If hiking FDI in defence and insurance were along expected lines, finance minister Jaitley deciding to accept his predecessors 4.1% deficit target as a challenge was a big surprise. The inability to scrap the retrospective tax or even to reduce subsidies, or announce a timeline for GST, were the most obvious negatives.
Given the economy is just about bottoming out, the chances of achieving challenging tax targets look difficult. Compared with a tax-to-GDP ratio of 10.2 in FY14, Jaitley is targeting a significantly higher 10.6, a number last achieved several years ago. This is after Jaitley gave away Rs 22,200 crore in direct taxes while gaining just Rs 7,455 crore in indirect taxes.
Sticking to the interim budgets fiscal deficit target will keep net borrowings low, though due to large redemptions of R1.4 lakh crore this year the gross borrowing target will be R6 lakh crore.
Jaitley hopes to collect the significantly higher revenue depend upon his ability to jump-start growth. In the short run, correcting the inverted duty structure that encouraged imports over domestic production in a plethora of industries is seen as a big positive. Small increments in tax exemptions are expected to revive demand a bit.
The Budgets biggest moves, however, were reserved for infrastructure, which got a host of incentives. Expenditure on roads, both for NHAI and rural ones, have been more than doubled. Clarification of tax laws on infrastructure trusts and changes in the 5/25 scheme for bank lending to infrastructure gave the sectors stocks a boost. In addition, banks that raise funds for infrastructure lending wont have to earmark part of these for SLR/CRR requirements, or even priority sector lending.
Section 80-IA tax holiday has been extended to all power projects coming up before end-FY17. Generation projects with a combined capacity of 55,000 MW and some transmission projects entailing investments of close to R5 lakh crore would benefit.
Total expenditure for FY15 has been kept at R17.95 lakh crore, which is just 1.8% higher than that in the interim budget. The Budget hopes to stimulate growth through a large increase in capital expenditure, up almost a fifth over last year.
Apart from the high tax target, Jaitley has raised the non-tax revenue from R1.8 lakh crore to R2.13 lakh crore. This includes significantly higher revenues from PSU divestment, R63,425 crore versus R25,841 crore in FY14. Another spectrum auction is planned and, along with licence fees, is budgeted at R45,471 crore compared to R40,847 crore in FY14.
Jaitley announced plans to raise the foreign investment cap in defence production and insurance from 26% to 49%, set up a R10,000-crore fund to boost availability of start-up capital in the MSME sector, earmarked a sum of R7,060 crore for developing 100 smart cities and set up a R500-crore price stabilisation fund to curb fluctuation in commodity prices and control food inflation.
He also set aside Rs 5,000 crore to boost warehousing and improve the shelf-life of farm commodities, and reiterated the resolve to persuade states to scrap the archaic APMC laws that jack up food prices. No plan of action was, however, proposed for revamping Food Corporation of India and the public distribution system.
While British telecom major Vodafone reiterated its plan to push ahead with arbitration in the absence of a retro-tax repeal, the minister sought to pacify the investor community by announcing that new tax cases of indirect transfers of Indian assets would be subject to mediation by a high-level committee to be formed by the Central Board of Direct Taxes. Dispute resolution has been helped by a string of measures including setting of six new debt recovery tribunals.
Although the survival of most of the special economic zones (SEZs) seems to be in jeopardy due to investor apathy, the Budget did not give them the much-needed relief from minimum alternate tax and dividend distribution tax imposed in the 2012 Budget. Speaking to reporters after presenting the Budget, the finance minister, however, promised some succour to SEZs.
Jaitley chose not to announce a timeline for the introduction of the goods and services tax (GST), even as it seemed that the ruling BJP was in a position to coax many larger states ruled by it and allies/friends to adopt the new tax. GST could help expand the tax base for both the Centre and states, remove cascading of taxes in B2B transactions and generate considerable incremental economic growth.
Ratings agency Moody's said a lack of details on how the promised fiscal consolidation would be achieved made it challenging to assess the credit impact of the Budget, but said the investment grade rating for India is safe for now. Showing his resolve to stick to FRBM targets, the minister proposed to set up an Expenditure Management Commission which would give its interim report in the current fiscal, in what is seen as an attempt to institutionalise expenditure reordering, given that just 12% of the Budget is used for creation of new assets.