• The Budget has laid a credible foundation for repositioning India along the lines envisaged by the Government
• A fine balance has been struck between growth and fiscal consolidation through a broad based set of reforms
• At the same time, the Budget focuses on inclusion, improving transparency and enhancing the ease of doing business

 

Budget for New India
The Budget has tried to address most of the pending issues in the economy and has taken a bold step in the fiscal consolidation roadmap. Although we think the shift in consolidation path was warranted given our investment needs, however we will closely watch for any slippages, which are unproductive in nature as they might easily become inflationary.

 

Balancing fiscal consolidation with the growth objective
The fiscal consolidation roadmap has been pushed back by one year and the FY2016 deficit has been pegged at 3.9% instead of the expected 3.6%. We will construe this positively as it signals the need for an increase in public capex spending especially for infrastructure. In an environment where private sector is not yet incentivized to add capex, the Government’s initiative is welcome to kick start the process.

 

Encourage financial savings and leverage technology
In order to encourage shift from physical saving towards financial saving, especially gold, the budget has taken a series of steps to monetize the significant gold stock in the economy and also to deter incremental consumption. Some such steps are introduction of sovereign gold bonds and modifications to gold deposit scheme. The thrust towards increasing exemptions for pension schemes is also positive. Further, the Jan Dhan, Aadhar and Mobile (JAM) number, will be utilized for better targeting of subsidies, promote financial inclusion and achieve a cashless India.

 

Progressive change in tax regime
The introduction of GST by April 1st 2016 is likely to improve tax buoyancy by developing a common market and reduce the cascading effect on the cost of goods and services. In the process of implementing GST, service tax rate has been hiked to 14%. Other sources of boosting tax revenues have also been explored such as additional surcharge on the super-rich. The emphasis on having a non-adversarial tax regime by providing clarity on GAAR and making tax laws friendlier for foreign investors would help in boosting investments as well.

 

“Make in India” initiative to support manufacturing sector growth
The “Make in India” imprint was visible across various segments of the budget and the need for skill development was highlighted. To support
industry, corporate tax rate will be reduced from 30% to 25% next year onwards. Measures such as infrastructure fund, additional depreciation
allowance for power, tax free bonds for infrastructure, single window clearance etc are welcome.

 

New monetary policy framework and movement towards DMO
The Government has accepted RBI’s policy framework of inflation targeting and has also signaled its intent to set up a debt management office, which is a commonly accepted practice globally.

 

Improved transparency and governance
The focus on improving governance and fostering increased transparency and compliance in the economy are most welcome. In this regard initiatives such as the black money legislation and PAN requirement for real estate purchases etc will go a long way in achieving this objective.

 

Key highlights for fiscal arithmetic for FY2016

• Fiscal deficit budgeted at 3.9% of GDP versus 4.1% in FY2015
• Gross tax revenue growth budgeted at ~16% YoY versus ~10% YoY in the current fiscal
• However, given the large tax devolution to states (INR 5240 bn at 55% YoY), the net tax revenue growth has been budgeted at only 1.3% YoY
• Disinvestment target increased to INR 695 bn versus INR 313.5 bn in FY2015
• Spectrum auction receipts budgeted flat at ~INR 430 bn
• After cutting plan expenditure by INR 1071 bn as compared to budget targets in order to meet the fiscal deficit target in FY2015, the Government has shifted focus towards greater investments
• Expenditure allocation indicates an increase in capital spending, with a budget allocation of INR 2415 bn versus prior of INR 1924 bn
• Major subsidies (food, fuel & fertilizer) have been budgeted to reduce to by ~INR 270 bn in the next fiscal to 1.6% of GDP from 2.0% of GDP in FY2015
• Net borrowings have increased to INR 4564 bn in FY2016 versus INR 4469 bn in the current fiscal. Consequently, gross borrowings (after including the redemption pressures) have been budgeted at INR 6000 bn, only INR 80 bn higher than FY2015.

Highlights of Budget FY2016

1. Balance fiscal consolidation with growth

• Fiscal consolidation:
  • 3% medium term fiscal deficit target to be achieved in 3 years (as against 2 years earlier)
    • FY2016: 3.9% of GDP
    • FY2017: 3.5% of GDP
    • FY2018: 3.0% of GDP
  • Devolve ~42% of gross tax revenues and total transfers to states (including grants) would be 62% of total tax receipts
• Prop up capital spending in order to crowd in private investment
  • The increased fiscal space utilized to step up capital spending with a budget allocation of INR 2415 bn versus prior of INR 1924 bn
  • Increase infrastructure investment by INR 700 bn
  • Embraced states as equal partners for growth
  • Focus to limit unproductive spending: Major subsidies (food, fuel & fertilizer) have been budgeted to reduce to by ~INR 270 bn in the next fiscal to 1.6% of GDP from 2.0% of GDP in FY2015

2. Boost financial savings

• Monetisation of gold holdings in the economy
  • Propose to develop a sovereign gold bond
  • To introduce gold monetization scheme to allow depositors to earn interest in their metal accounts and the jewellers to obtain loans in their metal account to be introduced
  • To introduce India-made gold coin to reduce demand for foreign gold coins
• Support provided to National Pension Scheme
  • Additional deduction of INR 50,000 for National Pension Scheme (section 80CCD)
  • To allow exemption of INR 1.5 lakhs for National Pension Scheme

3. Focus on Make in India

• Tax incentives to corporate sector
  • Reduce corporate tax from 30% to 25% over the next 4 years
  • To rationalize and remove exemptions for corporates (from next fiscal)
• Support towards infrastructure sector
  • To increase infra investment by INR 700 bn
  • To establish National Investment and infrastructure fund: to get annual flows from the Govt of INR 200 bn and then invest in equity of IRFC and NHB etc. They would then leverage this manifold
  • Tax free infra bonds for projects in rail, road and irrigation projects
  • To allocate INR 250 bn for rural infra
  • To set up 5 ultra-mega power projects
  • Balance of 50% of additional depreciation @ 20% for new plant and machinery installed and used for less than six months by a manufacturing unit or a unit engaged in generation and distribution of power is to be allowed immediately in the next year
  • To introduce regulatory reform law for infra
  • Step up progress on DMIC
• Attract foreign investment flows
  • To allow foreign investment in alternative investment funds
  • To do away with distinction between FPIs and FDI. Replacement with composite caps
  • Will not subject capital gains by FIIs to Minimum alternate tax

4. Progressive change in the tax regime

• Path laid for implementation of GST by 1st April-2016
  • Service tax rate hiked from 12.36% to 14%
• Plans to introduce direct tax regime that is internationally competitive on rates without exemptions
• Other sources of revenue explored
  • To tax super rich: replace wealth tax with an additional 2% surcharge for incomes over INR 1 crores
  • Rate of central excise duty on some commodities rounded off to 12.5%
• Clarity on adversarial tax regimes
  • Defer the applicability of GAAR by 2 years
  • To apply prospectively to investments made on/after FY2017

 

5. Leverage technology

 

Utilize a Jan Dhan, Aadhar and Mobile (JAM) number - for direct benefit transfer, promote financial inclusion and achieve the objective of a cashless society

 

6. Social initiatives

• Allocates INR 346.99 bn for rural employment guarantee scheme
• Housing for all - 2 crore houses in urban areas and 4 crore houses in rural areas
• To launch National Skills Mission for rural youth
• Propose to create a universal social security system for all Indians

 

7. Increased transparency and governance

• Black money
  • Introduce a bill in the current session
  • Concealment of income/asset and evasion of tax will be prosecuted
  • Tough penalties to be imposed
• To bring a new bankruptcy code in 2015/16
• Ease of doing business
  • E-business portal: 14 regulatory permissions in one source and
  • Replacing regulatory permission with preexisting framework

8. New monetary policy framework and movement towards DMO

• The Government has accepted RBI’s policy framework of inflation targeting
• Also, the Government plans to set up a public debt management agency (currently, the RBI is undertaking this role)

 

9. Other important announcements

• REITs
  • Sponsors are not subject to paying full capital gains at time of listing, making it at parity to equity IPOs
  • Entire rental income from a REIT is a pass-through, and will be taxed at individual/corporate tax rate
• Farm credit target increased to INR 8.5 lakh crore in FY2016
• Set up task force to create Finance Sector Redressal Agency
• Propose to increase visa on arrival to 150 countries in stages
• Propose to merge commodities regulator with SEBI
• NBFCs with size more than Rs500cr (registered with RBI) will get SARFAESI benefits

 

Video on Pre-Budget Expectations

Hear what Lakshmi Iyer, CIO (Fixed Income), Kotak Mahindra AMC, had to say about expectations from the budget before it was released. She explains why the bond markets were keenly watching out for the fiscal deficit number, the likely influence of inflation on bond yields and the probable risks that debt market investors should be mindful of.