Budget 2016: A tough balancing act for FM to pull off

The FY17 Union Budget appears to have balanced the difficult task of maintaining fiscal prudence with providing impetus to the economy.

The FY17 Union Budget appears to have balanced the difficult task of maintaining fiscal prudence with providing impetus to the economy.

Besides meeting broader expectations on fiscal consolidation by announcing the fiscal deficit target of 3.5% for FY17, Finance Minister Arun Jaitley’s allocations for rural areas and infrastructure were well received.

The bond market appeared particularly pleased with the fiscal deficit numbers with the 10-year benchmark yield retreating 16 basis points to 7.626% on Monday. The move appears to reflect the view that the RBI will have more leeway to cut benchmark interest rates.

At a time when private sector spending has dried up, the government seems to have acknowledged its role in reviving the investment cycle with the FM announcing a total outlay of Rs 2.2 lakh crore on infra spending. This includes a total allocation of close to Rs 97,000 crore towards road development and a commitment to approve nearly 10,000 km of national highways in FY17. The Budget also proposes to revive 160 under-served airports & airstrips at an estimated cost of Rs 50 to 100 crore each. The decision to exempt dividend distribution tax on income distributed by special purpose vehicle to real estate investment trust and infrastructure investment trust (REIT and InvITs) is seen as increasing the funding avenues for companies in these sectors.

Planned rural and agricultural outlay at a collective Rs 1.23 lakh crore is being seen as a much needed thrust to revive rural consumption growth. The outlay includes an allocation of Rs 38,500 crore for MGNREGA. Fast-tracking of slow-moving irrigation projects, introduction of a Rs 20,000 crore long-term irrigation fund under NABARD and allocation of Rs 5,500 crore towards crop insurance are all seen leaving farmers with a higher disposable income, outcomes which could benefit both FMCG and rural-focused auto companies.

With much attention having been given in recent months to the health of the banking sector, especially public sector banks, the street was largely disappointed with the government’s decision to stand by the planned re-capitalisation of Rs 25,000 crore for PSBs.

The projection of close to 12% growth in tax revenue is seen as achievable with the government deciding to levy an infrastructure cess of 1-4% on different types of passenger vehicles. The introduction of a Krishi Kalyan Cess of 0.5% will lead to an effective service tax rate of 15%. The decision to implement a 1% tax at source on purchase of luxury cars worth more than R10 lakh and purchase of goods and services in cash exceeding Rs 2 lakh could impact the sales of premium products.

Despite sticking to its commitment of reducing the corporate tax rate from 30% to 25% over four fiscal years, the FM did not announce any tapering in the tax rate for larger corporates even as incentives such as accelerated depreciation and weighted deductions have been reduced for all eligible taxpayers.

The decision to impose a dividend distribution tax for shareholders that are individuals, HUFs or firms and in receipt of dividend more than Rs 10 lakh, is going to result in a higher tax outgo for rich individual investors and promoter companies.

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