Citizens Speak : How is the Indian union budget 2016-2017?

Answer by Sanyam Gupta:

FISCAL DEFICIT

The government had set an ambitious target of reaching a 3.5% fiscal deficit from 3.9% last year though this target is hugely expected to be revised:

A) PAYMENTS

One Rank One Pension: As defined ‘same pension, for same rank, for same length of service, irrespective of the date of retirement’, is going to lead to a budget outlay of ₹18,000-22,000 crore this coming year.

The 7th Pay Commission: Pay Commissions periodically revise the salaries of (the insanely high number of) public-sector employees adjusting it to the prevailing inflation levels. The 7th Pay Commission came out last year and is expected to lighten the exchequer’s pocket by ₹1.10 lakh crore!

Recapitalisation of Public Sector Banks: The NPA problem has gone berserk and the only way ahead is for the government itself to put in taxpayers’ money into these banks. I had explained the reasons and implications of this in my last post:Lehman’s Ghosts: The NPA Problem in Indian Banks. The government is expected to part with ₹70,000 crore over the next four years to meet the write-offs made to corporate debts on these banks’ balance sheets.

Rural Distress: With two back-to-back failed monsoons, rural incomes have been ploughed away. Rural demand has been extremely weak hurting many FMCG’s profits (particularly HUL). It is expected that investments and transfer payments to the rural regions will increase manifold and a lot more money will be invested in the much celebrated (by me, at least) crop-insurance scheme.

Low Private Investment: Private investments have been particularly low due to 1) Low credit availability due to the NPA issue 2) extremely high corporate debt. This is what Arvind Subramanium described as the twin-balance sheet problem in the Economic Survey released today.  This coupled with low exports and falling earnings have meant one of the most important component of GDP is hanging out to dry.

B) RECEIPTS

Falling Export Value: While the volume of exports is still stable (as you’ll see Nirmala Sitaraman reminding us frantically time and again :P), the value (in $) of exports has dropped drastically. 1) China has “outsourced its deflation to the rest of the world” through its excruciating slowdown that has global demand. Global exports have slowed down in general. 2) Rupee has greatly depreciated against the dollar due to i) Interest rate hike by the US Fed and ii) Devaluation of the Chinese Yuan that led to a decline in the currencies of most Asian economies in a cascading effect. We get less dollar value for every rupee of good exported.

Slow Divestment: One of the definite ways of raising revenue is disinvestment of public assets by the government. This might not happen turn out to a good option since the stock markets in India are falling (mostly due to PSU stocks and FII outflows {due to US interest rate hike and otherwise}) and the government won’t get good valuations in this bear market.

Some more expectations:

Boost to Cashless Payments: Reduce the service and convenience tax on cashless payments and set a threshold limit above which payments will only be allowed to be made in the cashless form.

Tax Reforms:

1. The government had promised a reduction of tax rate from 30% to 25% starting this fiscal. This was to promote the manufacturing sector at the expense of the service sector which has historically risen rapidly (service tax increased from 12.36% to 14%).
2. Phase out exemptions to corporate taxation. It’s an indication of a mature tax regime. Though ideally, the effective tax rate should be lower than earlier, or the rationale forwarded for hiking service tax rates would stand unjustified.
3. Implement GAAR: The General Anti-Avoidance Rules seek to haul of businesses that voluntary ‘avoid’ taxes’. Tax mitigation= legally reducing taxes, tax evasion= illegally reducing taxes, tax avoidance= finding loopholes in the tax structure or carrying out an activity solely for the purpose of reducing the amount of tax payable (eg DTAA, see previous post). It opens up the companies’ doors to IT Deptt. scrutiny and therefore was resisted by the industry.
4. Roll back retrospective taxes and clarity on transfer pricing taxes: We thought that after the MAT demand from FIIs was withdrawn that the tax regime would finally be welcomingly predictable. The recent order issued to Vodafone goes against this spirit.
5. BEPS: I’ll cover this in detail in a future blog post. It’s a highly welcome move to detect tax evaders.

Crop Insurance Scheme: Highly welcome! On low premiums, the government shall guarantee insurance cover in cases of failed crops. It’s sad the newspapers haven’t covered this too well, but I hope this becomes a revolution. The government hopes to sustain it through economies of scale. This is a shift from the earlier policy of compensation a % of the loss to the farmers through direct transfers.

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How is the Indian union budget 2016-2017?