Thursday, March 17, 2016

Budget Summary - 2016-17

(Prepared by Shriram hegde - CFA)

Union Budget 2016-17
Finance Minister (FM) Shri. Arun Jaitley presented union budget on 29th February. If you compare union budget 2016 with previous two budgets, you can observe that he has tried to build up on previous two budgets where the view is long term. (In last year budget FM has acknowledged suffering agricultural income, inefficiency of PPP model for Infrastructure development and declining manufacturing).
Union budget 2016 focuses on 1)Agriculture and Farmers’ Welfare 2) Rural Sector 3) Social Sector including Healthcare 4)Education, Skills and Job Creation 5) Infrastructure and Investment 6)Financial Sector Reforms 7) Governance and Ease of Doing Business 8) Fiscal Discipline 9) Tax Reforms.
This year’s budget gives the impression of political or farmers’ budget and there is nothing for the industry. However I believe thrust is on creating demand. At this moment industries will be more interested in seeing demand cycle getting revived than any tax breaks or incentives, when their capacities are underutilised. If we are lucky with the monsoon this year then this budget will have far reaching results in giving boost to demand. Having said this, expectation seems to be overoptimistic when it comes to doubling farmers’ income in five years. Salaried class will be disappointed as there is no change in tax slabs for last two years. Also lot could have been done in reviving banking sector. GST is still distant possibility; however I can’t blame the government for the same.
Following table summarises achievement viz-a-viz budgeted targets last year

CPI Inflation
Close to 5%
Projected GDP growth
8% - 8.5%
Fiscal Deficit
3.9% of GDP

Except GDP growth rate government has achieved its target. Considering two consecutive years of monsoon shortfall of 13%, this is really good show by the government.
Agriculture and Farmers’ Welfare
Government expects to double the income of the farmers by 2022. Total allocation for Agriculture and Farmers’ welfare is Rs. 35,984 crore. Government wants to achieve this target by creating new infrastructure for irrigation and providing value addition and connectivity from farm to markets. Out of 141 million hectares of net cultivated area in the country, only 46% is covered with irrigation. Government plans to bring additional 11 million hectors under irrigation (Increase of approx. 8%). The Government is implementing the Unified Agriculture Marketing Scheme which envisages a common e-market platform that will be deployed in selected 585 regulated wholesale markets. Amendments to the APMC Acts of the States are a pre-requisite to join this e-platform.

(Rule of 70:               70                            = Years required to double the investment)
          Growth rate
Rural Sector
A sum of Rs. 2.87 lakh crore will be given as Grant in Aid to Gram Panchayats and Municipalities. This translates to an average assistance of over Rs. 80 lakh per Gram Panchayat and over Rs. 21 crore per Urban Local Body. This should help in spurring the demand. A sum of Rs. 38,500 crore has been allocated for MGNREGS in 2016-17. Water conservation and natural resource management will be covered under MGNREGS. The Government is committed to achieve 100% village electrification by 1st May, 2018.
Social Sector including Health Care
A sum of Rs. 2,000 crore in this year’s Budget is set aside to meet the initial cost of providing LPG connections. This will benefit about 1 crore 50 lakh households below the poverty line in 2016-17. (75 lakh middle class and lower middle class households have voluntarily given up their cooking gas subsidy, in response to the call given by the Prime Minister)
Education, Skills and Job Creation
Government want to focus on quality education. 62 new Navodaya Vidyalayas will be opened in the remaining uncovered districts over the next two years. A Digital Depository for School Leaving Certificates, College Degrees, Academic Awards and Mark sheets, on the pattern of a Securities Depository will be established. This will help validate their authenticity, safe storage and easy retrieval. 1500 Multi Skill Training Institutes will be set up across the country. Rs 1,700 crore earmarked for these initiatives. In order to incentivize creation of new jobs in the formal sector, Government of India will pay the Employee Pension Scheme contribution of 8.33% for all new employees enrolling in EPFO for the first three years of their employment. This is expected to incentivize the employers to recruit unemployed persons and also to bring into the books the informal employees. In order to channelize this intervention towards the target group of semi-skilled and unskilled workers, the scheme will be applicable to those with salary up to Rs. 15,000 per month. Budget provision of Rs 1,000 crore is made for this scheme. However I am not sure that industries will be keen to avail this scheme.
Infrastructure and Investment
Nearly 85% of the road projects involving 8500 kms are put on track in current fiscal. The total investment in the road sector, including PMGSY allocation, would be Rs 97,000 crore during 2016-17. History shows massive work in roads and highways always helps us in coming out of recession. The total outlay for infrastructure in BE 2016-17 stands at Rs. 2,21,246 crore. Government will enact necessary amendments in the Motor Vehicles Act and open up the road transport sector in the passenger segment. A Public Utility (Resolution of Disputes) Bill will be introduced during 2016-17 to streamline arrangements for resolution of disputes in infrastructure related construction contracts, PPP and public utility

contracts. Guidelines for renegotiation of PPP Concession Agreements will be issued, keeping in view the long term nature of such contracts and potential uncertainties of the real economy, without compromising transparency. 100% FDI will be allowed through FIPB route in marketing of food products produced and manufactured in India. This will benefit farmers, give impetus to food processing industry and create vast employment opportunities. We have not seen any concrete development of National Waterways that was announced in 2014.
Financial Sector Reforms
Various steps like credit enhancement for infrastructure project, electronic auction platform for primary debt offer, are taken to for deepening corporate bond market. If we want to bring transparency, relieve stress on the banking system, reduce NPAs we need to develop broad, liquid and deep bond market. To support credit growth, FM has proposed an allocation of Rs 25,000 crore in BE 2016-17 towards recapitalisation of Public Sector Banks. If you compare this number with bad debt of 4 lakh crore, number seems to be very low.
Governance and Ease of Doing Business
A social security platform will be developed using Aadhar to accurately target beneficiaries. Direct Benefit Transfer (DBT) on pilot basis will be introduced for fertilizer in a few districts across the country, with a view to improving the quality of service delivery to farmers. The Director General of Supplies and Disposal (DGS&D) will establish a technology driven platform to facilitate procurement of goods and services by various Ministries and agencies of the Government. These are excellent move to curb the corruption and plug the leakage in the delivery system. To remove the difficulties and impediments to ease of doing business, bill will be introduced to amend the Companies Act, 2013 in the current Budget Session of the Parliament. The Bill is expected to improve the enabling environment for start-ups. The registration of companies will also be done in one day.
Fiscal Discipline
The risks of further global slowdown and turbulence are mounting. Since foreign markets are weak, we must rely on domestic demand and Indian markets to ensure that India’s growth does not slow down so we could have adopted slightly expansionary fiscal policy Plan-Non-Plan classification will be done away with from fiscal 2017-18.
Tax Reforms
Ceiling of tax rebate under section 87A increased from Rs. 2,000 to Rs. 5,000. limit of deduction in respect of rent paid under section 80GG from Rs.24,000 per annum to Rs. 60,000 per annum. Beyond this there is nothing for the salaried class. I believe there should have been change in slab or increase in standard deduction allowed under section 80C or both and tax loss due to this could have been compensated with micro increase in indirect taxes. Approximately only 3% of the population are paying income taxes. However indirect taxes affect everyone including affluent class who do not pay any income taxes. Enough confusion is created in taxation of EPF. I firmly believe government can come up with various savings schemes including pension schemes however it should not force anyone for the investment in those schemes as every individual have different risk profile and investments should be done considering the same.

Measures for promoting affordable housing
Any distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax.

Followings will be costlier after budget
Cigarettes, Movies, Eating Out, Cars, Gold, Mobile Bill, Readymade Clothes, Air and Railway Tickets, Diamond, Insurance, Smart Watches, Cable

Followings will be cheaper after budget
Aerated Drink, Sanitary Pads, Solar Lamps, Routers, Microwave Oven, Legal Service, Hybrid Electric Vehicles, CCTV Camera, Ready-mix Concrete, Parts of Dialysis Machine, Braille Paper