The budget has presented a believable picture on the numbers and outlining the priority areas of Government spending. It was expected that the Finance Minister would focus on rural economy and growth just because past two monsoons in the country were not at all satisfactory. It is essentially a budget for rural India. Finance Minister has carved an ambition to double agricultural incomes by 2022. The enabling parameters are – linking MGNREGA spend to productive assets like farm ponds, dug wells and compost pits with record high allocation of Rs 38,000 crore, creation of a Long Term Irrigation Fund under NABARD at Rs 20,000 crore allocation and a program with Rs 6,000 crore allocation for better ground water management. The Government will also fast-track 23 major irrigation projects and bring an additional 28.5 lakh hectares of land under irrigation (about 20% of the total cultivable land in India). Helping rural majority to get more amenities is a good political and moral goal to pursue. Creation of a National Agriculture Market is intended to be facilitated by states amending their respective APMC acts to let farmers sell their produce anywhere in India has been announced from April 2016. This is a big move, but so far only 12 states are onboard the program, and the Prime Minister needs to push these states law changes the way he is popularizing the Crop Insurance Scheme directly. Road infrastructure development got a big push in the budget. The Government will earmark Rs 55,000 crore for road construction with National Highways Authority of India adding another Rs 15,000 crore via bonds, in total bringing the road spending to Rs 97,000 crore.
Fiscal Deficit targets stuck to at 3.9% of GDP in 2015-16 and 3.5% of GDP in 2016-17 is the single biggest announcement in the budget. Black money reduction and repatriation has been a big topic for the Modi Government. This budget allows a new scheme – which is a penalty cum surcharge scheme as opposed to an amnesty scheme – for anyone holding undeclared income or assets to come out, pay a 30% tax with 7.5% penalty and 7.5% surcharge for agriculture and regularize the accounts. Moving away from the Plan / Non Plan legacy has been established with this year being the last of the 12th Plan. There is a boost for low cost housing, with 100% tax exemption (MAT applicable) for companies which invest in 30 sq mt/ 60 sq mt (other areas) housing schemes for the next three years. The first time home buyers will get an additional 50,000 deduction on interest payments for property values fewer than Rs 50 lakh. The budget promises cooking gas for below poverty line families, power to all un-electrified villages and road connectivity to all villages by 2018-19.
However, on the downside of the budget, a number of observations can be made. Government is taxing the rich and bringing in new cess for retail investors. The surcharge paid for more than Rs 1 crore in income will go up from 12% to 15%. Krishi Kalyan Cess at 0.5% on all taxable services is there. The Government can always repurpose any tax collection anywhere – so the need to call a cess Krishi or Swacch Bharat is not very important.
Bank recapitalization at Rs 25,000 crore is not a great statement to make. The Government had already provided for Rs 70,000 crore over the next three years and shifting the needle on yearly allocation by a small amount does not help. The Government can wait for Bank Board Bureau to make its recapitalization recommendations. The Government will claim that it demonstrated intent, but the situation warrants rapid and deep response, not band aids.
There isn’t much to cheer about from the Individual Tax payer point of view. Taxpayers who fall inside the sub-Rs 5 lakh income zone will get an additional tax rebate of around Rs 3,000, as slabs remain unchanged. There is no major change in any exemptions or deductions except for those staying in rented houses, which will now get a deduction of up to Rs 60,000.
The National Pension Scheme (NPS) and the EPFO (Employee Provident Fund Organization) have now been equalized. This is a good thing in the long run as the NPS is a defined contribution scheme while the EPFO is modeled as a defined benefits organization.
On the balance this budget may well be remembered for what it did not do rather than for what it did. The former was uncertain, while the latter was more or less a given. It presents a great case for macroeconomic responsibility, but risks losing the microeconomic battle. This is the same as last year, where the big changes will not be appreciated. The budget has done the best thing possible – move focus back on executive action, legislative reform and the RBI – which may be compelled to cut interest rates in the near future based on the Government prudence. Finally, it will all boil down to ensure that this, rather difficult math on the revenue side is achieved.
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