for funds.

The budget assumes a growth of 11 per cent in nominal GDP at Rs. 150.65 lakh crore, a big macro number that anchors budgetary arithmetic.

Interestingly, the Government was still able to meet the  fiscal deficit target for this year of 3.9 percent of GDP without having to cut overall expenditure - an achievement that was underpinned by the surge in indirect tax collections, mainly on account of higher collections of customs and excise duties on  crude oil and petroleum finished products.

However, the road map for fiscal consolidation - which aims to bring fiscal deficit down to 3 per cent by 2018 - will now be reviewed. A committee will be formed to review the tough deficit targets that have been laid out under the Fiscal Responsibility and Budget Management (FRBM) Act in the context of the uncertainty and volatility in the global economy.

A list of financial sector reforms which included revamping the capital structure of state run giant banks by Rs. 25,000 crore, with a promise of more funds if needed and listing of state run insurance firms also formed part of Mr. Jaitley’s key budget announcement. The move comes in the wake of calculations which show that nearly 17 per cent of state run banks’ portfolios were either written off or were bad loans or had been restructured. The Government had in the run up to the budget, also announced the formation of a panel that will help select chief executives of state-run banks and also work with banks on strategies to consolidate the banking sector and plans to raise capital.

For foreign investors, whom the Narendra Modi Government has been wooing to Indian shores  with easier norms for doing business, direct investment rules were tweaked to allow upto 49 per cent investment in pension funds and insurance companies,  100 per cent in asset reconstruction firms, up to 15 per cent take in Indian stock exchanges and up to 49 per cent in PSUs.  Overseas investors were also offered Permanent Resident status and a scheme to settle tax disputes. The moves come on top of easier FDI rules announced last year which resulted in a 40 per cent increase in foreign direct investment inflows between April and December 2015.

A tax-holiday of three years was announced for start-ups set up between April 2016 and  2019, provided they do not claim any tax deductions on investment and protection was granted to domestic industry by applying higher customs duty on a host of imports ranging from solar water heaters and rubber balloons to jewelery, aluminium, telecom equipment and capital goods. Industry was also given a fillip by being allowed to import at lower rates raw materials including coal, peat, electronic components, giving in to a long standing demand that import duties were flawed allowing finished goods in at cheaper rates while levying higher duties on raw materials needed by Indian manufacturers.

The budget also proposes to impose a 1 per cent tax on purchase of cars that cost more than Rs 10 lakh. Jaitley proposed to levy a 1 per cent infrastructure cess on small petrol, LPG and CNG cars, 2.5 per cent on diesel cars and 4 per cent on cars and SUVs with a higher engine capacity.

In a relief to small taxpayers, the tax rebate ceiling on incomes not exceeding Rs 5 lakh a year has been raised from Rs 2,000 to Rs 5,000. First-time home-buyers will get a deduction of an additional interest of Rs 50,000 per annum on a loan of up to Rs 35 lakh, provided the cost of the property does not exceed Rs 50 lakh.

In its continued bid to check black money, the government also  decided to open a limited period compliance window between June 1 and September 30 to enable resident taxpayers to disclose unaccounted income and assets at an effective penalty of 45 per cent. The scheme assures errant taxpayers freedom from scrutiny and immunity from prosecution.

The budget will raise expenditure next year to Rs 19.78 lakh crore, which will be broken into plan expenditure of Rs 5.50 lakh crore and non-plan spending of Rs 14.28 lakh crore. The distinction between plan and non-plan spending will disappear next year.

Interestingly, the Government’s total expenditure is slated to grow 10.8 per cent in the coming financial year, very near to the assumed nominal GDP growth of 11 per cent and indeed achievable.

This implies that the expenditure to GDP ratio will remain almost constant at 13.2 per cent of GDP in 2016-2017. This in turn implies that the fiscal deficit would come about by way of the government garnering more revenues rather than by lowering expenditure.

The revenue collection targets are ambitious, but nevertheless feasible. Direct tax revenue is estimated to grow by  12.6 per cent compared to last year’s budget estimate of 13.2 per cent . While Indirect tax growth has been taken to be to the magnitude of 10.8 per cent  compared to last year’s budget estimate of 19.5 per cent and actual growth of 28.9 per cent.

The success of the targeted fiscal consolidation, however, will also hinge on successful disinvestment and auction of telecom spectrum.

The Department of Disinvestment is being renamed to ‘Department of Investment and Public Asset Management (DIPAM)’ and a decision has been taken to aggressively persue disinvestment not only through share sales in Public Sector Undertakings but also by selling non-essential assets such as some hotels run by the Central Government owned ITDC.

The government has, however, lowered the stake sale target by 19 per cent to Rs 56,500 crore in the next fiscal, 2016-17. Of the total budgeted proceeds, Rs 36,000 crore is estimated to come from minority stake sale in PSUs, and the remaining Rs 20,500 crore is projected to come from strategic sale in both profit and loss-making companies.

In returns from spectrum auction, license fees and one-time spectrum charges in 2016-17,  the government has estimated revenues of Rs 98,994.93 crore. The figure  is 72.5 per cent higher than the Rs 57,383.89 crore revised estimate provided for the current fiscal year. The government had earlier estimated revenue of Rs 42,865.62 crore in 2015-16.

The Department of Telecommunica-tions plans to auction new bands of airwaves this year, including the ‘premium’ 700 MHz band in June-July. As per the Telecom Regulatory Authority’s of India’ proposed reserve prices, the Centre is expected to fetch around Rs 5.36 lakh crore from sale of radio-waves.

Analysts feel that the Government could easily earn far more than what it has budgeted given the quality of spectrum assets it is putting up for sale. “The revenues could exceed the budgeted target of Rs. 99,000 crore for fiscal 2017," said credit rating agency Crisil  in a research report.

The Finance  Ministry has indicated that it may opt for a partial roll-back of its bid to tax provident fund when withdrawn by investors. The move was in line with international norms and introduced in a bid to bring equity in treatment of various pension schemes including the New Pension Scheme.

In a clarification statement issued a day after the budget, the finance ministry  said it will consider allowing the principle sum invested  to be withdrawn tax free, while taxing withdrawals of the interest amount besides considering pleas that employer’s contribution to a worker’s provident fund account is not limited to Rs 1.5 lakh annually. 

“The Finance Minister would be considering all these suggestions and taking a view on it in due course,” the statement said. 

Earlier in the Budget, it had been announced that 60 % of savings in employees provident fund, the largest savings fund in the country with a corpus of Rs 6.5 lakh crore,  made from the financial year 2016-2017, will be taxable when pulled out.

However, the Government made it clear that the majority of people for whom EPF scheme was created earn equal or less  than the statutory wage limit of Rs.15,000 per month, and they will be allowed to withdraw their EPF savings without any taxes being levied.  Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. “For this category of people, there is not going to be any change in the new dispensation”, the finance ministry said.

Over all, the Union Budget is likely to push the economic growth. It has succeded in giving the much needed boost to the farm sector and rural economy.

(The author is a senior economic journalist. Views expressed are personal.
 e-mail jrchowdhury@yahoo.com)