India Union Budget

India Union Budget  F17 – 29^th Feb 2016

·         The budget has been made with an objective to give a boost to the Rural Economy, impetus to infrastructure investments , creation of more employment opportunities and giving a boost to the new ventures.

·         Close to Rs.1 trillion has been allocated for Rural development and Rs.2.2 trillion to give a push to infrastructure. A clear road map for number of KM’s of roads has been specified.

·         There is a stimulus for Real Estate and Infrastructure through making the tax aspects relating to REIT’s and INVIT’s more investor friendly. There is also an incentive for those who are buying houses valued at less than Rs.50 L and avail a loan of less than Rs.35 L. The income earned from Affordable housing projects has been made 100% exempt from tax.

·         The above measures are likely to increase the private consumption levels, create demand for infrastructure driven industries.

·         There is an attempt to reduce the incentives given for various investment schemes by individuals less attractive. Especially, the schemes relating to superannuation , Provident fund and investment in equity. Considering that out of total savings in India, less than 10% is invested in financial instruments, this move could reduce the share of financial instruments further in the investments made from savings.

·         There is a VDS scheme announced and schemes for settlement of Income tax dispute cases and they had factored in more than Rs.25,000 cr of additional tax from these schemes.

·         Considering the above measures and the implementation of 7^th Pay commission will keep the inflation above 5 – 6% levels going forward.

·         The Revised Estimate (RE) for Total receipts is Rs.17.85 trn, which was 0.45% higher than the Budgeted Estiamtes(BE) and it was higher than the previous year by 7.32%. The projection for F 17 is Rs.19.78 trn, a rise of 10.8% over the RE for F 16.

·         The RE for Gross tax revenue for F 16 was at Rs.14.59 trn, higher than the budget by 0.7% and 17.25% higher than the previous year. Considering that Banks and Corporates did not show such an high growth rate, the contribution to growth in tax has come from taxes on petroleum products and increase in Service tax. The projection for F 17 is Rs.16.30 trn, a growth rate of 11.7%. This will result in higher inflation.

·         After the share with the states, the net tax revenues in F 16 was at Rs.9.47 cr , only 3% higher than the budget. It was higher than the previous year by 4.86%. The projection for F 17 is 11.25% . In F 16, the tax shared with the States rose by 49.9% and it is likely to rise by 12.67% at Rs.5.57 trn.

·          Due to poor performance of corporates, the corporate taxes were lower than the budgeted level by 3.75% at Rs.4.53 trn. The assumption is that , it will rise by 9% to Rs.4.93 trn in F 17. Considering the very poor performance of corporates in F 16, if many corporates would be able to turn around the performance, the growth could be even higher at 12 – 15% over the previous year’s level.

·         Taxes on income was at Rs.2.99 trn, 8.7% lower than the budgeted levels in F16. They had assumed an increase of Rs.53,000 cr over the previous year, a growth of 18.1% in F 17. This has assumed a sharp rise , after factoring in the expected inflow on account of VDS and settlement of pending cases.

·         In F 15 , there was a collection of Rs.1086 cr of wealth tax. In F 16 there was no number shown and in F 17 it has been assumed to be nil. Considering the poor compliance on this count, they could consider scrapping the concept of Wealth tax. The administration cost of this tax would be higher than the expected collections under this account.

·         In Customs, the revenue was higher than the budget by 0.56% at Rs.2.10 trn and higher than the previous year 11.4%. Considering that the value of imports were lower than last year, despite the imported value of petroleum products dropped, the customs duties were maintained at the previous years’ levels, which was a positive in revenue generation. The growth projected for F 17 is only 9.8%, lower than the growth witnessed in F 16.

·         On Excise, they were planning to collect only Rs.2.29 trn. But they had collected Rs.2.84 trn, 23.6% higher than the budgeted level and 49.6% higher than the previous year. Whatever savings on import of petroleum products was protected through higher Excise duties on the petroleum products. In F 17, they expect Rs.3.18 trn, a rise of 12.2% increase over F 16.

·         Service tax collection was higher than the budget by 0.11% at Rs.2.1 trn. It was higher than the previous year by 25%. The projection for F 17 is Rs.2.31 trn, 10% higher than the previous year.

·         Interest receipts by the government was lower than the previous year at Rs.2.78% at Rs.23,804 in F 16 and it is likely to rise to Rs.29,620 cr , a rise of 28% over the previous year. Here the Government must have assumed issue of Bonus Debentures by PSU’s to share holders and receipt of Interest on such debentures.

·         In F 16 , they had assumed receipt of dividend of Rs. 1 trn and it was higher at Rs.1.18 trn. This was higher than the budget by 17.51% and higher than the F 15 by 31.7%. In F 17 the assumption is that Rs.1.24 trn, a rise of 4.66% over F 16.

·         Other non tax revenues. This includes Sale of air waves and disinvestments. The plan for F 16 was Rs.0.94 trn and the actual was Rs.1.12 trn, 19.6% higher than the budget and 38.99% higher than the previous year. The budget for F 17 is Rs.1.65 trn, Rs.53,000 cr higher than the previous year, 46.4% higher than the previous year.

·         They had assumed Miscellaneous capital receipts of Rs.56,500 cr, a rise of 123% over the F 16 level.

·         The strategy for  Market loans is to keep this at previous year’s levels. In F 16, it was lower than  F 15 by 2.75%. In F 17, it is assumed to be even lower by 3.5% at Rs.4.25 trn.

·         Short term borrowings in F 16 was higher than F 15 by 648 % at Rs.68,665 cr. It was higher than the budget also by 128.40%. The plan for F 17 is a reduction of 75% and the plan is to mobilise Rs.16,649 cr . Hence, the Government will not compete in short term funds market and the liquidity for others in the short term market should improve.

·         The amount raised through small savings in F 16 was higher than F 15 by 65.6% and budget by 138.39% at Rs.53,418 cr. There is a plan to reduce this to Rs.22108 cr , 58.6% lower than F 16.

·         Other Capital receipts in F 16 was negative at Rs.28,000 cr . In F 17 , it is likely to be higher by Rs.53,000 cr at Rs.25,677 cr.

·         In the expense category, Interest payments are likely to rise by 11.3% to Rs.4.92 trn.

·         Defence services will rise by 13.63% to Rs.1.43 trn.

·         Subsidies in F 16 was marginally than the previous year at Rs.2.58 trn. There is an assumption of a marginal reduction and this is expected at Rs.2.50 trn in F  17. They do not expect a big benefit from DBT and direct transfer scheme as the reduction is not substantial.

·         Pension payments rose by 2.26% in F 16 and it is expected to increase by 28.87% in F 17 and it is expected to be Rs. 1.23 trn, Rs.27,000 cr higher than the previous year.

Despite , the Economic growth coming below 8% , the collection by the government was very robust in F 16 and the projections for F 17 also assumes, significant improvement in revenue from many of the revenue sources.

In a crisis situation like this, the role of government in kick starting the higher economic growth is very critical. Some of the issues which are attracting the attention of investors are the Non Performing Assets in the Banking System and the poor performance of many PSU’s.

The PSU’s and PSB’s have hidden assets in terms of real estate assets and Capitalising them would help to bolster the balance sheets of the PSU’s and PSB’s.

Globally, the banking system is in bad shape and if they have to declare their real NPA’s, then the banking system will collapse. In a growing Economy like ours, there is a good scope for our banking system to recover. If they have to aggressively provide for NPA’s within a short period, then the health of banking system will deteriorate within a short period and the rating of the entities will go down thereby making the capital raising a difficult exercise. Hence we can look at experience of China, which at one time had NPA’s of more than 45% and the experience of other countries where NPA’s were very high. A window of 5 years could be given to provide for NPA’s.

Considering the various initiatives by the Government , it should be possible to achieve the desired growth levels and if there is any slippage in collection on account of any extra ordinary sources of income as assumed , it could put strain on the Fiscal deficit. Hence it is essential to prepare special action plans to generate revenue at regular intervals under the Other income categories.  Under the present assumptions, the deficit will be down to 3.5% , which would help to achieve a good country rating and enable the mobilisation of funds from foreign sources.

Like in F 16, For the next one year, the commodity prices are likely to be soft and this should facilitate the achievement of various objectives of the Budget for F17.