The proposals of the Union Budget have resulted in palatable fiscal numbers. This has been done by providing incentives where they were due and cutting expenses or raising tax rates to balance the fiscal sheet, which is always a challenge. In doing so, there are some bold assumptions made or certain stances taken which we may have missed. Also, the proposals have been iced with some new initiatives to be taken.
Do they all fit in?
Some of the optimistic proposals relate to the disinvestment process. It has become a habit to target a high number, which is to be R69,500 crore this year. The issue is that the ability to get close to this number requires the capital market to be buoyant and the procedures to be followed. Unless the attempt is made from April, it is a touch-and-go affair, as delays can coincide with unfavourable market conditions which have come in the way of this programme.
Interestingly, in the last five years, where the initial target has been above R30,000 crore, in only one year—FY13—we have come close to the target when 86.3% of the R30,000 crore target was realised. In all other years, the realisation was lower, at 57.1% in FY11, 45.2% in FY12, 52.6% in FY14 and 49.4% in FY15. With static expectations in FY16, the realisation, in fact, could be in the region of R35-40,000 crore this year.
Second, the Budget talks of the creation of the MUDRA Bank—to be formed with a corpus of R20,000 crore—which will be involved with providing refinance to MFIs lending to small units. There is no provision in the Budget for this venture, which means that the formation of this bank would be from outside the Budget with probably only the initial capital coming from the government. This would not have been an issue but for the fact that the big bang announcement last year on 100 smart cities has not quite taken off. The Budget for FY15 had allocated R7,016 crore for 100 smart cities along with JNNURM, while the actual amount spent was R924 crore. This anchor project, which was to bring in strong linkages with manufacturing and investment, has an allocation of just R143 crore in FY16. Therefore, one may have to wait and watch as to how this project takes off.
Third, there has been some enthusiasm on the lowering of the corporate tax rate from 30% to 25% from FY17 onwards. However, this comes with a rider that the exemptions given would actually come down or be removed completely once this is implemented fully. The net result is always important. The Budget document does give some numbers of the tax rates and tax paid for a set of 5.64 lakh companies in FY14. The calculation is that the effective tax rate is 23.2%, which is much lower than the nominal tax rate of 30%-plus surcharges. However, assuming that the exemptions go and that profits before tax on the P&L account are taxed at 25% now, the overall tax paid would be higher than the R2.58 lakh crore paid currently by R20,000 crore. Therefore, we may have to moderate our cheer on this score.
Fourth, contrary to the perception that the government would be more severe with social spending, the Budget has actually retained the spending levels and increased them at times. The food and fertiliser subsidies have been increased while the flagship NREGA programme has been retained and overall allocations for the rural economy increased for FY16. This is remarkable because it shows that fiscal prudence can still be maintained by not giving up on social spending. The positive part is that the stated approach is to make the money work better by plugging leakages and ensuring better delivery of services. This focus has been highlighted by the higher allocation for interest subvention, which is to increase by R3,500 crore this year.
Fifth, there is once again a strong reminder for public sector banks on the capital front. The allocation is lower at R7,940 crore, which may not be adequate for them. This is an indication that the current financial year may witness either mergers of public sector banks or a sale of equity up to 52%, depending on how the government views it. Given that the commercial ratios of ROA and ROE are to be used to see which banks qualify for capital infusion, there could be something significant in both the areas of disinvestment and M&A in the coming year, which has not been clearly spelt out.
Sixth, the Budget evokes positive sentiment by talking of three gold schemes. But will they work? Providing a return of 2-3% will not be adequate to get one to monetise their gold. Further, a bank recycling gold would run a high price risk as well as cost of conversion charges. If sold to jewellers, the deposit holders have to be given the gold after the tenure, which will involve a price change. Would banks be willing to take on this job? Besides, we would only be deferring the import of gold to another date, hoping all the while that there is a rollover. The Budget also talks of a sovereign gold bond which works on the price of gold. Who will pay the interest on this bond? It has to be the government? Will it be attractive? Today, there is an active futures market for investors and hence such a paper certificate may not be too attractive. If it does work, then there would be a cost borne by the government and it could just end up getting in fresh investors while the traditional buyers of the physical asset remain unchanged. Last, a gold coin from India would also need gold to be brought from somewhere, i.e. imported. Will this mean the same gold being imported by different entities?
Last, the total revenue foregone in FY15 has been put at R5.89 lakh crore on account of all the four taxes—corporate, income, excise and customs—compared with R5.49 lakh crore in FY14. Can we expect that, going by the proposal to eliminate exemptions for corporates, we could soon see the government working towards the same for the other taxes too? The DTC smelt like this.
The author is chief economist, CARE Ratings. Views are personal