Labeling of the budget as progressive or regressive, good or bad always emerges from the ideological and political standpoint of a citizen. In reality, the budget is very much like most other things that he has to deal with; it comes with its pros and cons . So we try not to label the budget but examine the details to see how far -reaching would their impacts be on the economy .
In the run-up to the Union Budget 2016-17, the phrase “make or break” was doing its rounds in anticipation of the path-breaking changes that were expected to be ushered in by the NDA government through the budget. An overhaul of the tax regime, a marked increase in public spending were some of the measures perceived to be on the cards. However, the government seemed to have taken a different route.
The Union budget 2016-17, as far as problem-solving is concerned, has focused on unemployment menace, the problems of the perennial distressed rural backyards of the country, the albatross around the government’s neck- the public sector banks, and of course, the country’s large infrastructure deficit. The 2016-17 budget is widely seen as the best budget of the NDA government
as it has tried to face all the hurdles head on. Nonetheless, it has to be understood that in a country like India, it is not possible to overhaul the system with a single budget.
Fiscal deficit
The fiscal deficit is undoubtedly among the most carefully watched numbers in the Budget. It is the gap between the government’s revenues and expenditure that has to be bridged through market
borrowings. The Union budget 2016-17 stays with the fiscal deficit roadmap was charted out and aims to bring the deficit down to 3.5 percent in 2016-17.As per the deficit roadmap announced by Jaitley in the last budget, the fiscal deficit was to be brought down to 3.9 per cent in current fiscal and further to 3.5 percent by 2016-17. The deficit is expected to be lowered to 3 percent by 2017-18.
In his budget speech, Finance minister Arun Jaitley said: “Different schools of thought have argued either in favour of fiscal consolidation and stability or for a less aggressive consolidation and
for boosting growth. I have weighed the policy options and decided that prudence lies in adhering to the fiscal targets. Consequently, the fiscal deficit in RE 2015-16 and BE 2016-17 have been retained at 3.9 percent and 3.5 percent of GDP respectively. While doing so, I have ensured that the development agenda has not been compromised.” Many reports suggest that this prudence shown by the government would essentially translate into “ dicey revenue assumptions” and “bloated nominal GDP figures”. And it takes only common sense to figure out that the government, as a part of its measures to reduce spending, may not fully implement the recommendations of the Seventh Finance Commission. As per the government expenditure in next fiscal would be Rs 19.78
lakh crore. Though in his speech Jaitley talked about discontinuing the practice of categorisation of expenditure as planned and unplanned, it is still, it has not been implemented in this budget. Of the total expenditure, Plan expenditure would be Rs 5.50 lakh crore while non-Plan gets Rs 14.28 lakh crore.
Corporate Sector
The big news that the corporate sector was expecting was the reduction in corporate taxes. But as this reduction was restricted to small and new companies, the cheers were mostly muffled. In fact, a few provisions in the budget resulted in the removal of some earlier tax concessions and will effectively see the consolidated tax rates for big corporations going up. There was also an announcement in the budget that declared that the corporate dividend distribution tax (DDT), high net worth individuals (HNIs), Hindu undivided families (HUFs), and firms with a dividend
income of more than Rs.10 lakh will be charged additional tax at the rate of 10% which elicited some negative response from the markets early on. The fear that higher taxation will deter the wealthy individuals from investing saw some immediate reactions in the stock markets. BSE’s Sensex, in a reaction to both this and few other announcements made, fell by 659.69 points, to 22,494.61. However, the market recovered quickly enough from the volatile trading, as there was more clarity. The Sensex gained a few points and closed at 23,002 points as the budgetday ended.
Infrastructure Investment
“Our infrastructure does not match our growth ambitions. There is a pressing need to increase public investment,” said Jaitley in his Budget speech. He backed this statement with the announcement of massive investments in infrastructure. A total investment of a whopping Rs 2,18,000 crore will be made into infrastructure, which includes both railways and roads (national highways and rural roads) in 2016-17. This is seen as a major stimulant for jobs.
The minister also expressed the intention of the government to establish a National Investment and Infrastructure Fund which will ensure an annual flow of Rs.20,000 crore into infrastructure
development. “This will enable the trust to raise debt, and in turn, invest it as equity in infrastructure finance companies such as the IRFC (Indian Railway Finance Corp. Ltd) and NHB (National Housing Board). The infra finance companies can then leverage this extra equity manifold,” the finance minister said. Citing the economic survey which had totalled the stock of stalled projects at Rs.8.8 trillion, (7% of GDP), the minister also discussed the introduction of a Public Contracts (Resolution of Disputes) Bill. If made a law, this could help in streamlining the institutional arrangement for the resolution of disputes that have stalled projects. A single-window approval for businesses has been seen as a need for some time now. As a move towards that direction and thereby increasing the ease of doing business, a regulatory mechanism that will remove the need for seeking multiple prior approvals for the setting up of businesses also featured in the budget speech. Laying emphasis on the need for revamping the public-private partnership (PPP) model that sometimes works against the private sector, Jaitley proposed to de-risk the private sector against the risks that are beyond its control.
Black Money
Black Money is a card that has been used by political parties and governments umpteen times. So now when an announcement is made about pumping back into the country’s economy, the black
money that circulates in the “parallel economy” and that which has been stashed in various tax havens around the world, it is met with some welldeserved cynicism. But this does not necessarily stop governments and parties from fielding the Black money as a key point in its election campaigns or budget proposals. And to be fair, the astronomical sums involved make the black money conundrum too dangerous to be neglected.
Union Budget 2016-17 too had its “exciting” plan for black money. In his Budget speech, Arun Jaitley introduced a tax amnesty scheme for domestic black money or undeclared incomes. This scheme assures an immunity from questioning and penal action if the black money holders pay 45 percent tax – a penalty about 10 percent more than normal. “ There will be no scrutiny or inquiry regarding tax in this declaration under Income Tax Act or Wealth Tax Act and declarations will have immunity from prosecution. Immunity from benami transaction has been proposed subject to
certain conditions,” he said. The riding factor for this scheme could have been the success of a similar scheme implemented 20 years ago that brought in Rs 10,000 crore from a much smaller GDP base. The government is looking to obtain Rs 25,000-50,000 crore from this one. Ina bid to raise additional revenue, the government will also allow those with disputed tax cases to pay the tax with no penalty for disputes up to Rs 10 lakh. Those with undisclosed income and assets are also incentivised into declaring them by the introduction of a four-month window beginning June 1 where the payment of a normal tax rate of 30 per cent plus 15 per cent in penalty and surcharge could let them evade prosecution.
However in a post- budget clarification Finance Minister Arun Jaitley clarified that the limited period compliance window to come clean was no amnesty scheme as an effective tax rate of 45 percent will be charged as against the normal rate of 30 percent. Amnesty or not, is the “exciting” plan a good enough incentive, only time will tell.
Organised Sector
As a part of its larger plan to strengthen the organised sector, the government has taken steps to incentivise the entry of more workforce into it by offering to pay the 8.33 percent of pension contributions of new employees for three years.
Jaitley said the government will pay 8.33% towards the employees’ pension scheme (EPS) of all unskilled and semi-skilled workers who will join work in the new financial year for a period of three years. He earmarked Rs.1,000 crore for the initiative in 2016-17. Companies are also entitled to tax deduction on 30 percent of emoluments paid to new employees, limited to those earning
up to Rs 25,000 per month. These schemes are not just aimed at incentivizing the employers at recruiting unemployed persons but also to bring into the folds of the organisational structure, all the informal employees. The finance minister said that the scheme will be applicable to those with salary up to Rs.15,000 per month to channelize this intervention towards the target group of semi-skilled and unskilled workers.
Luxury Tax
The announcement of a raise in cess or taxes on cars, including diesel and luxury cars came as another hit to the rich in the country. Though there is still not much clarity on the details, a special infrastructure cess on certain cars, including luxury and diesel cars have also been announced. Companies are still waiting for more clarity, however, a hike to the tune of Rs. 3,000 to Rs. 45,000 per car is on the cards for sub-10 lakh cars. According to the budget speech, cess will also have levied on petrol/LPG/CNG-driven motor vehicles depending on their lengths and engine capacities.
The Tax Regime
The budget also brought some respite to the so- called lower-middle class. A tax rebate of around Rs 3,000 was announced for taxpayers in the sub- Rs 5 lakh income bracket. This rebate will benefit over two crore taxpayers in the country. A deduction of up to Rs 60,000 will also be given to those staying in rented houses, this goes up from a previous cap of Rs 24,000.
Public Sector Banks
As a part of the government’s initiative to rejuvenate public sector banks that are lamenting under the weight of their NPA’s, a recapitalisation package of Rs 25,000 crore has been announced this year. The government has also agreed to reduces its stake in some banks to below 50 percent, especially in IDBI Bank. However, a lot still hangs on the legislation to change the bank nationalisation laws. The proposal for the formation of a monetary policy committee that shall oversee the central bank’s policy rate movement has also gone down well with the banking industry.
Agriculture
The largest beneficiary of the Union Budget 2016-17 budget, without a doubt, was the rural and farm sector. A mammoth sum of Rs 2.87 lakh crore was promised villages as fiscal transfer and electrification of all villages was promised by 2018. After Jan Dhan, the government has now shifted its focus towards electrification and making cooking gas accessible to rural households.
NREGA also took centre stage in the budget announcements with allocations of Rs 38,500 crore.
A farm interest subvention scheme of Rs 15,000 crore was also announced which would help farmers recuperate from two continuous years of drought, without having to depend on a waiver extension. Farm sector rejuvenation was also given enough importance with higher outlays for irrigation and also farm reforms.
The budget, though did not turn up as expected by many, has been seen as a clear sign of the government’s drive to address pressing issue and also politically broaden its appeal beyond its traditional backyards.
Text: FWD Media Photos: Various Sources Illustration: Shalin Sebastian
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