The key accomplishments of the Budget FY16 are the measures to revive investment, deepen the social security net and empower the state governments, albeit at the cost of some slippage relative to previously set fiscal deficit target.
The Budget enhanced the allocation for infrastructure spending, particularly on roads and railways, and announced five new ultra-mega power projects subsequent to all clearances and linkages being put in place. Funding for infrastructure is being augmented through channels such as setting up of the National Investment and Infrastructure Fund, tax-free infrastructure bonds for rail, road and irrigation sectors, rationalisation of capital gains at the time of listing of REITs and InvITs, and proposals to monetise gold savings, partly offsetting the inadequate outlay for recapitalisation of public sector banks, which remain a key source for funding infrastructure. The move towards rational allocation of risks to fix the PPP model would boost investor sentiment. The Budget announced several steps to improve the ease of doing business, correct the inverted duty structure for certain sectors, enhance funding for the MSME sector and augment skill development, all of which are likely to boost its the Make-In-India initiative. The roadmap for rationalisation of corporate taxes, reiteration that the government would strive for a stable and predictable tax regime and deferral of GAAR are positive steps.
The Budget focused on deepening social security net through focusing on health, accident and life insurance and providing incentives to contribute to pension schemes, and also extending benefits to middle-class taxpayers.
The government has projected a moderate 15.8% rise in its gross tax revenues in 2015-16, primarily benefiting from higher surcharge on direct taxes, the previously instituted hikes in excise levied on petrol and diesel as well as an increase in service tax rate. Higher tax collections combined with the sharp step-up in the proportion of shareable Union taxes to be devolved to the state governments to 42% from 2015-16 onwards from current 32% can infuse additional R1.9 lakh crore of tax revenues to the states in the next fiscal. This step-up in untied funds would empower states with greater flexibility to design programmes based on local needs.
While the government stuck to its commitment that the fiscal deficit for 2014-15 would not breach the budgeted 4.1% of GDP, the substantial cut in plan expenditure of over R1 lakh crore remains a concern. In particular, grants to state governments have been cut by nearly R50,000 crore in the revised estimates (RE) for 2014-15 as compared to the budget estimates (BE) for 2014-15.
The BE for 2015-16 indicates continued fiscal consolidation, albeit with a limited reduction in the fiscal deficit to 3.9% of GDP from 4.1% of GDP in 2014-15 RE. Citing enhanced tax devolution to state governments, the Budget set a less ambitious target for the fiscal deficit at 3.9% of GDP, as compared to the rolling target of 3.6% of GDP in July 2014. Higher fiscal deficit allows the government to incur R47,700 crore of additional expenditure in 2015-16.
The imprint of the Interim Report submitted by Expenditure Reform Commission to the government in the Budget FY16 is unclear. While allocation for subsidies has been reduced to R2.44 lakh crore in the BE for 2015-16 from R2.67 lakh crore in the RE for 2014-15, this primarily benefits from a reduction in fuel subsidy related to decline in crude oil prices and deregulation of retail sale of diesel that was effected in 2014.
In contrast, allocations for food and fertiliser subsidy have been stepped up, in spite of which concerns persist regarding the adequacy of outlays for 2015-16, given the impending pan-India roll-out of the Food Security Act and the substantial backlog of fertiliser subsidy that has been carried forward. Notwithstanding the reduction in overall subsidy allocation, the quality of fiscal deficit is expected to remain stagnant, with the government’s revenue deficit accounting for 71% of the total fiscal deficit in both 2014-15 RE and 2015-16 BE.
The achievement of the fiscal deficit target for 2015-16 hinges on the projection of R69,500 crore of non-loan capital receipts, over twice as high as the R31,300 crore included in the RE for 2014-15. The likelihood of raising entire budgeted amount will depend on how quickly the stake sale programme is started, in order to prevent bunching towards the end of the fiscal year, in addition to prevailing market conditions.
While inflation is expected to remain well below the target of 6%, the limited fiscal consolidation being attempted in the Budget suggests that RBI may limit repo rate cuts to an additional 50-75 bps in the current calendar year. Monetary easing in conjunction with the marginal uptick seen in the government’s gross borrowings to R6 lakh crore in 2015-16 from R5.9 lakh crore in 2014-15 is likely to result in a further moderation in yields of dated government securities.
The author is CEO, Group ICRA