ABM Equity Research's view on Union Budget 2016-2017:
The much awaited Union Budget 2016-17 is behind us. It has turned out to be a pragmatic budget which above all looks at keeping the credibility of budgetary estimates intact. The budget focuses on 3 main themes, rural spending (agriculture, roads, etc), phasing out of exemptions/deductions to align effective corporate tax rates to the stated rate of 25 percent, over the next few years, and bringing some socio-economic balance in the society through transfer of wealth.
Specifically, the government has expanded its budgetary size by ~11 percent. Total revenues (both tax and non-tax, and both revenue and capital) are expected to go up by 15.46 percent to Rs 14.47 trillion, while total expenditure is expected to go up by 10.8 percent to Rs 19.78tn. Fiscal Deficit is targeted to be 3.5 percent, and hence the govt. has chosen to stick to fiscal prudence.
As the Fiscal Deficit is targeted at 3.5 percent for FY17, it will keep the borrowing program at a lower level, thereby improving probability of a rate cut in future. Contrary to the market expectation, Budget has left the Service Tax unchanged and LTCG was not maneuvered. However there was disappointment on the corporate tax front, as the convergence to the 25 percent rate was only proposed for “new mfg units” and not for existing companies.
On the infrastructure side, the budget has set out an aggressive spending target. Roads and Railways alone are likely to see a capex of Rs 2.2tn.
In terms of financial sector reforms, strengthening of ARCs and setting up of Bank Bureau have been proposed. The PSU banking sector too has been allocated Rs 25k crore of capital, though we were expecting it to be about 35k-40k crore.
On the spending side, subsidy bill is expected to go down marginally from Rs 257,000 crores to Rs 250,000 crores, thereby indicating government’s intent to spend on productive causes and not use up excessive revenue for subsidies.
The redistribution of wealth through increased allocation to farm sector and “robin-hood” type taxes (higher dividend
tax, higher surcharge, which impacts the rich) were also some of the key measures announced in the budget. Budget targets to double income of famers over next five years and has allocated Rs 870bn towards that end including higher outlay to MNREGA.
For the common man, though, direct measures to boost the consumption growth were missing in the budget. It however, does allow Rs 50,000 interest exemption for first time home buyers if the value of the house is less than Rs 50 lakhs. Exemption for rent paid under Section 80GG for employees who don’t get HRA from their companies was hiked 150 percent to Rs 60,000. For NPS, 40 percent of the corpus would be tax-exempt at the time of withdrawal for retirement, compared to the entire proceeds being taxable under the EET regime hitherto.
To conclude, it is a pragmatic budget, with focus on fiscal prudence, rural spending, infrastructure spending, rationalizing tax exemptions/deductions, reducing social divide and above all, reducing credibility gap for the budgetary estimates.
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