I am presenting this Budget when the global economy is in serious crisis. Global growth has slowed down from 3.4% in 2014 to 3.1% in 2015. Financial markets have been battered and global trade has contracted. Amidst all these global headwinds, the Indian economy has held its ground firmly. Thanks to our inherent strengths and the policies of this Government, a lot of confidence and hope continues to be built around India.

~ Mr Arun Jaitley (Minister of Finance)

 

The Finance Minister, Mr Arun Jaitley started his budget speech counting the achievements of the Modi-led-NDA Government and comparing them to the last three years of the previous (UPA) Government, where growth decelerated to 6.3%. Mr Jaitley was quick in giving credit to the policies framed by his Government that helped India stand strong amid a weak global scenario.

GDP growth at 7.6%, CPI inflation at 5.4% and CAD at 1.4% of GDP...
It is noteworthy that under the NDA Government, the GDP growth has significantly accelerated to 7.6% despite the contraction of global exports by 4.4% (compared to 7.7% growth in world exports during the last 3 years of the previous Government). The Finance Minister mentioned that the NDA Government has provided big relief to the public by bringing down the CPI inflation to 5.4% despite two consecutive years of monsoon shortfall of 13%. On the other hand, CPI inflation during the last 3 years of the previous Government was at 9.4% despite normal rainfall in the last three years of the previous Government.

It is inspiring that India’s Current Account deficit has declined from USD 18.4 billion in the first half of CY 2015 year to USD 14.4 billion in 2016 and is projected to be 1.4% of the GDP at the end of CY 2016. Moreover India’s foreign exchange reserves are at the highest ever level of about USD 350 billion.

Mr Jaitley pointed out that the initiatives of the Modi-led-NDA Government in the last 21 months have not only placed the economy on a faster growth trajectory but have also bridged the trust deficit, created by the previous Government. Moreover, he cited that the Government has achieved this despite working in an unsupportive global environment, adverse weather conditions and an obstructive political atmosphere.

Despite challenging circumstances, the Indian economy has emerged as the fastest growing economy amongst the large economies of the world by registering a GDP growth rate of 7.6% in 2015-16. The measures taken by the Government on macroeconomic and fiscal fronts, aided by the fall in international crude prices have shown positive results. With the continuance of fiscal prudence, lower inflation, lower current account deficit and robust foreign exchange reserves, India’s macroeconomic fundamentals seems to have improved substantially.

Challenges as opportunities...
As the 14th Finance Commission reduced the Central share of taxes to 58% from the 68%, FY 2015-16 has been challenging for the Government expenditure. Nevertheless steep reduction in the Central share of taxes, the revenue buoyancy helped NDA Government to improve upon the budgeted expenditure. In contrast to the usual practice of reducing, the Government increased its Plan expenditure at the Revised Estimate (RE) stage in 2015-16.

In Budgeted Estimate 2015-16, the total expenditure by the Government was estimated at 12.6% of GDP compared to 13.3% of GDP in 2014-15. Based on Advanced Estimates of GDP, the total expenditure has been revised to 13.2% of GDP in RE 2015-16. This is largely attributable to revision in the GDP estimates. The actual increase in total expenditure over the budgeted estimates is only Rs 7,914 crore in nominal terms and 0.06% of GDP. While the component of planned expenditure has been marginally enhanced with an increase of 2.6% in the RE 2015-16, the provision for non-plan expenditure showed a marginal reduction of 0.3% against BE 2015-16 provisions. On the other hand, the capital expenditure of the Government has increased from 11.8% of total expenditure in 2014-15 to 13.3% in RE 2015-16, which is the highest since 2007-08. The Revenue Deficit target has been revised from 2.8% to 2.5% in RE 2015-16.

It is noteworthy that the FY 2016-17 is also expected to be challenging as it will cast an additional burden on account of the recommendations of the 7th Central Pay Commission and the implementation of Defence - One Rank One Pension scheme.

In order to address sectors which need immediate attention, the Government (before focusing on other areas of utmost priority) prioritised and enhanced expenditure in the farm and rural sector, the social sector, infrastructure sector and also provided for recapitalisation of banks.

Helped by the higher growth in both tax and non-tax receipts, the total revenue receipts of the Centre has been revised upward in RE 2015-16 showing an increase of 5.7% BE 2015-16. Receipts from disinvestment (including strategic disinvestment) of Government stake in PSUs however continued to be lower than the budgeted estimates. While the receipts from disinvestment for FY 2015-16 was budgeted at Rs 69,500 crore; the highly uncertain market conditions prevalent for most part of the year, forced the Government to take a more cautious approach and go slow on disinvestments. In RE 2015-16, disinvestment target has been revised downwards to Rs 25,000 crore. However the receipts from disinvestment of Government stake in PSUs have been estimated at Rs 56,500 crore in BE 2016-17.

The fiscal policy of the Government in 2015-16 has shown positive results. The measures taken by the Government for fiscal prudence, revenue collection and expenditure management, may result in substantial improvements in fiscal performance over the budgeted targets. Moreover the capital expenditure of the Government as a percentage of total expenditure and the Tax to GDP ratio is likely to be the highest since 2007-08.
 

Important Budget Estimates for 2016-17

Particulars	Rs ( in Lakh Crore)
Receipts from Disinvestments	0.565
Tax to GDP	10.8%
Non-tax Revenue	2.1%
Total budget expenditure	19.78
Plan expenditure	5.50
Non-plan expenditure	14.28
Fiscal deficit target (as a % of GDP)	3.5%
Total Borrowing	6.00
Net market borrowing required to finance the deficit	4.43

 

Fiscal Policy for 2016-17:
The fiscal policy of 2016-17 is aimed at abetting the momentum for revival of economic growth and walking on the path of fiscal consolidation. The fiscal policy of the Government is guided by the larger macroeconomic needs of higher investments and focus on agricultural and rural sectors that together hold substantial potential to clock higher economic growth. Higher levels of infrastructural investments particularly in the roads, railways, waterways, power etc. are the other focus areas for supporting the goals of building up growth momentum. For this, the Government has allowed mobilisation of additional financial resources to the extent of Rs 31,300 crore by issue of bonds by public sector enterprises and other Government institutions such as NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority.

On the fiscal deficit front, the fiscal policy of the Government in 2016-17 will continue to be guided by the principles of gradual adjustments to achieve the fiscal consolidation targets as laid down in the FRBM (Fiscal Responsibilities and Budget Management) Act and Rules. The fiscal deficit for FY 2016-17 is estimated at 3.5% of GDP as against 3.9% estimated in 2015-16. The accelerated adjustment on fiscal deficit will help the Government in reducing the debt-to-GDP ratio at a faster pace. This in turn will help free-up more resources out of the Government revenues for developmental programmes and bring down the existing levels of interest payments as a ratio of net revenues of the Centre.

The Government has projected its total expenditure at Rs 19.78 lakh crore, out of which the Plan expenditure is pegged at Rs 5.50 lakh crore (an increase of 15.3%) while the Non-Plan expenditure is kept at Rs 14.28 lakh crore.

While the Government seems to have stuck to the roadmap of fiscal consolidation, a fiscal deficit target of 3.5% for FY 2016-17 seems rather ambitious given the outlays and announcement of 10.8% rise in spending. Though the Governments budgeted 11.8% growth in tax revenues seems achievable, the expectation of generating Rs 1,60,000 crore from disinvestment plus telecom receipts in FY 2016-17 (as against Rs 80,000 crore in FY 2015-16) seems ambitious. The target of Rs 1,00,000 crore from telecom receipts if not achieved may disrupt the Governments plan of achieving 3.5% fiscal deficit target.

The Governments borrowings and Indian bond markets:
The Government has budgeted the total borrowing requirement for FY 2016-17 at Rs 6,00,000 crore, while the net market borrowings is estimated at Rs 4,26,670 crore through dated securities to finance nearly 80% of Gross Fiscal Deficit (GFD). Moreover, a provision of Rs 16,649 crore is made to be realised through treasury bills. Thus, in terms of both the short-term and medium term debt financing, the borrowings strategy during 2016-17 will continue to rely majorly on market oriented domestic sources.

Aimed at providing growth direction to the Indian economy by following fiscal prudence and at the same time not compromising on developmental expenditure, the union budget 2016-17 seems to have by far met the expectations of both Indian equity, as well as bond markets. An objective to containing fiscal deficit target of 3.9% of GDP for the current year 2015-16 and further bringing it down to 3.5% of GDP for 2016-17, instils confidence and creates room for the RBI to cut policy rates by 50-100 bps in CY 2016. Moreover, by providing capitalization to banks and enabling banks to recover stressed assets, the Government has in a way given stimulus to the financial sector in India.

PersonalFN is of the view that, while the Government has chosen to remain on the path of fiscal prudence, the ambitious targets set by the Government may not be easy to achieve. However the focus on revival of rural demand by emphasising on the agricultural sector is an attempt to increase agricultural productivity and paving the way for non-inflationary growth in the medium term. While the Governments road map to fiscal growth and attractive valuations make the investment climate more conducive, you should stick to your investment plans of achieving long term financial goals. Moreover given the uncertainty prevailing in the global economy, it would be prudent to stagger your investments and invest gradually with a long term view.

 

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