Budget 2016: Time to revive investments and continue fiscal consolidation

Vibha BatraThe Government of India (GoI) will present its Budget for 2016-17 on February 29, 2016. With both investments and growth momentum showing only a very modest and uneven recovery, the most important expectation from the Union Budget for 2016-17 would be the manner in which it focuses on reviving investments, without deviating from the medium-term fiscal consolidation agenda. Further, announcements are expected to improve the ease of doing business as well as for easing the norms for foreign investments.The implementation of the Seventh Central Pay Commission’s (SCPC’s) recommendations as well as One Rank One Pension (OROP) scheme constrain the fiscal spaceIn the Union Budget for 2015-16, the GoI had committed to paring its fiscal deficit to 3.5% of GDP in 2016-17. Assuming nominal GDP growth of 11.5% in FY17, a fiscal deficit of 3.5% of GDP translates to Rs. 5.3 trillion as against the Rs. 5.6 trillion budget estimate for 2015-16. Achieving this target may be more challenging in light of Rs. 1.1 trillion expected rise in the GoI’s salary and pension bill with the implementation of SCPC’s recommendations as well as the OROP scheme.However, budgetary outlays for capital spending need to be enhancedWith the pickup in private investment likely to significantly lag the spurt in project announcements, government spending on infrastructure is likely to remain a critical engine of economic growth. While we have seen some traction in the awards and execution in the roads and railways sector, a significantly higher thrust needs to be provided. Ambitious projects in the area of ports, high speed railway, smart cities etc., have been already announced. The size of the outlay on such schemes, for instance the Sagar Mala project, and the possible avenues of financing these large resource requirements are awaited. We estimate that every 10 bps of expansion in the GoI’s fiscal deficit to GDP ratio would allow for extra spending of a relatively limited Rs. 150 billion. As fiscal space is likely to be constrained, Govt many leverage NIIF to enhance funds for capital expenditure.Allocation for rural sector may go upThe feeble performance of the farm sector has exerted a drag on economic growth, with crop output dampened by two successive weak monsoons. Moreover, increases in minimum support prices for crops have been limited in recent years. Additionally, rural wage growth has not kept pace with rural CPI inflation. As a result, disposable incomes and consumer demand for this sector have suffered. Given the distress faced by the rural economy, enhancing allocations for social sector and agriculture-focused schemes as well as infrastructure projects for rural areas, including rural roads, irrigation etc. may assume greater precedence in the Union Budget for 2016-17. The nature of this outlay would be critical, whether it would be utilised to generate durable assets that would also have a multiplier effect on the rest of the rural economy, or provide social security through enhanced allocation for NREGA for instance, or risk mitigation through crop insurance etc.Alignment in tax rates expectedA clear roadmap for reduction in corporate tax rate from 30% to 25% is awaited in the Union Budget. Other changes in taxation rates are, however, expected to be limited, in pursuance of the goal of maintaining a relatively stable policy regime, and the anticipated shift to the goods and services tax (GST). Raising finances through innovative means to strengthen bank balance sheets and banking reforms also assume critical importance. Given the significant stress on the PSBs’ balance sheets (Gross NPAs crossing Rs. 4 trillion as on December 31, 2015) as well large Tier I capital requirement (Rs. 400-600 billion*) for FY 2017, ability of PSBs to provide adequate credit for the revival of the economy is extremely constrained. Govt is expected to remove some of these constraints by strengthening PSBs’ balance sheets by making higher fund allocation for NPA resolution through NIIF or a bad bank and / or direct equity infusion. Further announcements could be made on banking sector reforms.*  Assuming 10% credit growth in FY 16 & FY 17 and low level of buffer over minimum regulatory requirement.Author is senior vice president, group head, financial sector ratings, ICRA