New Delhi : On paper, the Union Budget for 2016-17 has excellently managed the fiscal mathematics by delivering the fiscal deficit to GDP ratio of 3.9% for 2015-16 and 3.5% for 2016-17 as per the government’s pre-defined roadmap for fiscal consolidation. The government has even declared its aim of attaining 3.0% fiscal deficit ratio in the year 2017-18.
This was not expected by many, given the fragility of global economy and India’s growing vulnerability to weather related risks that has created unprecedented challenges to its farm sector. Contrary to bond players’ perception, the net market borrowings for 2016-17 are placed at a reasonably lower level of Rs 4.25 lakh crore and gross borrowings at Rs 6 lakh crore, giving a big boost to their appetite. Post the budget announcement, the benchmark bond yield dipped 12 bps, pushing bond prices up.
To endorse the government’s revealed fiscal prudence, if RBI lowers the policy rate (the chances for which look very high now), then one can expect a short-term rally in the nation’s bond and equity markets, offering the nation another opportunity to again shore up its foreign exchange reserves. Also, one can expect a concomitant reduction in the borrowing costs for companies – at least in the corporate bond market.
How will this be achieved? The government has expected a significant recovery in the nominal GDP growth from this year’s 8.6% to 11.0% next year amid the ongoing global slowdown and crashing commodity prices. Moreover, it has expected personal income tax receipts to grow by 18%; proceeds from spectrum sales to grow by almost 73% and privatization receipts to grow by more than 123%. This means total revenue has to go up by 15.5% in Budget 2016-17 versus just 8.4% achieved in 2015-16. This is too ambitious in our opinion. The preconditions for the success of this plan range from normal monsoon to stable domestic political conditions (to facilitate privatization in smooth fashion) to significant global recovery.
From the “current expenditure” side, the government will have to lower its spending on fertilizer and food subsidies next year (from this year’s 1.9% of GDP to 1.7% of GDP next year) besides curtailing its expenses under various heads of non-plan expenditures. One has to see the feasibility of this plan in the context of political economy of state elections in the coming year.
Several tax measures are also taken in today’s Budget. While an increase in the dividend distribution tax and securities transaction tax has surprised the equity players, they seem to have preferred these taxes to a long-term capital gains tax. A 50 bps surcharge in service tax will also be less disruptive, as the overall service tax rate is kept stable.
From the short-term perspective, today’s Budget is certainly market-friendly. However, its success would largely depend on the evolving macro mix.
So far as the Capital Spending is concerned, the government appears to have touched all major segments from agriculture & rural sector to infrastructure and banking. However, the Budget math shows the stipulated increase in Capital Spending is just 3.9% in 2016-17 versus the last year’s 20.9%. This has to be seen against the increase of 11.8% in revenue spending in 2016-17. Does this mean the government will resort more to off-budgetary sources to fulfill its aspirations of productive spending on infrastructure and rural economy? This seems to be likely given that it has to provide a substantial amount towards the seventh pay commission’s recommendations and one rank, one pension scheme in 2016-17 through budgetary allocations.
So far as the public sector banks (PSBs) are concerned, the recapitalization figure of Rs 25,000 crore against their requirement of Rs 1.55 lakh crore during the period 2016-17 to 2018-19 looks grossly insufficient. But this was expected given the imperative of showing better fiscal arithmetic and growing concerns of several eminent bankers & regulators about the functioning of PSBs.
According to these experts, given the leadership issues, governance challenges and weakened systems and controls in these banks in the past few years, mere “infusion of capital” may not improve their performance and raise the returns on their assets or equities.
Against this backdrop, a move by the government to set up the “Bank Board Bureau to be headed by the ex-CAG Vinod Rai along with other eminent financial professionals” and a bold reform measure to “reduce the stake of government in the IDBI bank below 50%”, are highly desirable steps that will go a long way in reforming these entities.
As regards the critical sectors like agriculture and infrastructure, the NDA government’s Budgets have been consistently focusing on long-term structural measures rather than short-term stabilization measures. This certainly augurs well for the sustainable growth of these sectors. This year also, the Budget has focused more on development of irrigation, creation of e-platform for the unification of wholesale markets, crop insurance, rural roads & electrification, rural employment, education, re-skilling, health, etc., for the agriculture and rural economy and modernization of ports & airports and development of overall road connectivity within the infrastructure space.
The government’s commitment to other critical reforms also appears to be unwavering as it has expressed its strong desire to push GST bill, bankruptcy bill, amendment to RBI Act to come out with Monetary Policy Committee, amendment to SEBI act to introduce new commodity products and rationalization of corporate tax, etc. in the coming months.
To cut a long story short, the Budget is right on reforms and in overall policy direction but too ambitious on fiscal mathematics. While it may act as a sentiment booster in the short-term, its actual success would depend on several exogenous factors beyond the government’s control.
(The writer is the Group Chief Economist of L&T Finance Holdings)
