Budget 2016: Expect a balancing act with more focus on investments

Published: February 26, 2016 12:13:38 AM

One can expect more capital infusion to be announced in this year’s Budget. Public sector banks are saddled with huge non-performing assets and with onset of the Basel III norms, additional capital is a necessity

The New Year began with the global economy feeling the after effects of the ongoing Chinese slowdown and since then things have only worsened. Our domestic financial markets have also felt the pain. Generally the expectations are always very high from the Budget especially with regard to measures being  announced to fast track reforms and introduce growth strengthening measures. However, this Budget comes with the clouds of fiscal constraints and not so very good news.

We are in a scenario where global growth has disappointed and on the domestic front, growth has slowed down in the third quarter to 7.3% from 7.7% in the second quarter. More importantly, nominal growth has been low at just 8.1%, where historically it has grown in double digits. Along with this decline, the government also has to create room for the extra expenditure on account of OROP and the 7th pay commission, which is estimated at whopping Rs 1,10,000 crore.

The recent data on CPI and IIP is also disappointing where unyielding food inflation is coupled with continued sluggishness in production.

In this scenario, if growth has to be boosted, the government would have to bear the lion’s share of the required capital spending and not much reliance can be placed on private investment. Given the state of the rural economy, which has suffered over the last two years due to two successive droughts, a part of the increased spend is most likely to be on with higher allocations for social sector schemes such as the MNREGA and an institutional push for farmers to adopt the crop insurance scheme.

Apart from this, one can expect more capital infusion to be announced in this year’s Budget. Public sector banks are saddled with huge non-performing assets and with onset of the Basel III norms, additional capital is a necessity.
However, capital infusion by itself may not be sufficient as the long-term solution for NPAs has to come, inter alia, from a robust bankruptcy code.

In all of this, it is difficult to see how the present FRBM targets would be maintained.  More likely than not, the government would move on the path of fiscal consolidation albeit through a longer road map with the fiscal deficit target for next year around 3.7% rather than 3.5%. If the plan will have a higher spend on productive investments, then perhaps the international rating agencies may take a more sanguine view of these developments, especially if the policy makers are able to refocus on the disinvestment programme.

Overall, the Budget can be expected to be a balancing act with a greater focus on investments and support for the rural economy. This is also the need of the hour. With India being one of the few bright spots in the global economy, the world is also hoping and waiting for a practical Budget which does not act as a panacea for all ills, but moves in the right direction with effective implementation.

By Richa Gupta and Rishi Shah

Richa Gupta is Senior Director, Deloitte Haskins & Sells LLP and Rishi Shah is Manager, Deloitte India

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