Arun Jaitley presented his 3rd
budget – a “purposeful” one - today &, perhaps, his best till date; “big bang”
it was not & hence comparison with Manmohan Singh’s budget of 1991 or Chidambaram’s
“dream budget” of 1997 would be odious. A “Thomas Piketty” budget it was widely
assumed to be but finally turned not. Sekhar Gupta in an article in the
Business standard calls Modi a reformer who believes in improving efficiency of
the govt. & not necessarily a true liberalizer; perhaps, that description
is apt & his imprint on the budget is obvious.
The street, though, was delighted
that Fiscal deficit was pegged at 3.5% next year, as committed in the roadmap unveiled
last year. The bond market is relieved & there are now rising expectations
of a rate cut from the RBI. While 4 rate cuts, cumulating 125 basis points were
announced, in 2015, only 50 basis points are transmitted till date. Deposit
rates which were 50 basis points higher before the first rate cut are 75 basis
points higher now & lending rate spread has increased from 200 basis points
to 275 basis points. Spread between the
91 day T bills & the repo rate dropped after the first 3 rate cuts but has
reversed after the Oct cut; call rate which was below the repo rate after the
first 3 rate cuts too & this too is now threatened. Easing of liquidity, therefore, is a
better strategy & the RBI governor should be allowed to have his way.
The Monetary policy committee which
is being pushed, through, envisages clipping of the RBI governor’s wings & providing
a greater leeway to the govt. to push through its agenda. It would be
interesting to see how this transition plays out. The FRBM review however is in
order.
FRBM mandates state debts to be
restricted to 3% of GSDP. Since electricity reform under “UDAY” involves states
taking over bad debts of discoms on their books, FRBM targets shall be
breached. With states like AP asking for either the “special status” promised
in the reorganization act to be implemented or be allowed greater FRBM
leeway, a review was necessary. This also means that the central govt. is preparing grounds for loosening the fiscal deficit target for FY 2017-18 - ordained at 3% - in the financial sector road-map unveiled some years ago. One only hopes that it will not lead to greater
fiscal profligacy though.
India is growing at 7.6% with a Consumer
Price Inflation (CPI) rate of 5.4%. Exports have dropped by 18% this year &
a 14 month sequential fall is unprecedented. The external situation is expected to remain tense
with the world economy poised to grow by 3.1% only. While remittances to India have not dropped
last year despite the turbulence in the Middle East one cannot expect that to
continue; an oil price drop bonanza similar to the last 2 years is again
unlikely. Against this background priming the economy to generate internal
demand is an urgent need which the FM has attempted to do within the fiscal
constraints imposed by largely concentrating on the two largest employers –
agriculture & Construction.
The lack of aggression from the
FM on driving revenues though is surprising. The budget figs target a nominal
growth in taxes of 11.8% & assuming an inflation of 5% - which the RBI is
mandated to achieve by Jan 2017 - translates into a real growth rate of 6.8% only. A
more aggressive disinvestment target with the proceeds flowing into an SPV to
be used entirely for capital investments would have been a more nuanced political
& economic strategy.
Revenues
Annual Budget for the year
2016-17 is pegged at 19.87 lakh
crores with 16.31 lakh crores in taxes - of which only 10.6 lakh crore accrues
to the centre. Total receipts are 16.32 lakh crores of which 5.71 lakh crores are non - tax revenues. Revenue deficit is
therefore3.54 lakh crore. The non-tax
revenue surge is proposed largely through spectrum auctions which have been
budgeted at 0.99 lakh crores – 0.40 lakh
crores over last year.
Planned expenditure is 5.5 lakh crore & non planned
14.28 lakh crores. The demise of the planning commission was announced in 2014
& the death of the planned / non planned expenditure this year – 2016-17
being the last year of the 12th five year plan.
Against a BE 2015-16 on tax revenues of 14.49 lakh crore, 14.59 lakh crore is the RE,
driven largely by a 50.5% surge in excise due to increase in taxes on oil &
introduction of swatch bharat cess; such a bonanza is unlikely this year. Direct taxes - both corporate taxes &
Income tax - targets for the current
year were not achieved & it is unlikely that the targets for next year
would be achieved either. While service
tax has surged 25.7% this year a more modest 10% growth has been targeted next
year; perhaps this will be breached. Service tax & additional taxes vide the
tax dispute resolution mechanism would provide some cushion to the FM to generate
further revenues.
Tax disputes amounting to 5.5 lakh crores are pending; perhaps
the FM is counting on at least 20% of those disputed amounts to flow in this
year. The retrospective tax issues that beguiled companies like Vodafone, Crain
etc. has now been addressed by proposing a waiver of interest & penalty in
lieu of payment of the disputed tax amounts & closure of arbitration
proceedings – a proposal initially made by Chidambaram some years ago. While
these announcements now are welcome, Jaitley could have announced these proposals
in his first budget itself; reversing the “retrospective’ tax to a “prospective”
one would have sent the right signals.
Expenditure
The FM has proposed pump priming the economy through an
investment of 2.18 lakh crores – 0.97 lakh crores in roads & 1.21 lakh
crores in railways. However fine print reveals that of the 1.21 lakh crores,
gross budgetary support is 0.45 lakh crores only – higher by 0.13 lakh crores
over RE. Of the 0.97 lakh crores, 0.55 lakh crores is the central contribution –
0.30 lakh crores over RE - & 0.19 lakh crores flows through the Pradhan
Mantri Gram sadak Yogana. Since 0.15 lakh crores is proposed to be raised
through NHAI bonds & the rest is the state govt. contribution, central
contribution is 1.2 lakh crores only.
Since urban demand is decent while rural distress is
palpable, NREGA has been revived with a proposed spend of 0.38 lakh crores.
Perhaps, the PM who announced on the floor of the house that he shall keep
NREGA alive as a living monument of the UPA’s failures is retracing his objections.
Expenditure shall be higher than the projected figs.
Against a fig of 1.18 lakh crores in food storage for the year 2014-15 &
1.4 lakh crores for 2015-16, only 1.38 lakh crores is budgeted for 2016-17. Unless
backed by a fool proof scheme on subsidy reduction through DBT transfers, this
target shall be breached. Likewise, the
7th Pay Commission recommendations do not seem to have been factored
into the budget although 0.65 -0.68 lakh crores is reported by TV channels as
unofficially claimed by the govt. sources to have been included; OROP through has been
included to avoid any controversy.
Individual & Corporate
expectations belied
Since last year’s budget proposed an incremental reduction
of the corporate taxes to 25% with a concurrent reduction in exemptions, a 1%
drop from 30% to 29% was expected this year which was belied since it would lead to a 0.15 lakh crore dip in corporate taxes. The
benefit was restricted to companies with a turnover not exceeding Rs 5 crore
in FY 2014-15. New manufacturing companies incorporated on or after 1.3.2016 were
given an option to be taxed at 25% + surcharge and cess provided they do not
claim profit linked or investment linked deductions and do not avail of
investment allowance and accelerated depreciation.
It
would be prudent for FMs to think through consequences before making promises
& if made to stick through the roadmaps for the sake of maintaining credibility.
Likewise, when the talk is about removing exemptions, extending the Benefit
of section 10AA to new SEZ units which commence activity before Mar 31st
2020 is abhorrent; it would be interpreted as a measure to boost exports
though.
100% FDI in food processing sector though is welcome as
much is the 10% rate of tax on income from worldwide exploitation of
patents developed and registered in India by a resident. Determination of
residency of foreign company on the basis of Place of Effective Management
(POEM) is proposed to be deferred by one year while the commitment to implement
General Anti Avoidance Rules (GAAR) from 1.4.2017 is on, which marks some
consistency.
Infrastructure cess, of 1% on
small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on
other higher engine capacity vehicles & SUVs is an environmentally conscious
choice as is doubling the coal cess to Rs 400/- per tonne which would involve a 0.12 paise per unit increase in electricity costs as per Piyush Goel.
Individual tax payers were harried since they were not rewarded with an increase
in tax slabs perhaps with an intention to increase the direct tax payer count which today is abnormally low; a minor benefit of a tax rebate of Rs 5000/- against Rs 2000/- earlier,
for income upto 5 lakhs was announced this year. Similarly, a deduction of Rs 60000 against Rs 24000
earlier for people living in rented houses was also announced. Together they
account for a benefit of Rs 6600/- in the lowest tax bracket & hence is
unlikely to enthuse the middle class.
In case of superannuation funds
and recognized provident funds, including EPF, the norm of 40% of corpus to be
tax free will apply in respect of corpus created out of contributions made on
or from 1.4.2016 – like NPS – through logical could cause employee angst.
DDT (dividend distribution tax) at
the rate of 10% of gross dividends in excess of Rs 10 lakh per annum is equitable as is the surcharge of 15% - increased
from 12% earlier - on persons, having income above Rs 1 crore. This segment
will also be hit by the TDS of 1 % on purchase of luxury cars exceeding value
of Rs 10 lakh and purchase of goods and services in cash exceeding Rs 2 lakh.
Stock Markets
The stock market was spooked by
rumours – before the budget - of an increase in the LTCG (Long term capital
gains) on listed securities from 12 months to 36 months in line with the same
change incorporated for unlisted securities last year. Non announcement of the
same provided relief to the market but the long term definition for unlisted
securities was reduced to 24 months, perhaps, as intimation that a similar treatment
awaits listed securities next year.
The increase in STT on future
options from 0.017% to 0.05% was however a surprise.
Disinvestment
Renaming the department is a precursor to some proposals
on divestment translating into investments elsewhere. However divestment proceeds have trended between 0.14 – 0.25
lakh crore during the last few years – against much higher targets - & the
general feeling is that it could be no different this year. However, with RFP for
IDTC hotels, supposedly, raised & the FM sneaking through a proposal of
reducing the stake on IDBI to less than 50% one has reasons to be optimistic.
There are 235 CPSE of which only 44 are listed and
account for 12% of market cap. Value unlocking can be achieved through listing &
a start is being proposed for listing the general insurance firms. Perhaps,
more would follow in due course including LIC – making disinvestment targets a
cakewalk.
Banking
While the street was disappointed with the capital infusion
of 0.25 lakh crores only, it was consistent with what the govt. promise under
project” Indradanush” & sticking to a promise needs appreciation. Either
the FM could have infused more funds into the banking sector & expected
them to lead the charge on economic revival or do it himself through infra spends; he has wisely decided on the latter since the private sector –
plagued by excess capacity in many sectors – is unlikely to have taken
advantage of more liquidity in the banking sector; likewise infra companies reeling under huge debts & stresses assets would be loath to take advantage of a more liquid banking sector.
With a Bank board under Vinod Rai appointed, a more
comprehensive strategy of revamp would be underway. Passage of the insolvency & bankruptcy act
would aid recovery. While amendments in the SARFAESI Act 2002 to enable
the sponsor of an ARC to hold up to 100% stake in the ARC and permit non
institutional investors to invest in Securitization Receipts has been announced
it might not help for none in the
PSU banks would sell assets at a discount to an ARC & risk incurring charges
of corruption later. While there are plans afoot to redraft the prevention of corruption act (PCA), the “twin balance sheet” problem can only be addressed in the medium
term.
Conclusion
Freeing the passenger transport
sector from constraints, incentivising gas discovery and exploration & providing
a legal framework for dispute resolution and re-negotiations in PPP projects
and public utility contracts are welcome measures. Likewise, GoI's proposed contribution
of 8.33% for of all new employees enrolling in EPFO for the first three years
of their employment is a better directed incentive to boost employment as
compared to offering geography or
industry based exemptions. Model shops & establishments bill advocating shops
remaining open, 7 days a week, through advisory in nature, is transformatory. The task force constituted
on rationalisation of human resources in various Ministries if successful would
lead to “minimum government, maximum governance”. Likewise, the launch of a
pilot on DBT on fertilizers announced could be a medium term solution to
harness the fertilizer subsidy of 0.70 lakh crores & automation facilities to
be provided in 3 lakh fair price shops by March 2017 could end pilferage & the menace of bogus customers
Therefore though the overall budget seems lacklustre at first glance it could still be retrieved though better execution of the proposals listed. The key to economic revival is
the new policy for management of Government investment in Public Sector
Enterprises, including disinvestment and strategic sale. Hope that fructifies.
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