Prime Minister Narendra Modi stated that he faced an examination with the NDA government’s third budget for 2016-17. How did he fare? The stock market kept yo-yoing as investors were unsure of what the myriad budgetary details meant. There was no thumbs-up as indices sank to negative territory. On a scale of 1 to 10, this writer gives a score of 5. There is no big idea or vision statement although there are positives like the adherence to a fiscal road map and an attempt at a Prime Minister Narendra Modi stated that he faced an examination with the NDA government’s third budget for 2016-17 kick-start of infrastructure spending. But where are the fiscal resources? Does it really boost private investor sentiment?
The commitment to stick to the fiscal deficit road map is certainly noteworthy. This lends credibility to the policy agenda of the Modi government. The deficit targets mentioned in last year’s budget for 2015-16, thus remain unchanged: notably, 3.9 per cent of GDP in 2015-16, 3.5 per cent in 2016-17 and 3 per cent in 2017-18. The finance minister to his credit decided to do so despite intense pressure from within his ministry, especially from his economic advisor, to relax these targets and step-up spending to fund much-needed infrastructure like road and highways, ports, power, railways and telecommunications.
THIS infrastructure-led push also cannot succeed unless domestic and international investors are also on board. They may be seeing India with cautious optimism as they have concerns regarding the business environment and tax regime.
As in 2015-16, this kick-start to infrastructure is common to the rail and union budget for 2016-17 as well. In his budget speech, the finance minister gave Rs 55,000 crore to road and highways. An additional Rs 15,000 crore is to be raised through bonds. The NDA government has also succeeded in getting quite a few languishing road and highways projects back on track. Together with capital spending in the latest rail budget, the overall outlay for infrastructure is pegged at Rs 2.2 lakh crore or 1.5 per cent of GDP in 2016-17. Such investments are bound to have multiplier effects on growth.
But is there fiscal space for such investments? If the NDA government intends to be fiscally responsible, then it will restrain its borrowings from the market and meet the fiscal deficit target. Market borrowings thus have been capped in the budget estimates for 2016-17 from the revised estimates of 2015-16. Can the government stick to this discipline when there is still a gap between tax revenues and expenditures on salaries, interest payments and subsidies? The buoyancy of tax revenues is also not assumed to go up in the budget 2016 despite GDP growth of 7 to 7.75 per cent.
The finance minister’s desire for a kick-start may turn out to be unrealistic on other grounds as well. The much-vaunted boost to infrastructure spending runs up against the stress in the public sector banking system. The stressed loan pile is estimated to hit Rs 8 trillion or $119 billion. But the resources for recapitalising banks in budget 2016 are only Rs 25,000 crore. When the requirement is much more, this order of resources is far from adequate. This, in turn, impairs the ability of public sector banks to step-up lending even if interest rates are reduced over the course of the financial year.
This infrastructure-led push also cannot succeed unless domestic and international investors are also on board. They may be seeing India with cautious optimism as they have concerns regarding the business environment and tax regime. Investor sentiment took a serious beating when tax authorities were given powers to reopen tax cases going back to 1962, enacted by the previous UPA Government. This was described as the ‘defining moment’ when investor sentiment turned hostile during the last years of the UPA government. They will be disappointed that this threat still exists on the books.
Like in his earlier budgets, the finance minister’s budget 2016 reiterated that the NDA government commits to not resort to retrospective taxation. But will investors have cause for cheer with the notice given to a telecom company by tax authorities to pay its retrospective capital gains taxes otherwise its assets would be seized? The finance minister stated that there will be a high-level committee to oversee fresh cases. An opportunity is also given to affected companies to a one-time scheme of dispute resolution and pay up their taxes. In the exam, NDA’s budget 2016 thus gets only average marks.
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