Pushes for growth and infrastructure, focus on fiscal fitness put off to a later date
Yearning to give an all-round boost to capital investment at a time of slow revenue growth and corporate procrastination, the Narendra Modi government’s first full-fledged Budget turned to states for help, given their additional guaranteed fiscal space mandated by the 14th Finance Commission.
Even as the fiscal room with the Centre hasn’t eroded much as a result of the commission’s award, the subdued revenue buoyancy has, and so finance minister Arun Jaitely had little option but to compress the overall central government expenditure in FY15 by R1.13 lakh crore and budget for a modest 5.7% increase in FY16.
While that meant the size of the FY16 Budget at R17.77 lakh crore will be less than originally planned figure of R17.95 lakh crore for FY15, a good part of this expenditure squeeze was a sharp reduction in the subsidy on petroleum products that allowed a 10.5% cut in the combined annual outgo on the three major explicit subsidies (petroleum, food and fertilisers) to R2.27 lakh crore for the next financial year.
Even though Jaitely stressed that the JAM Trinity (Jan Dhan Yojana, Aadhaar and Mobile numbers) will help target subsidies better, he shied away, at least for now, from reducing fertiliser and food subsidies. Yet the Centre’s overall subsidy bill was slated to decline 8.6% to R2.44 lakh crore in FY16, and the minister said the savings would only be used for infrastructure funding.
While enhanced public capital spending was the prominent theme of the Budget, Jaitely could not achieve the same as much as he wanted even after digressing a bit from the fiscal consolidation road map and vowing, now, to achieve the end-of-the-road fiscal deficit target of 3% for the Centre in FY18, instead of FY17 as decided earlier. While the FY15 fiscal deficit target of 4.1% was to be met, the deficit would be 3.9% next year compared with 3.6% envisaged earlier and 3.5% in FY17. Net borrowing by the Centre is pegged at R4.56 lakh crore in FY16 compared with R4.47 lakh crore in FY15.
The effective revenue deficit, which excludes revenue expenditures in the form of grants for creation of capital assets, was projected to increase to 2% of GDP in FY16 from 1.8% in FY15 and 1.6% in FY14, reflecting how badly revenue productivity has been hit over the past two to three years.
Saturday’s Budget, which made several heartening announcements for corporate India, foreign investors, small-scale units, the agricultural sector, rural India and players in the infrastructure space, assumed a tax buoyancy of 15.8% in FY16, reckoning a nominal GDP growth of just 11.5%. Not every analyst would take this for granted, given that despite the nominal GDP growth being seen to be close to 2 percentage points higher in the current year, growth in the Centre’s gross tax receipts was just 9.9%. Jaitely’s caution on estimating the total expenditure, despite being very low for an economy of India’s size, is indeed par for the course.
Given that service tax collections fell 22% in FY15 and the need to raise it to conform to the goods and services tax to be launched on April 1, 2016, the rate was hiked from 12.36% (including cess and surcharge) to a flat 14% and the negative list pruned to widen the net. (Service tax buoyancy for next year is seen at a bullish 24%.)
Excise duty increased marginally to 12.5% from 12.36%. To spur revenues, Jaitley relaunched strategic sale of PSUs including profit-making ones, and aimed to garner Rs 28,500 crore in FY15. This would take the “non-debt capital receipts” to Rs 80,258 crore for FY16, up from Rs 42,236 crore in FY15, despite the PSU disinvestment proceeds expected at just Rs 41,000 crore next fiscal and no provision being made for sale of government stake in private companies. Finance secretary Rajiv Mehrishi later told reporters that the closed-ended exchange-traded fund to be launched with the government’s SUUTI stakes were valued at Rs 50,000 crore.
Impatient for double-digit growth, Jaitley promised India Inc that the tax on their income will be reduced to 25% over four years from the current 30% (various incentives that currently let them enjoy an average effective tax rate of 23% will, however, be removed during the period) and deferred the dreaded General Anti-Avoidance Rules to prospectively apply from April 1, 2017. Developers of real estate or infrastructure investment trusts (REITS and InvITS), like the investors in these trusts’ securities, would now enjoy a concessional capital gains regime.
Jaitely vouched for a modern monetary policy framework, the Indian Financial Code, and merged the Forward Markets Commission with the Securities and Exchange Board of India to converge regulation of various segments of financial markets. He also announced a clutch of changes in capital market regulations to channelise external savings to India: Issuance of depository receipts on all permissible securities, international settlement of Indian debt securities and 5% concessional withholding tax to all bonds issued by Indian corporates abroad for all sectors and extension of the scheme to June 30, 2017. Indian depository receipts, he said, would be revamped to create a “more liberal” version called Bharat depository receipts. Offshore funds that employ fund managers in India got a major relief as it was clarified that mere presence of a fund manager in the country will not constitute a permanent establishment, meaning their income in other countries will not be taxable in India, even if transactions were advised or executed by a manager in India.
Other steps aimed to enthuse foreign investors included a lower withholding tax on royalty paid to a foreign associates of Indian firms and the clarification that the minimum alternate tax won’t be applicable to foreign institutional investor. It was also clarified that tax claims on offshore sales of Indian assets could be made only if at least 50% of the value is derived from Indian assets, which is not less than Rs 10 crore.
Jaitely proposed to amend the Foreign Exchange Management Act to provide that control on capital flows as equity would now be under the government’s domain, although the RBI will be consulted, the rationale behind the move being to put in place a single-window system for approval, in sync with the Modi government’s Make in India slogan. Another decision favouring overseas investments in India is the one to make foreign investments caps composite, including FDI and FPI/FII; this, experts said, would give Indian firms greater flexibility in seeking foreign investments, although FIPB approval will be a must if there is a transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities.
Jaitley proposed to set up a National Investment and Infrastructure Fund (NIIF) and envisaged fund flows of Rs 20,000 crore to it, enabling it to raise debt and, in turn, invest as equity in infrastructure finance companies such as the IRFC and NHB. Acknowledging the weakness of the extant public-private partnership (PPP) framework despite some stellar examples of success, the minister promised to develop more nuanced and sophisticated models of contracting and a speedier dispute resolution mechanism.
The Budget had a conspicuous focus on rural India and the farm sector, even as it laid out a social security net for sections of population. The corpus of the Rural Infrastructure Development Fund, supported by Nabard, has been hiked by Rs 5,000 crore to Rs 25,000 crore in FY15. To catalyse venture capital funding to the MSME sector, a Rs 10,000-crore fund will be created that will provide all forms of support — equity, quasi equity, soft loans and other risk capital — for start-up firms, Jaitley said.
The MSME sector has also been in focus, and a Micro Units Development Refinance Agency (MUDRA) Bank, with a mandate to refinance microfinance institutions, has been set up with a corpus of Rs 20,000 crore, and credit guarantee corpus of another Rs 3,000 crore.
The net resources to be transferred to states by the Centre will rise 23.24% to Rs 8.42 lakh crore, including states’ share in taxes and duties that will increase 55% to Rs 5.24 lakh crore. The Centre’s Plan size, which dipped to Rs 4.26 lakh crore in FY15 from the previous year’s Rs 6 lakh crore, will increase to Rs 5.78 lakh crore in FY16, thanks to an increase in PSU resources from Rs 2.37 lakh crore in the current year to Rs 3.18 lakh crore next year. While the aggregate transfers to states as a share of the divisible pool has gone up from 61.88% in Budget estimate FY15 to 62.75% in FY16, this included various modes of central Plan transfers to states.
Among the 66 centrally sponsored schemes, financial support from the Centre has been withdrawn for eight, according to the Budget papers, while in the case of another 24, states will now have to contribute a higher share. However, in the case of 31 schemes, including MGNREGA, Sarva Shiksha Abhiyan (financed from education cess), and cess-backed Pradhan Mantri Gram Sadak Yojana, the Centre will continue to extend full financial support.
* Expenditure, which as a share of GDP peaked at 15.8% in FY10, has since steadily declined, to 13.3% in FY15 and a projected 12.6% in FY16
* Centre’s subsidy bill to decline 8.6% to R2.44 lakh crore in FY16
* FY15 fiscal deficit target of 4.1% to be met; deficit to be 3.9% in FY16, against 3.6% aimed earlier