The finance minister has delivered a mildly expansionary, business-friendly Budget that prioritises a return to 8-8.5% GDP growth in FY16 via a mix of tax reform and accelerated capital spending, particularly on infrastructure
Given the fevered speculation that surrounded the build-up to this Budget, there was always a risk that sky-high expectations would be disappointed. The Budget was never in reality ‘make or break’ for Modinomics that some had characterised it as, but the NDA administration’s floundering reform drive clearly needed a shot in the arm. Finance minister Arun Jaitley has on balance done the minimum required, delivering a mildly expansionary, business-friendly Budget that prioritises a return to 8-8.5% GDP growth in FY16 via a mix of tax reform and accelerated capital spending, particularly on infrastructure. While no damp squib, the Budget leaves a somewhat anti-climactic taste in the mouth.
Key measures were the cuts to corporate tax from 30% to 25% over four years and R70,000 crore of infrastructure spending including a plan for five UMPPs of 4,000 MW each, which would boost electricity generation by 2%. Total capital spending is budgeted to increase by an eye-popping 25.5%, recouping much of the ground lost by FY15’s dismal 2.5% growth, which was vital in keeping the FY15 deficit target of 4.1% on track. Other key measures included a significant lift in the income-tax benefit level and deferring the implementation of GAAR by a further two years. The commitment to the introduction of GST by FY17 was reaffirmed but little, if any, detail was provided.
What of the Budget’s broader tax and spending assumptions? A key feature of recent Budgets has been overoptimistic assumptions on economic growth, tax revenues, privatisation proceeds and subsidy control, which has left capital spending budgets to take the strain when these elements have disappointed. The assumption for nominal GDP growth in FY16 is a sober 11.5%, while net tax revenues to the Centre, restrained by greater revenue devolution to the states, are assumed to rise by a meagre 1.5%! One concern is that the Budget has pencilled FY15 net tax revenues growing by 11.4%. Given growth of just 5% in the first nine months of the financial year, the reaffirmed 4.1% deficit target for FY15 is far from assured.
The Budget’s assumptions on subsidies look reasonable. Led by lower petroleum subsidy spending, the Centre’s total subsidy bill is budgeted to fall from 2.1% of GDP in FY15 to 1.7% in FY16. Food and fertiliser subsidies are assumed to hold steady as shares of GDP. Total revenue expenditure is budgeted to rise by just 3.2% in FY16, implying unlikely restraint in current spending. Revenue expenditure has never grown this slowly in over 40 years! Disinvestment receipts are assumed to be worth R69,500 crore in FY16 or 0.5% of GDP. Given the experience of recent years (FY15 receipts likely disappointed relative to target by R32,075 crore), a shortfall here looks more likely than not.
The Budget pencils a slower pace of fiscal consolidation than previously targeted. FY16’s deficit is expected to only narrow a touch to 3.9% of GDP (previously 3.6%) and a 3% of GDP deficit is now targeted in FY18 rather than FY17 previously. While sovereign ratings agencies are unlikely to be overexercised by a modestly higher deficit profile over the next three years, RBI is likely to be underwhelmed by the Budget. The apex bank has emphasised ‘high quality fiscal consolidation’ as an essential corollary to looser monetary policy. The combination of an effective 0.3% of GDP discretionary fiscal loosening for FY16 that the Budget assumes and the optimistic assumptions on revenue expenditure and disinvestment proceeds probably rules out an unscheduled rate cut by RBI before its next Policy Review in April.
Jaitley probably did what was necessary to keep Modinomics broadly on track, but little more. The Budget is certainly no game-changer either for the economy or for RBI’s interest-rate calculus. Its pro-growth tilt should ensure that GDP growth continues to revive but optimistic assumptions on current spending and privatisation proceeds in FY16 may once again ensure that space for the planned revival in capex spending continues to be cramped.
By Richard Iley, Chief Asia Economist, BNP Paribas