Sticking to the target of 3% fiscal deficit by FY18 will help keep interest rates at a moderate level
Budget FY16 presented by finance minister Arun Jaitley was the first full-year budget for the current Government and, as such, it was expected to be a landmark document. We have not been disappointed as the vision laid out in the Budget speech has something for all sections of society while transforming the economic narrative of the development process.
As mentioned by the finance minister, the economic environment for the country is far more benign than in the recent past. With GDP growth recalculated at 7.4% for the year, inflation down by 6 percentage points, contraction in the current account deficit, and stabilisation of the rupee, forecasts for India have been more optimistic than for other emerging economies. The government has built on the better climate by introducing a number of seminal reforms during the last nine months which, taken together, have dramatically improved the outlook.
However, despite this, the Indian economy remains vulnerable to slowing global conditions as well as deceleration in savings and investment rates. With private sector still under duress, it was incumbent on the government to raise its own spending. This was challenging due to the added outgo to the states under the recommendations of the 14th Finance Commission as well as future spending on account of the 7th Pay Commission. Hence, the deferment of fiscal consolidation by a year is reasonable and, in fact, necessary in order to crowd in private sector investment. As the government has also committed to working with Reserve Bank of India on inflation targeting, the fiscal deficit target of 3.9% for FY16 and 3% by FY18 would need to be strictly adhered to. This would help keep interest rates at a moderate level.
The strategy of increasing public investments in infrastructure is accompanied by definitive steps to boost private sector investments. As mentioned in the Economic Survey, about 7% of the GDP is locked up in stalled projects, and if unlocked, these funds can be redeployed through Real Estate Investment Trusts and Infrastructure Investment Trusts. Thus, sponsors have been permitted to exit through a rationalised capital gains regime and pass-through facility to rental income of REITs.
The infrastructure mission has received high attention in the Budget. Five ultra-mega power plants of 4,000 MW each have been announced. Importantly, the private sector has been encouraged by a promise to review the public private partnerships (PPPs)to allocate risks more effectively. The proposed policy for offering projects to private sector bidders after all clearances and approvals have been obtained would greatly reduce the risk profile of PPP as well.
The deferment of the General Anti Avoidance Rules (GAAR) by two years is a significant step that was suggested by industry. The Budget also mentions indirect transfers in the Income Tax Act, dispute resolution, and avoiding retrospective taxation for imparting stability and predictability to the tax regime. The intention to reduce corporate tax rates in line with prevailing rates in other emerging economies over the next four years is a welcome initiative that industry had been requesting for.
The FM has announced the commitment to introduce Goods and Services Tax on the stipulated date of April 1, 2016, and we would hope that the Constitutional amendment legislation would be passed in time. The GST must have a reasonable revenue-neutral rate and subsume all taxes while covering all sectors for maximal efficiency. The Budget encourages smooth transition to GST by increasing the service tax to a consolidated rate of 14%. A number of issues have also been addressed in customs duty to avoid anomalies and inverted duty structures. The annexure to the Budget emphasises job-creation by tweaking excise duties on industry sectors like electronics, medical devices, and solar power equipment, among others.
The savings imperative has not been neglected in the Budget and this has been converged with the imperative for social security. Thus, insurance and pension instruments have been leveraged to strengthen social security provisions, with the government contributing for certain sections of society. Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana, and Pradhan Mantri Jeevan Jyoti Bima Yojana would cover each citizen of the country. A comprehensive plan for monetising gold has also been outlined including through a sovereign gold bond and an Indian gold coin. Steps to increase tax-free infrastructure bonds and raise exemptions for health insurance would also build up savings.
Flagship projects of the government have found special attention in the Budget. The Swachh Bharat mission will be accelerated through a cess on taxable services and clean energy cess on coal will be enhanced. However, the smart cities initiative is not mentioned in the Budget speech. The Skill India mission is expected to be introduced shortly, and the rural youth would be empowered through digital vouchers directly in their accounts. We would have expected the Budget to raise the expenditure on public education to 6% of the GDP as a strategic goal.
There are several innovative steps in the Budget. The direct transfer of benefits is a game-changer made possible by Aadhaar and financial inclusion under the Jan Dhan Yojana. Special cells for commercial disputes would be established in law courts. A globally-aligned bankruptcy law would also provide much comfort to new entrepreneurs. Start-ups will find much encouragement in the R20,000-crore MUDRA, or Micro Units Development Refinance Agency, and SETU or Self-Employment and Talent Utilisation mechanisms. The Unified National Agricultural Market when instituted could greatly improve farmer incomes, while irrigation has been mentioned as one of the infrastructure thrust areas.
The options provided to workers to choose instruments other than Employees Provident Fund and Employees State Insurance are new as well. The black money scourge has received comprehensive attention through various punitive measures.
With clear vision, defined targets and a range of innovative steps, Budget FY16 emerges as a potent instrument to increase savings, investment, growth and jobs.
The author is director general, CII