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Column: Building Basics

Tax incentives for affordable housing is expected to propel demand. The budget also encourages MSMEs to set up businesses, leading to an increase in job creation.

Photo Credit : Umesh Goswami

The union budget 2016-17 is clearly focused on addressing stress in the rural economy, infrastructure, de-stressing the banking sector, and increasing efficiency of governance. It stresses on improving ease of doing business, rationalisation of taxation and development of a comprehensive digital infrastructure. The reorientation of government spending towards building infrastructure has continued, and more than Rs 2.2 trillion allocated to the infrastructure industry could prove to be a sizeable stimulus for economic growth. Sticking to the fiscal deficit target of 3.5 per cent for 2016-17 is a welcome development as it would create more space for monetary easing. Overall, the budget appears to focus on building the fundamentals of the economy.

The rural focus in this year’s Budget is strong. The farm sector has seen a 94 per cent increase in allocation, with crop insurance and irrigation being the biggest beneficiaries. While there is some push to irrigation, the coverage is far from adequate. It will have to rise rapidly to help increase the irrigated land ratio from the current low of 47 per cent of the total 141 million hectares of cultivable land and make agriculture less dependent on monsoons.

The proposed online national e-marketplace for farmers could prove to be a significant income booster for farmers. Additionally, allowing 100 per cent foreign direct investment into food processing and marketing might further help modernise agriculture, generate employment and improve farmers’ incomes.

Allocation for MNREGA (Rs 385 billion) is the highest ever budget spend; it will provide sizeable employment generation and stimulate demand. Also, the nationwide rollout of ATMs and micro-ATMs through the postal system will provide better access to financial services in rural areas. Increase in allocation under the Pradhan Mantri Gram Sadak Yojana to Rs 190 billion will, to some extent, cushion non-farm rural income through job creation.

High logistics cost, constituting around 14 per cent of India’s GDP, undermines India’s competitiveness. Thus, what India needs is an efficient transport system with a robust inter-modal connectivity that will have a multiplier effect on economic growth. To enable the road ministry to make progress towards its ambitious target of laying 30 km of road per day, the Budget 2016-17 allocated Rs 550 billion. Add this to the capital expenditure of the Railways and the total outlay will be Rs 2.2 trillion in 2016-17, which is expected to crowd in private investment.

The other key prerequisite for infrastructure growth is enabling public-private partnership (PPP). Measures such as a proposed dispute resolution mechanism and provision for renegotiation of PPP contracts have the potential to revive the PPP model.

Tax incentives for affordable housing is expected to propel demand. The budget also encourages MSMEs to set up businesses, leading to an increase in job creation.

A stable financial system is vital for ensuring healthy infrastructure growth. High non-performing assets prompted banks to turn risk averse; this problem needs to be addressed soon for banks to be ready to participate in the next round of economic growth. The Rs 250-billion recapitalisation plan announced is lower than the Rs 350 billion expected by investors. However, with the finance minister (FM) indicating that he will be open to additional funding support, we can expect more capital injection in 2016-17. Introduction of bankruptcy code, relaxation of norms for asset reconstruction companies and regulatory changes to speed up resolution of disputes/renegotiation of contracts in PPPs would help address asset quality issues in the banking system in the long run.

Clearly, the theme in terms of ease of doing business has been to minimise government and maximise governance. In line with this agenda, the government has constituted a task force for rationalisation of human resources in the government and in autonomous bodies.

The agenda of strengthening India’s social sector received an impressive Rs 1.5 trillion allocation. Innovations underlined several of the initiatives announced for education. Introduction of Navodaya schools, Sarva Shiksha Abhiyan to increase focus on quality of education, the 1,500 multi-skill training institutes and the National Board for Skill Development Certification to enhance employability mark the year’s agenda for Skill India.

The vision Ek Bharat Shrestha Bharat aims to make India more inclusive. A large number of digital infrastructure was proposed which are likely to make it easier for citizens to deal with the government.

Budget 2016 underlines the efforts that are being made by the current government towards a stable and predictable tax regime. The tax dispute resolution scheme will address the concerns of foreign investors embroiled in tax litigation arising from retrospective amendments in the past as they can now get a one-time settlement by paying only the tax arrears with waiver of interest and penalty liability. Another significant provision is reduced corporate tax rate of 25 per cent for new manufacturing companies (which do not claim any profit or investment linked deductions). Additionally, tax incentives to startups, rationalisation of penalties and PAN norms and abolition of insignificant cesses levied by ministries are all steps in the right direction. The FM also reiterated that having the GST and bankruptcy law passed are top priorities for the government.

A 10 per cent tax on dividends received in excess of Rs 1 million and increase in surcharge from existing 12 per cent to 15 per cent for non-corporate tax payers having taxable income of more than Rs 10 million seem to be in accordance with FM’s theme of taxing the rich more. Retiral schemes, including provident fund, have also been brought under the Exempt-Exempt-Tax regime to bring them on par with National Pension Scheme and would be taxable on withdrawals, though 40 per cent of such withdrawals would still be exempt from tax.

It is interesting to note that there is a proposal to set up a Centre-State Investment agreement that will ensure efficient and effective implementation of bilateral and multi-lateral treaties, in the given federal structure.

In sum, India’s Union Budget 2016-17, to a reasonable extent, can be termed as a balancing act between fiscal judiciousness and increasing public expenditure, as has always been the case. The focus this year is clearly on long-term economic growth, while ensuring that there is enough headroom for monetary easing makes it stand out as a balanced and mature budget.

The author is CEO, KPMG India

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Richard Rekhy

The author is CEO, KPMG India

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