Budget 2016: A Fiscal Perspective

The role of fiscal policy is three fold: to maintain macroeconomic stability, to play a role in income redistribution and to have a fair allocation of resources.. The 2016 Union budget has met the first task head-on and commendably well. On the second, there are doubts due to rise in indirect taxes and their regressive nature. On the third point, one has to look at the host of subsidies to increase rural demand and growth in rural India.

On a macro-level, most of India’s indicators look good. Inflation is moderate and under control. The Current Account Deficit (CAD) is around 1 percent of GDP and India has foreign exchange reserves in excess of $350 billion.

Given that India’s indicators were good, the government could have leveraged them and gone for a higher fiscal deficit target for January 2017. However, the big question got answered when Jaitley committed to 3.5 percent. Most analysts had predicted an increase in the fiscal deficit target to about 3.7-3.9 percent of GDP. That didn’t happen and for two major reasons.

The first being that maintaining credibility of the government is key. In the past three years, there has been a consistent decline in fiscal deficit by 0.5 percentage points and the government would want to stick to the same trajectory, especially after giving its word to the markets. The markets need to believe that the government will keep its promise.

Second reason was to give some more room to the RBI to lower interest rates. So, we can expect monetary easing and the RBI becoming more accommodative in the months to come. An interest rate cut, keeping tab on inflation numbers as well, could very well be in order.

This year, the outlay for wages has increased by 55 percent and the pensions are up by 28 percent due to the 7th Pay Commission and One Rank One Pension (OROP). While, there was great concern on how the center would raise its earnings to finance these outgoings, the answer came in the form of renewed number of cesses and surcharges.

In 2015-16, the government had expected to collect a surcharge/cess of Rs 1.96 lakh crores. The number is now up to Rs. 2.66 lakh crore for FY 2016-17.

Financial year 2015-16 has been a good year for the tax earnings. The estimates for tax revenue growth Rs were 9.19 lakh crore. But the revised estimates stand around Rs 9.47 lakh crore, surpassing the budgetary estimates. Given that the revenue deficit indicates a shortfall, the figures show a reduction in shortfall. This adds to national savings and makes the country less dependent on the foreign capital. The projected figures for tax revenues in FY 2016-17 currently stand at 10.54 lakh crore.

Everyone had their eye on the investments the government was likely to forego. Total dis-investments are shown to bring in 56,5000 crores in FY 2016-17. But, from previous years’ analysis, the budgetary numbers on disinvestments are to worry about. For FY 2014-15, the budget estimates for dis-investments were 63,425 crores but the actual figures were at 37,736 crores. For FY 2015-16, the same story repeats itself- the budgeted estimates were at 69,500 crores but they have been revised to 25,312 crores. Seeing this trend, it will be worrisome if the government won’t be meeting its target.

This year’s budget has increased spending considerably on various Centrally Sponsored Schemes (CSS). This, most definitely, will help cope-up with the slowdown looming over the world at large. Given that consumption, investment and net exports growing slow, increasing the government spending is the only way to increase demand and growth.

Although, even last year, the government ended up spending more than what it expected. MNREGA was budgeted at Rs 33,000 crore but the government spent in excess of Rs 35,000 crore. Similarly Pradhan Mantri Gram Sadhak Yojana had a budget estimate of about Rs 10,100 crore. But the government ended up spending 15,175 crore. For ICDS as well, the spending was almost 80 percent in excess of its budgetary estimates.

For 2016, the spending figures are high on almost all Centrally Sponsored Schemes. MNREGA is up to 38,500 crore, from 35,753 crore. PMGSY is up to 19,000 crore from 15,100 crore this year. Sarva Shiksha Abhiyan and Mid-Day Meal schemes are up to 32,200 crore in FY 2016 from 27,000 crore estimated last year. The government has also allotted 2.87 lakh-crore in grants for gram panchayats and municipalities - this is a jump of 228 percent.

These efforts clearly show an unmoved focus to push rural India and generate demand in areas that would be supposedly worst affected. Increasing FDI to 100 percent in food storage and processing industry was also a welcome move by the government in the same respect.

To collect enough money to meet its spending targets, the government has changed the tax structure. Even though the income tax slab is largely the same, the larger change is brought about in the indirect taxes that are to be levied. A Krishi Kalyan cess of 0.5 percent will be enforced henceforth. There will be an extra infrastructure and another agricultural cess that will be levied on commodities. A pollution cess of 1 percent on petrol and 2.5 percent on diesel cars will be charged. High-end cars and SUVs will face an extra tax of 4 percent. The tax on tobacco products has gone up by 5 percent. An extra 1 percent tax on articles of jewelry and cars (above 10 lakhs) will also be levied to collect taxes. The taxing of interest rates on EPF from 1st April 2016 will need some time to digest, but the implications of the move are yet unknown.

Now, while a lot of the increases in the taxes are on expensive products that would not directly affect the poor, indirect taxes in principle are regressive. When consumption is taxed, the proportion of income of the high-income person taxed on the same product will be lesser than the proportion of income of the low-income person. In effect, the person earning less will have to pay a higher price for the same good than the person earning more. Thus, that seems to be an area where this government will have to significantly change the way it is looking at tax collections.

The biggest criticism has to be the recapitalization of bank loans. RBI estimates 4.3 lakh crore as stressed assets and NPAs. Under the Indradhanush mission Rs. 70,000 crore. were announced last August. But, in addition, only 25,000 crore have been announced in this year’s budget. The government has to probe this problem and balance out its fiscal expenditures keeping such restructuring measures into account as well.

The budget seems balanced, although revised estimates in 2017 will be the true judge of the effectiveness of this budget. Weight has now shifted on RBI to work its magic