Budget 2016: On the path to fiscal consolidation

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Updated: March 1, 2016 12:57:50 AM

Revenue deficit being well below the FRBM cap shows quality of consolidation is good

Given the FY17 budget has not laid down a roadmap for bank recapitalisation (unchanged at Rs 25,000 crore for this fiscal), we may expect this will be an ongoing exercise. The proposed code on resolution of financial firms, along with the bankruptcy code, will create a level playing field for banks as far as the loan recovery mechanism is concerned.

The proposed law to curb illicit deposit-taking schemes will ensure a level playing field for bank deposits as well.

Additionally, from the banks’ perspective, broad-basing eligible investors in ARCs/security receipts (SRs) will be a positive. The possibility of including HNIs and non-QIBs as eligible investors/subscribers can help broad-base the investor array. We have to wait for RBI to clarify on the same.

The fiscal deficit target, set at 3.5%, underlines the need to stick to fiscal prudence despite adversities. Remarkably, revenue deficit, at 2.5% in FY16, has significantly undershot the FRBM cap of 2.8%, implying that the quality of fiscal consolidation is good. As a logical corollary, gross government borrowings have been pegged at R6 lakh crore. Debt markets have greeted this announcement with gusto and this will be a big positive for bank treasury and market sentiments.

As anticipated, the focus of the budget is on agriculture and job creation. The past two years, 2014 and 2015, were the fourth case of a consecutive pair of years when monsoon was deficient on a pan-India basis, in the last 115 years (1901–2015). The budget prioritises revival of rural demand through a carefully-drafted focus on increasing the agriculture sector’s productivity. Key plans include the creation of a unified agriculture market, promotion of soil health cards on a mission-mode basis, expanding the net cultivable area under irrigation and routing of fertiliser subsidy (on a pilot basis) through DBT. Some of these could prove to be game-changers.

The budget keeps the focus on the social sector, specifically education and health-care. The new health insurance scheme and tax rebate for senior citizens on pension schemes will provide succour in the absence of comprehensive social security. As far as infrastructure is concerned, the plan to make amendments in the Motor Vehicles Act introduces more competition in the transport sector. The new hybrid annuity concession agreements for the roads segment hold great promise and the impetus provided to developing inland water-ways and small airports are all positives in the medium- to long-term.

Let me conclude by saying that India is poised to become a roaring tiger, on the strength of its vast domestic market and economic fundamentals. It is imperative that we use this opportunity to take the bold steps and the required calculated risks to tide over the slackness that envelopes the rest of the world. India is at an inflection point and this Budget has decidedly determined the coordinates in a positive manner.

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