FM sails without rocking the boat
The first full budget of the incumbent NDA government reinforces
the trend seen in past three years. The focus continues on gradual
simplification in the tax laws and procedures, withdrawing the fiscal stimulus,
and building rural infrastructure. "Incrementalism" against "Big
bang" has been the strategy and continues to be so.
The question "whether FM could have done more?" is
unfructuous in our view.
Market economists dominate - Financial markets get a cause
to cheer
In a material departure from the past, the Union Budget, much
like Railway Budget, has a distinct mark of the dominance of market economists.
Historically the budget had been dominated by development economists. Financial
markets should find a cause to cheer in this.
Vision 2022 - all encompassing development, execution to
improve
The vision 2022 of the PM Modi finds some feet on the ground
with this budget. The budget presents firm indications of execution strategy
and plan for the vision to effect a wholesome improvement in the life of
underprivileged (housing, water, power, health, education, access). "Plug
and play" could be a game changer for infrastructure sector investments.
Accelerated globalization - focus shifts on
"enablement" from "provision"
The budget seeks to accelerate the move towards globalization of
fiscal practices and development policies. For example, consider the follwoing:
(a) Social
security for all.
(b) Shades
of Obamacare in health insurance, ESI to mediclaim etc.
(c) 401K
makes an appearance in the form of 80CCD
(d) Platform
for creating multiple layers of leverage
(e) Cashless
society living on plastic money
(f) Foreign
assets and income to strictly monitored & taxed just like US.
Policy focus is
conspicuously shifting on enablement of youth through skilling, inclusion and
access rather than just providing through subsidies and doles.
Key highlights - Union Budget FY16
v Housing
for all - 2 crore houses in Urban areas and 4 crore houses in Rural areas.
v Basic
facility of 24x7 power, clean drinking water, a toilet and road connectivity.
v At
least one member has access to means for livelihood.
v Substantial
reduction in poverty.
v Electrification
of the remaining 20,000 villages including off-grid Solar Power- by 2020.
v Connecting
each of the 1,78,000 un-connected habitation.
v Providing
medical services in each village and city.
v Ensure
a Senior Secondary School within 5 km reach of every child, while improving quality
of education and learning outcomes.
v To
strengthen rural economy - increase irrigated area, improve the efficiency of
existing irrigation systems, and ensure value addition and reasonable price for
farm produce.
v Ensure
communication connectivity to all villages.
v Agricultural
income under stress
v Increasing
investment in infrastructure
v Decline
in manufacturing
v Resource
crunch in view of higher devolution in taxes to states
v Maintaining
fiscal discipline
v Micro
Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs20,000cr,
and credit guarantee corpus of Rs3,000cr to be created. MUDRA Bank will be
responsible for refinancing all Micro-finance Institutions which are in the
business of lending to such small entities of business through a Pradhan Mantri
Mudra Yojana.
v In
lending, priority will be given to SC/ST enterprises.
v A
Trade Receivables discounting System (TReDS) which will be an electronic
platform for facilitating financing of trade receivables of MSMEs to be
established.
v Postal
network with 1,54,000 points of presence spread across villages to be used for increasing
access of the people to the formal financial system.
v Government
to work towards creating a functional social security system for all Indians, specially
the poor and the under-privileged.
v Pradhan
Mantri Suraksha Bima Yojna to cover accidental death risk of Rs2 Lakh for a premium
of Rs12 per year.
v Atal
Pension Yojana to provide a defined pension, depending on the contribution and the
period of contribution. Government to contribute 50% of the beneficiaries’
premium limited to Rs1,000 each year, for five years, in the new accounts
opened before 31st December 2015.
v Pradhan
Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death risk
of Rs2 lakh at premium of Rs330 per year for the age group of 18-50.
v Unclaimed
deposits of about Rs3,000 crores in the PPF, and approximately Rs6,000crores in
the EPF corpus to be appropriated to a corpus, which will be used to subsidize
the premiums on these social security schemes.
v Tax
incentives increased for contribution to Pension Funds.
v Sharp
increase in outlays of roads and railways. Capital expenditure of public sector
units to also go up.
v National
Investment and Infrastructure Fund (NIIF), to be established with an annual flow
of Rs20,000 crores to it.
v Tax
free infrastructure bonds for the projects in the rail, road and irrigation
sectors.
v PPP
mode of infrastructure development to be revisited and revitalised.
v Conversion
of existing excise duty on petrol and diesel to the extent of Rs4 per litre
into Road Cess to fund investment.
v Atal
Innovation Mission (AIM) to be established in NITI to provide Innovation Promotion
Platform involving academicians, and drawing upon national and international experiences
to foster a culture of innovation , research and development.
v (SETU)
Self-Employment and Talent Utilization) to be established as Techno-financial, incubation
and facilitation programme to support all aspects of start-up business. Rs1000 crore
to be set aside as initial amount in NITI.
v Proposed
legislation to replace the need for multiple prior permission by a pre-existing
regulatory mechanism. This will facilitate India becoming an investment
destination.
v 5
new UMPPS, each of 4000MW, in Plug-and-Play mode.
v Target
of renewable energy capacity revised to 175000 MW till 2022, comprising 100000
MW Solar, 60000 MW Wind, 10000 MW Biomass and 5000 MW Small Hydro.
v The
National Optical Fibre Network Programme (NOFNP) to be further speeded up by
allowing willing states to execute on reimbursement of cost basis.
Budget highlights –
Financial Markets
v Foreign
investments in Alternate Investment Funds to be allowed.
v Distinction
between different types of foreign investments, especially between foreign
portfolio investments and foreign direct investments to be done away with.
Replacement with composite caps.
v Tax
“pass through” to be allowed to both category I and category II alternative
investment funds.
v Rationalisation
of capital gains regime for the sponsors exiting at the time of listing of the
units of REITs and InvITs.
v Rental
income of REITs from their own assets to have pass through facility.
v Permanent
Establishment (PE) norm to be modified to encourage fund managers to relocate
to India.
v MAT
rationalised for FIIs.
v Public
Debt Management Agency (PDMA) bringing both external and domestic borrowings
under one roof to be set up this year.
v Forward
Markets commission to be merged with SEBI.
v Section-6
of FEMA to be amended to provide for control on equity capital flows by
Government in consultation with RBI.
v Proposal
to create a Task Force to establish sector-neutral financial redressal agency that
will address grievance against all financial service providers.
v India
Financial Code to be introduced soon in Parliament.
v Gold
monetisation scheme to allow the depositors of gold to earn interest in their
metal accounts and the jewellers to obtain loans in their metal account to be
introduced.
v Sovereign
Gold Bond, as an alternative to purchasing metal gold scheme to be developed.
v Permanent
Establishment (PE) norm to be modified to encourage fund managers to relocate
to India.
Key tax proposals
v Rates
of corporate tax remain unchanged.
v
Surcharge increased from 5% to 7% and from 10%
to 12% for domestic companies where income exceeds Rs10mn & Rs100mn
respectively.
v
Tax rate for
income of non-residents (including foreign companies) by way of royalty or FTS
reduced from 25% to10%.
v
Where income
of a company from its share in an AOP or BOI is exempt, then such income and
its corresponding expenditure will not be taken into consideration while
calculating book profits under MAT provisions.
v
Certain
income from sale of securities by Fll not to be taken into account for
calculating book profits under MAT.
v
The
definition of charitable purpose now includes 'Yoga'.
v
Clarifications
on taxability of indirect transfer of shares deriving substantial value from
assets in India. 'Substantial' value clarified to mean 50% Indian assets vis
a-vis global assets and minimum Indian assets of INR 100 million.
v
Indirect
transfer of shares of an Indian company pursuant to amalgamation or demerger of
foreign companies shall be exempt from capital gain tax subject to fulfilment
of prescribed conditions.
v
Cost of acquisition
and period of holding of capital assets of demerged company to continue post
demerger for the resulting company.
v
Applicability
of GAAR deferred by 2 years and will now be applicable from financial year
2017-18.
v
Concept of
place of effective management introduced to determine residential status of
foreign company.
v
Higher
additional depreciation and additional investment allowance on acquisition and
installation of new assets in the State of Andhra Pradesh and State of
Telangana.
v
100% Deduction
on donation made to National Fund for Control of Drug Abuse, Swachh Bharat Kosh
and Clean Ganga Fund.
v
30% deduction
of additional wages paid to new regular workmen in excess of 50 regular workmen
employed.
v
Pass through
status provided to Category I and Category II AIFs.
v Proposal
to reduce corporate tax from 30% to 25% over the next four years, starting from
next financial year.
v Rationalisation
and removal of various tax exemptions and incentives to reduce tax disputes and
improve administration.
v Monetary
limit for a case to be heard by a single member bench of ITAT increase from Rs5lakh
to Rs15lakh.
v Domestic
transfer pricing threshold limit increased from Rs5cr to Rs20c.
v No
change in the rates of income tax.
v Surcharge
increased from 5% to 7% and from 10% to 12% where taxable income exceeds Rs10mn
& Rs100mn respectively.
v Limit
of deduction of health insurance premium increased from Rs15,000 to Rs25,000, for
senior citizens limit increased from Rs20,000 to Rs30,000.
v Senior
citizens above the age of 80 years, who are not covered by health insurance, to
be allowed deduction of Rs30,000 towards medical expenditures.
v Deduction
limit of Rs60,000 with respect to specified decease of serious nature enhanced to
Rs80,000 in case of senior citizen.
v Additional
deduction of Rs25,000 allowed for differently abled persons.
v Limit
on deduction u/s 80C on account of contribution to a pension fund and the new
pension scheme increased from Rs1lakh to Rs1.5 lakh.
v Additional
deduction of Rs50,000 for contribution to the new pension scheme u/s 80CCD.
v Payments
to the beneficiaries including interest payment on deposit in Sukanya Samriddhi
scheme to be fully exempt.
v Service-tax
exemption on Varishtha Bima Yojana.
v Effective
median excise duty rate increased from 12.36% to 12.50%.
v Education
cess and secondary and higher education cess exempted on all goods.
v Manufacturers
can issue digitally signed invoices and maintain records in electronic form.
v Effective
service tax rate to be increased from 12.36% to 14%, from a date to be
notified.
v Education
cess and secondary and higher education cess to be removed from a date to be
notified.
v Negative
list pruned.
Curbing black money - highlights
v Evasion
of tax in relation to foreign assets to have a punishment of rigorous imprisonment
upto 10 years, be non-compoundable, have a penalty rate of 300% and the
offender will not be permitted to approach the Settlement Commission.
v Non-filing
of return/filing of return with inadequate disclosures to have a punishment of
rigorous imprisonment upto 7 years.
v Undisclosed
income from any foreign assets to be taxable at the maximum marginal rate.
v Mandatory
filing of return in respect of foreign asset.
v Entities,
banks, financial institutions including individuals all liable for prosecution and
penalty.
v Concealment
of income/evasion of income in relation to a foreign asset to be made a
predicate offence under PML Act, 2002.
v PML
Act, 2002 and FEMA to be amended to enable administration of new Act on black
money.
v Benami
Transactions (Prohibition) Bill to curb domestic black money to be introduced in
the current session of Parliament.
v Acceptance
or re-payment of an advance of ` 20,000 or more in cash for purchase of immovable
property to be prohibited.
v PAN
being made mandatory for any purchase or sale exceeding Rupees 1 lakh.
v Third
party reporting entities would be required to furnish information about foreign
currency sales and cross border transactions.
v Provision
to tackle splitting of reportable transactions.
v Leverage
of technology by CBDT and CBEC to access information from either’s data bases.
Budget Estimates
v Non-Plan
expenditure estimates for the Financial Year are estimated at Rs13,12,200cr.
v Plan
expenditure is estimated to be Rs4,65,277cr.
v Gross
Tax receipts are estimated to be Rs14,49,490c.
v Devolution
to the States is estimated to be `5,23,958. Share of Central Government will be
`9,19,842.
v Non
Tax Revenues for the next fiscal are estimated to be Rs2,21,733cr, including
Rs69,500cr from disinvestment of PSEs.
Fiscal deficit will be 3.9% of GDP and Revenue Deficit will be 2.8% of GDP
Fiscal roadmap
Assumptions
v The
Gross tax revenue has been estimated at 10.3 per cent of GDP in Budget 2015-16,
with a growth of 15.8 per cent over RE 2014-15. Projections for 2015-16 have
been made taking into account a realistic economic recovery and continuation of
set of tax measures announced in the budget for 2014-15. It is also expected
that reforms in the administrative machinery oriented towards strict implementation
will yield result.
v For
the budget of 2015-16, receipts from disinvestment have been estimated at Rs41,000
crore. However, as additional resource mobilization to meet the revenue shortfall
following 14th Finance Commission, ` 28,500 crores have been estimated to flow
from strategic disinvestments. These include sale of government holdings in
non-government commercial entities, SUUTI, BALCO, HZL etc. Over the medium term
frame work, an amount of Rs55,000cr and Rs50,000cr has been estimated for the
years 2016-17 and 2017-18 respectively.
v Total
borrowings requirement for 2015-16 has been budgeted at Rs5,55,649cr.
v Interest
payment is projected at 49.6% of net tax to Centre, which is marked increase
over the last year despite fiscal consolidation underway.
v Major
subsidies have been budgeted in 2015-16 at 1.6 per cent of GDP as against 2.0
per cent in BE 2014-15. The GDP at current market prices expected to achieve a growth of 11.5
per cent in 2015-16 (real growth of 8.5 per cent and an implied inflation of
2.8 per cent) to attain a level of Rs14108945cr (US$2.28trn with USD= Rs62)
Background of the Union Budget for FY16
The Union Budget for the fiscal year 2015-16 presented today
is the first full scale budget of the incumbent government. Having given an
overwhelming political mandate for faster, inclusive and sustainable
development to the Prime Minister, all stakeholders have been looking forward
to this budget with great anticipation of delivery on promises.
The government has delivered in right earnest inasmuch as
administrative corrections are concerned. However, the economic reforms remain
a work in progress and standing at this juncture in time, the road does not
look smooth.
The economic survey for the year 2014-15, presented in the
Parliament yesterday succinctly highlights the bumps in the road ahead and the
strategy to move forward. The Budget should be interpreted in juxtaposition
with this background to arrive at appropriate conclusion.
Highlights of the Economic Survey 2014-15
·
Real GDP Growth Rate for FY2015 pegged at 7.4%.
·
Average CPI to stand at 6.2% in FY2015. A
further deceleration is expected opening up the space for further monetary
policy easing
·
Assuming a further moderation in average annual
price of crude oil the current account deficit is estimated at less than 1.0%
of GDP in FY2016
·
Risks from a shift in US monetary policy and
turmoil in the Eurozone need to be watched but could remain within control
·
India’s services sector has grown rapidly in
last decade with almost 72.4% of the growth in India’s coming from this sector
which is growing in 2 digits
·
India’s e-commerce market is expected to grow by
more than 50 per cent in the next five years
·
Proposals for the next five years, in renewable
energy, are likely to generate business opportunities of the order of US$ 160
billion
·
With contained inflation and fiscal deficit,
Liquidity conditions are likely to remain benign in FY2016.
·
To remain strong at external front, India should
target foreign exchange reserves of $750Bn - $1 Tn over the long term
·
Expenditure control and expenditure switching,
from consumption to investment, both in the short and medium term will be key
for maintaining fiscal discipline
·
Raising economy-wide skills must complement
efforts to improve the conditions for manufacturing. Skill India objective should be accorded high priority along with, and indeed in order to realize, ‘‘Make in India’’
· Infrastructure growth in terms of eight core industries has been higher than industrial growth since 2011-12 and this trend is expected to continue
Creative incrementalism with selected boldness
The policy stance of government so far has been incremental changes
in status quo rather than any "big bang" departure from the past.
This stance is likely to be maintained in the coming years also.
"Equally though, the mandate received by the government affords
a unique window of political opportunity which should not be foregone. India
needs to follow what might be called “a persistent, encompassing, and creative
incrementalism” but with bold steps in a few areas that signal a decisive
departure from the past and that are aimed at addressing key problems such as
ramping up investment, rationalizing subsidies, creating a competitive,
predictable, and clean tax policy environment, and accelerating disinvestment.
Thus, Weber’s wisdom cannot be a licence for inaction or
procrastination. Boldness in areas where policy levers can be more easily
pulled by the center combined with that incrementalism in other areas is a
combination that can cumulate over time to Big Bang reforms. That is the
appropriate standard against which future reforms must be assessed."
Lagging employment growth a worry
Unemployment is emerging to be the single most critical
challenge for the policymakers. The challenge is even more severe in case of
urban skilled workers who have been at the core of the India's urbanization so
far. Given the current demographics of the country, a year's delay in finding a
suitable job could jeopardize the whole professional career of a person.
Moreover, in past few years the rural wages have declined
steadily thus impacting the very fulcrum of the India's consumption story.
"Regardless of which data source is used, it seems clear
that employment growth is lagging behind growth in the labour force. For
example, according to the Census, between 2001 and 2011, labor force growth was
2.23 percent (male and female combined). This is lower than most estimates of
employment growth in this decade of closer to 1.4 percent. Creating more rapid
employment opportunities is clearly a major policy challenge."
Dramatic macro improvement warrant caution
Helped by some prudent policy measures by the government,
RBI, lower global commodity prices and some improvement in business conditions,
the matrix of India's macro parameters has improved materially in past 4-6
qtrs.
However given the speed and nature of the improvement some
caution is in order and jumping to bold decisions may prove counterproductive
at this stage.
"India’s macroeconomic improvement has been nothing short
of dramatic—inflation has been cut in half to about 5 percent today, underlying
rural wage growth has declined from over 20 percent to below 5 percent, and the
current account deficit has shrivelled from over 6.7 percent of GDP (in Q 3,
2012-13) to an estimated 1.0 percent in the coming fiscal year.
That said, there is hardly room for fiscal complacency. To
understand why, to realize where India needs to go, it is important to
understand where it has been, and to draw lessons from this experience. The
similarity between India’s situation today and in the early 2000s makes this
exercise especially important."
Corporate balance sheets stressed, execution to remain
challenged
The revival of investment cycle and improvement in project
execution is also contingent upon strong corporate balance sheets. The data shows
that the stress in corporate balance sheets has risen materially in past five
years.
"India needs to tread the path of investment-driven growth.
Can the private sector be expected to rise to the occasion? Highly leveraged
corporate balance sheets, and a banking system under severe stress suggest that
this will prove challenging."
"The biggest lesson from stalled projects and the
associated credit aided infrastructure bubble is that perhaps more than a run
up problem (over exuberant and misdirected private investment), we face a
clean-up problem (bankruptcy laws, asset restructuring, etc.). Creative
solutions are necessary for distributing pain equally amongst the stakeholders
from past deals gone sour.
An idea to fix the clean-up problem is setting up of a high
powered Independent Renegotiation Committee. In the presence of a market and
regulatory failure, perhaps a creative step would be to involve external
experts for a quick and independent resolution of the problems."
"Many infrastructure projects are today financially
stressed, accounting for almost a third of stressed assets in banks. New
projects cannot attract sponsors, as in recent NHAI bids, and banks are
unwilling to lend. Given its riskiness, pension and insurance funds have
sensibly limited their exposure to these projects. This current state of the
public private partnership (PPP) model is due to poorly designed frameworks,
which need restructuring."
As per a research study by Credit Suisse, almost one third
of the companies are not earning enough to meet their interest liability.
Banking sector repressed and stressed
The challenges in the Indian banking system fall into two
categories: policy and structure.
"The policy challenge relates to financial repression. The
Indian banking system is afflicted by what might be called “double financial
repression”.
Financial repression on the asset side of the balance sheet is
created by the statutory liquidity ratio (SLR) requirement that forces banks to
hold government securities, and priority sector lending (PSL) that forces
resource deployment in lessthan-fully efficient ways.
Financial repression on the liability side has arisen from high
inflation since 2007, leading to negative real interest rates, and a sharp
reduction in households’ financial savings. As India exits from liability-side
repression with declining inflation, the time may be appropriate for addressing
its asset-side counterparts."
The structural problems relate to competition and ownership. First,
there appears to be a lack of competition, reflected in the private sector
banks’ inability to increase their presence.
Indeed, one of the paradoxes of recent banking history is that
the share of the private sector in overall banking aggregates barely increased
at a time when the country witnessed its most rapid growth and one that was
fuelled by the private sector.
It was an anomalous case of private sector growth without
private sector bank financing. Even allowing for the irrational exuberance of
the Public Sector Banks (PSBs) that financed this growth phase, the reticence
of the private sector was striking.
Need for public investment, Railways selected to engine
the growth
Since the new government assumed office, a slew of economic
reforms has led to a partial revival of investor sentiment. But increasing
financial flows are yet to translate into a durable pick-up of real investment,
especially in the private sector. This owes to a number of interrelated factors
that stem from what has been identified as the “balance sheet syndrome with
Indian characteristics.” If the weakness of private investment offers one
negative or indirect rationale for increased public investment, there are also
more affirmative rationales.
"The two biggest challenges facing increased public
investment in India are financial resources and implementation capacity. the
trick is to find sectors with maximum positive spillovers and institutions with
a modicum of proven capacity for investing quickly and efficiently. Two prime
candidates are rural roads and railways."
Conceptually, there is a strong case for channeling resources to
transport infrastructure in India given the widely known spillover effects of
transport networks to link markets, reduce a variety of costs, boost
agglomeration economies, and improve the competitiveness of the economy,
especially manufacturing which tends to be logistics-intensive. However,
resources need to be prioritized among sectors based on assessments of risks,
rewards, and capacity for efficient implementation."
Finally, even within the public sector banks there is sufficient variation in performance. Viewing public sector banks as one homogenous block would be a mistake."
Interest liability rising, subsidies, defence allocation
down
