By Samiran Chakraborty, MD & Chief Economist (India),Citi research
Budget 2016: Consolidation and credibility have been the key features of Budget FY17 as it tried to maintain spending on the rural and social sectors and physical infrastructure while accommodating the needs of implementing the 7th Pay Commission recommendations. The assumption of a 11.7% tax revenue growth is a conservative estimate, even after accounting for some reduction in excise duty on petro-products during FY17. However, the close to Rs 1 lakh crore revenue envisaged from telecom (mostly from spectrum auction) could be a stretch. If the government is changing its approach towards divestment, then the FY17 target, though much higher than FY16, can be achieved.
There were minimum tweaks in the tax rates—while service tax was increased only 0.5% (against expectation of 2%), the expected 1% reduction in corporate tax did not happen for larger companies. There appears to be an effort to make the tax regime more progressive (higher dividend distribution tax, higher STT on options, cess on passenger cars, higher taxes on jewellery, branded clothes, lower exemptions, etc) which to some extent will moderate the positive impact on urban consumption from the 7th Pay Commission implementation.
The reallocation of these resources will be towards agriculture and rural development—put together, the allocation has witnessed a 31% growth in FY17, with higher spends for MGNREGA, irrigation and crop insurance. Another focus area, infrastructure, has seen 18% spending growth while social sector has seen a 13% growth. However, in a sense, the quality of spending has been impacted. Revenue expenditure growth has been pushed up to 11.8% by the pay panel and rural spending while capital expenditure growth is budgeted at only 3.9%—a sharp drop from 20.9% y-o-y in FY16 and even a 0.2 percentage points drop in terms of GDP. In such a scenario, public capex may not be able to shoulder investment recovery in FY17. The Rs 25,000 crore set aside for bank recapitalisation has been lower than the market expectation, but the finance minister has kept the door open for more, if necessary.
In an effort to modernise the central bank, the Finance Bill outlines the setting up of the much-awaited Monetary Policy Committee. In addition, the budget also hints at several other reforms in the areas of revitalising the PPP framework, new bankruptcy code, using Aadhaar for streamlining subsidy disbursement, expanding the social safety net, changing the APMC Act at the state level, simplifying tax administration, more liberalised FDI norms, etc.
The lower-than-expected borrowing number has eased the pressure of supply in the fixed income market. Also, a conservative fiscal policy, despite strong headwinds, has created space for some monetary easing.
However, it will likely be the last cut in this easing cycle and investors may be keen to reduce long exposure as the end of easing cycle approaches. The balance of risks does not favour chasing the rally in fixed income.
In an uncertain global environment, the budget has tried to preserve macro-stability, adjust the balance of the economy by nudging up rural consumption and continued with the government’s efforts to impart simplicity in the tax administration process.