Budget lays out reasonable roadmap: India Ratings

Union Budget 2015-16 analysis by India Ratings:

Growth and Macroeconomy: India Ratings & Research (Ind-Ra) believes the first full budget of the NDA government is less about big bang reforms and more about laying down a road map. Yet, it proposes two reforms that will the turning point for the economy – goods and services tax (GST) and JAM (Jan Dhan, Aadhar and Mobile). While GST has the potential to generate higher tax revenue and boost the GDP growth, JAM could help government pursue the income transfer mechanism more efficiently. GST is slated to come into effect by 1 April 2016.

Fiscal Consolidation: While fiscal deficit for FY15 has been retained at 4.1% of GDP, it has been pegged at 3.9% and 3.5% for FY16 and FY17, respectively. This is a deviation from the earlier announced fiscal road map. Ind-Ra believes a higher fiscal deficit as such is not harmful for the economy, so long as the borrowed money is used for expanding the productive capacity of the economy. However, the quality of fiscal deficit measured by the ratio of revenue deficit to fiscal deficit (FY15 revised estimate (RE): 70.7%; FY16 budget estimate (BE): 71.0%) does not indicate the same.

Arithmetic of Fiscal Consolidation: For FY15, RE receipts were lower 5.3% and revised total expenditure was lower 6.3% than BE of FY15. While containing the fiscal deficit for FY15 at 4.1% of GDP is commendable, it has been achieved primarily by compressing the capital expenditure, a soft target. If continued, it will be detrimental for the medium-term growth prospect of the economy. For FY15, RE for capital expenditure under the non-plan category and plan category fell 13.3% and 16.8%, respectively, from BE of FY15. The total RE capital expenditure declined 15.2% from BE of FY15.

Debt Sustainability: A sustained decline in primary deficit along with nominal GDP growth in excess of average interest rate on debt can bring down the debt/GDP ratio to a more manageable level. Primary deficit declined to 0.8% of GDP in FY15RE from 1.1% in FY14. It has been budgeted at 0.7% of GDP for FY16.

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Manufacturing Receives Special Attention: As „Make in India‟ has been one of the key focus areas of the government, some of the tax proposals of this budget have been aimed at eliminating the distortions faced by domestic manufacturing. Although the most significant step in simplifying the prevailing inverted indirect tax structure is the introduction of GST, the budget proposes to reduce the custom duty on several raw materials, intermediate and components. Also, the special additional duty imposed on all goods, except printed circuit boards used in information technology agreement, has been proposed to be removed. An additional depreciation of 20% has been allowed on new plants and machinery installed by a manufacturing unit or a unit engaged in power generation and distribution. The budget proposes a project development company through SPVs to set up manufacturing hubs in Cambodia, Myanmar, Laos and Vietnam to promote better industrial linkages.

More Action in Infrastructure Sector: Despite a reduction in plan/capital expenditure in both FY14 and FY15 (RE) from BE, some progress has been made with respect to roads, power, railways and ports. Capital spending, according to FY16BE, has been increased to INR2,414.31bn from INR1,923.78bn in FY15RE. The capital would be used for key initiatives in the railways, roads and other infrastructure sectors as also mobilisation of resources by the public sector. The government has provided INR1,000.11bn to railways in FY15BE as against INR657.98bn in FY15RE.

Looking Beyond Banks: The budget has provided INR79.4bn (FY15: INR70bn) for the capitalisation of public sector banks. Ind-Ra believes this modest capital allocation compared to an expectation of INR200bn and recent differentiation in infusion based on performance are not enough to meet the capital requirement of government banks. The prospects for private banks and non-banking finance companies (NBFCs) are positive instead.

Ind-Ra believes looking beyond banks to encourage credit delivery is the right move by the government. The new „Mudra Bank‟ for refinancing microfinance institutions and including large NBFCs under the Sarfaesi Act are structural changes that will improve the viability of these growing intermediaries. The Sarfaesi Act will enable large NBFCs to fund SMEs and mid-corporate businesses with lower loss prospects. The Gold Monetisation Scheme could moderate the demand for gold loans; however, the details of the scheme are awaited.

Social Sector Spending: Social sector spending has been a focus area for the Union Government to achieve more balanced and just growth in the economy; the budget has announced several new initiatives besides allocating adequate resources for on-going social schemes. The budget proposes „Housing for all‟ by 2022. It also proposes providing electricity to the remaining 20,000 villages and connecting each of the 178,000 habitations by all-weather roads by 2020. MGNREGA has been allocated a sum of INR346.99bn to boost employment opportunities.

Ind-Ra believes the government‟s focus on Jan Dhan to Jan Suraksha is a logical extension of the Jan Dhan scheme to cover a vast section of population without insurance of any kind - health, accidental or life. Several schemes such as Pradhan Mantri Suraksha Bima Yojna, Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana will help in creating a universal social security system for all Indians, specially the poor and the under-privileged. The budget has also allocated INR308.51bn, INR199.80bn and INR792.58bn for the on-going welfare schemes for SCs, STs and women.

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