Union Budget: Social Sector & Infrastructure Are Two Focus Areas
The targeted spending in areas like farming, rural sector and infrastructure can be gauged from the fact that the budget has set aside over Rs 4 lakh crore for initiatives in these areas, which is 21 per cent of the total budget spend of Rs 19.78 lakh crore
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The Union Budget for financial year 2016-17 has its priorities set out in the 9 pillars that will transform India. Ahead of the budget, there was one school of thought that advocated big ticket spending to boost growth while deviating from the path of consolidation as laid out by the FRBM Act. However, the finance minister has been prudent to stick to the FRBM road map keeping the fiscal deficit target at 3.5 per cent for the next financial year. Having decided this, the Budget becomes essentially a zero sum game of figuring out where to raise resources and where to deploy them.
Instead of spreading the expenditure side too thin, the budget has focused on spending on the rural, infrastructure and social sectors. Given the poor monsoons for two consecutive years, there is distress in rural India and the government needed to provide some relief. The social sector and Infrastructure are two focus areas of this Government so it was not surprising to see these two areas getting allocations as well.
The twin goals of connecting the remaining 65,000 eligible habitations by constructing 2.23 lakh km of roads by 2019 and electrifying all villages by May 1, 2018 may look ambitious but they are laudable and achievable. Roads, rail and power lie at the heart of economic development and their combination has the potential to transform the rural landscape by creating small scale units, generating new jobs and putting more spending power in the hands of our rural brethren.
The targeted spending in areas like farming, rural sector and infrastructure can be gauged from the fact that the budget has set aside over Rs 4 lakh crore for initiatives in these areas, which is 21 per cent of the total budget spend of Rs 19.78 lakh crore. However, Capital expenditure - the better quality of expenditure as opposed to revenue expenditure - has seen a marginal increase in this Budget.
As always though, the expenditure side's efficacy is dependent on execution. Given the increase in capital outlay this time, the government will need to ensure that every rupee of its capital expenditure of Rs 2.47 lakh crore, which is up just about 4 per cent over revised estimates for 2015-16 , is indeed effectively spent to create assets, generate employment and augment growth.
India's banks, which lie at the core of the financial system, have been grappling with rising bad loans. While the budget set aside 25,000 crore rupees for recapitalization of public sector banks, the RBI followed this up with some guidelines that augment bank capital by a similar amount. The Bank Board Bureau, which will be operationalized from April 1, would hopefully set off consolidation of the smaller banks. Similarly, the Bankruptcy Code which can be expected in the next financial year, should provide specialized resolution mechanisms to deal with bankruptcy situations. The series of measures to make asset reconstruction companies more robust while enhancing their capacity to raise more capital should be seen as yet another step to tackle stressed assets. A vibrant asset reconstruction framework will ensure that a chunk of bad loans can be taken off the books of the banks and sold to the ARCs.
With the government borrowing budgeted at well below market estimates, bond yields have already dropped and could rally more in the event of a rate cut by RBI. This should help bank treasuries boost their income.
On the revenue side, the Budget is perhaps less imaginative. Going after the usual suspects of cigarettes, luxury goods, cars and the HNIs does not signal much of a change from what was expected. Rumours of an estate duty and a long-term capital gains tax were belied but the tax on Provident fund contributions and withdrawals seems to go after the last bastion of the Indian saver. Hopefully this provision will be reconsidered.
The break-up of the budget numbers tells us that projected growth in tax revenue is not unrealistic. Against 17.23 per cent increase in gross tax revenue for 2015-2016, the Government has projected only about 11.73 per cent growth for 2016-17 with implied revenue buoyancy of 10.83 per cent for FY17 v/s 10.76 per cent for FY16. Hence we feel that the Government has kept some buffer here to cushion slippages, if any, on account of say divestment or spectrum auction proceeds.
On the whole, the budget is a good balancing act within the constraints imposed by the FRBM. We need good implementation on the ground and an ongoing effort to make it easier to do business in India and to create jobs. With the budget behind us, all eyes are now on the crucial legislation of GST. If the government is able to push it through Parliament, it will surely amplify the India growth story.
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