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The Union Budget 2016 is a tightrope walk for Arun Jaitley, the lawyer-turned-politician in Prime Minister Narendra Modi’s cabinet. On the one side is the need to increase public spending to support a still-struggling economy and the other side is the need to stick to the fiscal consolidation path.[caption id=“attachment_2647000” align=“alignleft” width=“380”]
Union Finance Minister Arun Jaitley. PIB [/caption] Above all is Jaitley’s own personal need to prove his skills in handling the finance ministry and the broader economy. The fact is in the last two years at the North Block, Jaitley has been able to attract a significant amount of criticism for mishandling of key issues, including bank recapitalisation. What is making his task particularly difficult is the fact the Narendra Modi government is going through a rough patch due to the heightening criticism over the rising intolerance. The JNU imbroglio and the Rohith Vemula suicide only aggravated the problem. Above all this is the two consecutive years of monsoon deficiency, which has pushed the rural economy into a crisis. There is wide expectation that the government will increase the expenditure for various social sector schemes to support the farming community. This is likely to put a drag on the government’s ability to spend for projects. The there is the high expectations from the difficult-to-please salaried class on tax front. Here are a few figures to watch out for: Fiscal deficit: It is the shortfall in the government’s revenues to meet its expenditure. The budget gives out the revised estimate of the deficit for the previous financial year and also the estimate for the next. The number is expressed both in absolute terms and as a percent of GDP. As per the fiscal consolidation roadmap, for the current financial year the deficit has been pegged at 3.9 percent, 2016-17 at 3.5 percent and 2017-18 at 3 percent. Will Jaitley stick to this? Market borrowing: The government bridges the fiscal gap through market borrowing by issuing borrowing. Gross market borrowing for the current financial year was Rs 6 lakh crore. The higher the deficit the higher the borrowing and the government’s interest expenses. Plan and non-plan expenditure: Plan expenditure pertains to public spending that comes as part of the current five-year plan. As opposed to this, the non-plan expenditure deals with interest payments, subsidies, defence spending, salaries to government staff, grants to state governments and Union Territories, loans etc. Jaitley had cut the plan expenditure for the current financial year by more than Rs 8,000 crore from the previous year. While cutting non-plan expenditure at a time of rural distress may be politically bad, will he cut the plan expenditure again? That will have direct correlation to the public spending, which is key to industrial recovery. The non-plan expenditure for the current financial year stands at Rs 13.12 lakh crore and plan expenditure at Rs 4.65 lakh crore.
Budget 2016 Live: Jaitley's has delivered his economic mantra, a year we will know how good it was
What is making his task particularly difficult is the fact the Narendra Modi government is going through a rough patch due to the heightening criticism over the rising intolerance. The JNU imbroglio and the Rohith Vemula suicide only aggravated the problem.
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Final word
So what’s the final word on the Budget 2016-17? It’s too early for that. But it can be said that it’s more of a political budget, careful not to ruffle feathers. It plays safe by trying to please all sections. The super-rich would be a bit unhappy, but it won’t bother the government much. Jaitley’s Budget eschews adventurism and is populist without being overtly so. Finally, everything comes down to to implementation. One would have preferred to hear the FM addressing the topic of farmers with more emphasis though.
Social security
Firstpost senior editor Akshaya Mishra says: It’s heartening that the government is giving attention to social security or the safety net. It’s not spoken of as much in India as in western countries but it’s critical to any economy preparing for structural changes – from farming to manufacturing to services – and the consequent financial and social disruption caused by them. We are still a long way to go. But the thinking is in the right direction.
The opposition isn’t happy with the Budget. Of course, that is almost ritual by now. What comes through in Jaitley’s Budget is the good intent. But good intent needs to translate into good implementation on ground. But the basic question remains: will the government be able to achieve what it has promised without overstepping the fiscal red line it has drawn for itself by a big margin? It seems to be a tough ask.
Budget positive for bond markets
Ramesh Damani, market expert: We live in a world that hates uncertainty. India adheres to the path of fiscal prudence and sticks to the path that is good for India. Borrowing figure is lower than last year will be taken postively by bond markets.
Ashok Wadhwa, CEO, Ambit Holdings: He has announced an amnesty scheme. Historically amnesy scheme can collect 0.2 and 0.8 percent. On the personal side, thankfully not brought the long-term capital gains tax. 10 pecent more tax for those who earn 10 lakhs. Overall, a decently balanced budget from tax perspective
Budget scores politically, but numbers bear scrutiny
@TheJaggi says: On balance, the budget presented by Arun Jaitley is probably his best so far. Politically, it is the right direction, and economically it is difficult to fault spending on infrastructure and rural areas.
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The middle taxpaying class should not be unhappy even without a raise in the tax-exempt limit in general, but lowest bracket gets a small Rs 3,000 relief.
If the tax amnesty schemes generate large resources, the numbers will add up, but not if they fail.
If the incentives to the organised sector enable more companies to expand employee base, it will benefit the neo middle classes the most – jobs at the bottom end of the strucuture, that pay under Rs 25,000 per month.
The fiscal devil in the fine print will, however, need closer scrutiny.
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Broadly, this budget sends a political message from Narendra Modi that the NDA is about the poor and not the rich. This is the first shot in his 2019 election campaign.
Flexible FRBM surprises everyone
Firstpost executive editor Ajay Singh says: Arun Jaitley’s insistence to maintain flexibility in the FRBM would come as a surprise for those who thought that the minister would adhere to targeted figure of fiscal deficit. His decision to review the functioning of the FRBM appears to be an outcome of the government’s view to divert more funds for social expenditure. This is an important decision as the government would have additional fund to play with on its social commitments.
Jaitley avoids rural distress in Delhi’s backyard
Firstpost executive editor Ajay Singh says: Just as union finance minister Arun Jaitley began painting an optimistic picture of the India economy against odds of downturn of the global economy, he has cautiously avoided the mentioning of the rural distress in Delhi backyard-Uttar Pradesh.
There were unmistakable signs that in the budget-making of this year, the lurking shadow of the UP election to be held next year guided the economic policies. Having lost Bihar elections, Jaitley was not oblivious to the fact that in the rural dominated Uttar Pradesh, the party’s support base of 2014 has been gradually slipping away.
Barely two hundred kilomteres away from Delhi, there have been reports of famine deaths in Bundlekhand on account of successive failure of crops. The entire region has been reeling under severe economic distress which is unprecedented. The similar situation persists in West UP and Eastern parts of the state. Jaitley’s emphasis on rural sector seems to be an attempt to win over a large section of the rural populace which seems to have alienated from the Centre and the state government in equal measures.
BJP shedding urban bias
Firstpost senior editor Akshaya Mishra says: The BJP is shedding its urban bias. Its economic policy, as reflected in Jaitley’s announcements so far, would disappoint many economists looking for drastic reforms. Right now it’s an UPA budget, minus the in your face populist spending. It could be the pressure of politics. But there’s nothing to complain about.
BJP shedding urban bias
Firstpost senior editor Akshaya Mishra says: The BJP is shedding its urban bias. Its economic policy, as reflected in Jaitley’s announcements so far, would disappoint many economists looking for drastic reforms. Right now it’s an UPA budget, minus the in your face populist spending. It could be the pressure of politics. But there’s nothing to complain about.
Sensex shocker
Stock market loss widens; Sensex crashes over 600 points and Nifty down over 200 points on Budget taxation proposals.
Dividend tax raised for the rich
@TheJaggi says: Promoters who pay less tax due to the dividend distribution tax that is paid by the company will now face a 10 percent additional tax when dividend payments exceed Rs 10 lakh. This will sting big promoters, who were not the intended beneficiary of the dividend tax.
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Luxury cars will be taxed more, and there will be a special infrastructure cess on certain cars and also diesel cars.
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Speculators will be stung with the raise in the securities transaction tax on options of 0.05 percent – a three-fold rise.
No big announcement for banking sector yet
Firstpost Dinesh Unnikrishnan says: For fiscal 2017, Jaitley announced a capital infusion of Rs 25,000 for government-banks, which is part of the Rs 70,000 crore announced for five years announced in last year. Jaitley also promised to examine the option to bring down government stake in 1DBI bank below 51 percent.
One needs to wait for details though. Jaitley, as finance minister, has failed so far to get hold of the root of the problems that has engulfed India’s Rs 95 trillion banking industry. He underestimated the capital needs of state-run banks in the initial days of this NDA government when he allocated merely Rs 11,200 crore and refusing to think of radical reforms in the baking sector such as merging small banks having synergy and bring in private capital.
His banking sector strategy fell short of what was needed to revive state-run banks. Though Jaitley recognised the issues later and offered more capital (Rs 70,000 crore over five years), it came too late and too little. India’s banking industry, 70 percent dominated by state-run banks, is in the midst of a crisis now with their total bad loans exceeding Rs 400,000 crore at the end of December and more likely to come from the restructured loan segment if economic recovery doesn’t happen as expected.
Meanwhile Sensex disappoints 🙁
Meanwhile, Jaitley seems to have failed to cheer the investors. The stock market has fallen. The Sensex 23,001, down 153 points and the Nifty 6977, down 55 pts.
According to Hemal Zobalia, Partner, Deloitte Haskins & Sells LLP, announcement of amending Motor Vehicles Act to remove/ reduce permit raj and allow more private players for passenger traffic will boost entry of private players especially for group/mass transportation. This could help mitigate people’s concern on lack of adequate public transport system.
Service tax
Service tax exemption for construction of affordable housing upto 60 sq. m. under state and central housing schemes, says Jaitley.
Presssing the right buttons
Firstpost senior editor Akshaya Mishra says: So far the Finance Minister has hit all the right buttons. Going by the announcements made by Jaitley, his could well be a budget of socialists. NREGA spending is up, there is emphasis on the farm sector, the rural sector gets due attention and the urban poor also is on the FM’s radar. He talks of fiscal discipline. The opposition shouldn’t have much to complain about. The devil is, however, is in the detail. Let’s wait for the fine print.
Here come the aam aadmi and corp tax benefits
@TheJaggi says: Taxpayers in the sub-Rs 5 lakh income bracket will get a tax rebate of around Rs 3,000. Two crore taxpayers will benefit.
Those without a house will get an HRA like deduction of Rs 60,000 – up from Rs 24,000, under section 87a.
Corporate tax rates for small companies down to 29 percent.
Jaitley sticks to fiscal roadmap, but….
@TheJaggi says: Arun Jaitley said in 2016-17 he will bring the fiscal deficit down to 3.5 percent, but given high allocations for many sectors, there could be a devil in the detail.
The numbers to watch are nominal GDP estimate, which, if made high, will allow deficit to look smaller. Also there could be over-estimation of revenues or underestimating of expenses.
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He has said Seventh Pay Commission gets only interim provisions, which means he could have underprovided here.
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The Fiscal Responsibility act will be made more lexible in future.
Jaitley proposes comprehensive exit policy
@TheJaggi says: The Economic Survey talked about India transitioning from limited entry to “marketism with no exit”.
Jaitley has proposed a strong exit policy which will involve legislating the Indian Financial Code and the Bankruptcy Code and quicker disposal of debt recovery cases in debt tribunals.
Banks will be recapitalised by Rs 25,000 crore this year, which is a substantial step-up from last year. Government will also try to bring its stake in banks below 50 percent, especially in IDBI Bank. But a lot will depend on legislation to change the bank nationalisation laws.