Budget 2016: Will be next step on the path of economic growth & development

Sampath ReddyBajaj Allianz Life InsuranceIndia’s Finance Minister shall be presenting the Annual Budget for FY17 on February 29, 2016. The key theme which has been in debate over the past few weeks is whether the government would continue to follow the revised FRBM (Fiscal Responsibility and Budget Management) targets as set out last year (Fiscal deficit at 3.5% of GDP in FY17 and 3.0% in FY18) or will the government look to extend the target yet again?We think that the Finance minister shall be walking a tight rope to manage the fiscal austerity path. Though the chances of a slippage from the FRBM path are high, owing to 7th pay commission payouts, but these would to a certain extent get offset by higher revenues.Impact of 7th Pay commission and OROP (One Rank one Pension): 7th Pay commission and OROP shall result in additional revenue spending by the government to the extent of about INR 1.1 lac crores ( including spending by Railways of about INR 30k crores). Net of incremental tax revenues, this translates into about 0.5% of GDP. We think that the government would likely defer a part of this payment into FY18 resulting in likely payout of about 0.3% of GDP in FY17. On direct tax front, the government shall go ahead with reduction in the corporate tax rate (from 30% to 29%) along with reductions in some exemptions, which should have a neutralizing effect. The indirect tax collections shall reap the benefits of higher fuel excise duties as well as increase in service tax (2% increase expected). Non tax revenues shall also be higher on account of the telecom auction next year. We think that the finance minister would maintain the fiscal deficit at 3.5% of GDP in FY17. We expect net market borrowing to rise to INR 4.8 trn in FY17 (FY16: INR 4.4 trn) and gross borrowing to increase to INR 6.5 trn in FY17 from INR 5.85 trn in FY16.The biggest worry in this year’s budget is clearly the roadmap for long term capital gains tax (LTCG). In India, equity market linked investments (shares, equity MF units, etc.) are taxed at 0% if the holding period is over one year, 15% if the holding period is less than 1 year.An additional important point to be watched is the spending on infrastructure and defense with the idea of reviving up the stalled economy. The ministry of urban development has mentioned its goal to set up 100 smart cities across the country well distributed across different states. A clear budgetary allocation towards setting up of these smart cities will go a long way towards bringing tangibility to the concept. Financial tangibility to the “Make in India” campaign is also keen watched.The government has recently announced that it intends to encourage the startup culture in India. Announcement of tax incentives towards the same along with the steps to ensure smoother and faster setting up of businesses with minimum red tape is the need of the hour. We expect the budget to act as a starting point towards the same. Most of the public sector banks are reeling under the dual pressure of higher NPA and low capital adequacy, which is resulting in cautious lending. The government is likely to set aside funds for infusion into public sector banks with the idea of shoring up their capital and improving the health of the banking system.The metals industry is reeling under the pressure of low global prices along with pressure from Chinese imports. The domestic steel companies are under extreme levels of stress and we expect announcement of import duties- already done in the form of MIP to safeguard the domestic steel industry. Pollution has proved to be a big worry for Indian cities. We expect the government to announce a “Cash for Clunkers” kind of program, where we expect the government to phase out commercial vehicles which are older than 20 years and announce tax incentives towards purchase of new vehicles in the form of higher deductions.Overall, we expect the government to announce additional steps towards reform which would translate into faster execution of the vision of the PM which would result in India being the fastest growing economy in the globe over the coming few years.