Anda di halaman 1dari 27

Union Budget 2016-17

Orbis Economics Coverage | March 7, 2016

Viewpoint: A loaded fiscal deficit target
Ready Reckoner: 10 Key Budget takeaways
Viewpoint: What is India's potential growth? The Economic
Survey answers
Q&A: Union Budget and Economic Survey

The latest Union Budget was an important one for the NDA government, and one that was keenly awaited. After
almost two years in power, growth is yet to pick up substantially and sustainably. Even with key economic
challenges inflation and deficit under control, and a smart pickup in long term foreign inflows; a number of
industries awaited relief, as did the individual tax payer.
With this scenario as the backdrop, we at Orbis Economics keenly watched the developments on the Union
Budget front. This report brings to you a compilation of our work on it. Our research on the budget started with
our take on the Economic Survey, 2015-16, where a specific aspect is zoned in on: Indias potential growth;
which speaks volumes about adjusting to new long term economic realities.
On the release of the budget, we did an issue of our weekly subscription report India Macro Weekly on the

10 Key Takeaways from the Budget. From deficit targets to social spends, from infrastructure to finance, the
key announcements were covered. An opinion on the fiscal deficit target was posted as a LinkedIn post, which
spoke about the implications of maintaining it.
All of these are now compiled in this report, in reverse chronological order.

Last but not the least, we got a number of responses on our budget coverage both as comments as well as
offline. Some key issues raised by the professional community have been put together in a Q&A format.

Union Budget 2016-17

Viewpoint: A loaded fiscal deficit target

Viewpoint: A loaded fiscal deficit target

- Manika Premsingh

The most striking facet of the Union

Budget 2016-17, from a macro angle,
is the fact that the centres fiscal deficit
target has been retained at 3.5% of








meaning, than a cursory reading

would indicate. The fact that the
centre has maintained the target
stands out for 2 reasons:
1. GDP growth is not expected to accelerate in any significant manner over 2015-16 growth. The budget puts
2015-16 growth expectations at 7.6%, and as per the latest economic survey, growth in 2016-17 is expected to be
between 7-7.75%. Even if we assume that growth will be 7.75% in the forthcoming fiscal year, it is only 15 basis

points over the current year growth.


Viewpoint: A loaded fiscal deficit target

2. There was enough argument with the government to justify a slippage in deficit target, if it so wanted. The
Finance Minister has said on multiple occasions prior to the budget that he has received divergent views on how
the fiscal deficit should be treated. While one school of thought believes that the deficit should be allowed to slip
in favour of higher growth, another school of thought believes that the targets should be maintained. The Ministry
of Finance could have followed either path without facing any flak, given that there are arguments on both sides.
So what message does sticking to the Fiscal Deficit target truly send out?
There are 5 implications of the decision:
#1. Maintaining stability in commitments: By sticking to the
fiscal deficit target, the centre has signalled that it will not go back
and forth on previous commitments. This is a positive move at a
time when the government is trying to woo foreign investors into
the country. It has also maintained that it will ensure policy stability.

This is particularly important in light of the fact that foreign

investors have indeed been spooked by policy flip flops in the
past. Clearly, the centre is in no mood to go down that road, as far

Viewpoint: A loaded fiscal deficit target

as it can. Incidentally, this is not the first time that the Finance Minister has stuck to the fiscal commitment. He
did exactly the same soon after coming into power as well, despite the fact that the deficit targets in 2014-15, had
been set by UPA 2 government. Also, if he did not maintain it, this would be the second year in a row when the
target was allowed to inflate. Last year too, the fiscal deficit target had been raised to 3.9% from the earlier 3.6%.
#2. Eye on inflation: Even though the inflation rate has
come in below 6% in January, 2016, which was the target
rate for the RBI, it is just about below 6%. In other words, at
this rate, there is not much room to allow inflation to inch
up. Already, some increase in inflation is expected on
account of increased consumer expenditure, on the margin,
on account of implementation of 7th pay commission

recommendations, continued improved urban wage rates

and particular pressures felt on food price inflation in the
early part of the fiscal year. Letting the deficit go even more,
would increase inflationary pressures further.

Viewpoint: A loaded fiscal deficit target

#3. No conflict between FinMin and RBI: One of the most
prominent advocates of keeping checks on the fisc has been none
other than the RBI governor, Raghuram Rajan himself. Clearly, then
the Ministry of Finance is heeding to his perspective. Despite much
water-cooler type speculation on how far the Ministry and the
Central Bank see eye to eye, which mystifyingly enough, has even
become a focal debating point enough times in the recent past; the
latest policy move, puts the debate at rest. Hopefully, for good.
#4. No stimulus aided growth: While India has tried government stimulated growth to good effect in the
aftermath of the 2008 financial crisis, the mood is clearly different at present. The centre has, in effect, made it
clear, that growth acceleration needs to be organic rather than on steroids.
#5. Capital spends impacted: With the fiscal deficit in place, increased expenditure on the revenue account and
increased devolution to the states, it is hardly any surprise that there is some squeeze on capital spends. Growth
in capital spends is expected to slow down considerably in 2016-17 from 2015-16, which was the concern
among advocates of allowing some deficit slippage to take place.
All in all, it is not hard to see why the centre has stuck to its targets; though it does intentionally or not send out
the signal if your idea of Achhe Din was only growth at the cost of everything else, perhaps you were


Union Budget 2016-17

Ready Reckoner: 10 Key Budget Takeaways

#1. Fiscal discipline maintained

Fiscal deficit target maintained

Fiscal Deficit/GDP (%)

Union Budget 2016-17 maintained the fiscal deficit to

GDP ratio targets at 3.5% for the forthcoming fiscal

year, as per the Fiscal Responsibility and Budget

Management (FRBM) Act. This indicates government

commitment to fiscal discipline.




2015-16 2016-17 F

Maintaining fiscal prudence is positive at a time when

inflation still needs to be kept under check.

Source: Ministry of Finance

Budget Speech on the way forward for FRBM

There is a school of thought, which believes that instead of fixed numbers as fiscal deficit targets, it maybe
better to have a fiscal deficit range as the target, which would give necessary policy space to the Government

to deal with dynamic situations.. While remaining committed to fiscal prudence and consolidation, a time
has come to review the working of the FRBM Act. I, therefore, propose to constitute a Committee to review
the implementation of the FRBM Act and give its recommendations on the way forward.


#2. Capital spends slow, but

directionally correct
Capital spending growth slows down (%,yoy)

2015-16 (RE)
2016-17 (BE)



Major capital spend announcements

Thrust on transport system development (See #8)

Proposal under consideration to incentivise gas



production from deep water, high temperature and


high pressure areas, which are presently not being


exploited due to high costs and risks.




Source: Ministry of Finance, OE Estimates

Comprehensive plan to augment investment in

nuclear power generation over 15-20 years.

While a number of announcements

Budgetary allocation of INR 30 billion along with

have been made for capital spends,

public sector investments will be required for this.





expected to rise by a small 4%,

compared to 21% last year and a
10.8% increase in total spends.

100% FDI in marketing of food products produced

and manufactured in India.

New policy for management of government

investment in PSUs, including disinvestments.

#3. Excise duties to boost revenue

Tax revenue heads as a proportion of total receipts (%)






Corporation Tax




Taxes on Income




Gross Tax Revenue


revenue in total receipts to rise to 83% in

2016-17, higher than both during the revised

Direct Tax

estimates for 2015-16 and budget estimates

fro the year.

Indirect Tax




Union Excise Duties




Service Tax




Source: Ministry of Finance, OE Estimates

The centre expects the share of gross tax

Income tax and union excise duties share in

total receipts is expected to increase, on

account of buoyancy seen in collections in

Major direct tax announcements

For assesses with income < INR 500,000, ceiling of tax rebate raised from INR 2,000 to INR 5,000.
Rent deduction for individuals living in rented accommodation and with no HRA, raised to INR

60,000 from INR 24,000.

Limits for eligibility under presumptive taxation, which frees non-corporate business owners from
maintaining detailed books of accounts raised from INR 10 million to INR 20 million.

#4. Small business in focus

Major announcements impacting small business
Standup India Scheme: INR 5 billion has been provided for the scheme, which promotes
entrepreneurship among SC/STs and women. This will benefit at least 250,000 entrepreneurs | A
National Scheduled Caste and Scheduled Tribe Hub in the MSME Ministry is proposed, to
provide professional support to SC/ ST entrepreneurs to perform to their highest capability.

Pradhan Mantri Mudra Yojana: Amount sanctioned under PMMY had reached about INR
1trillion and over 25 million borrowers. | The target is now increased to INR 1.8 trillion.

Tax incentives: Manufacturing companies incorporated after March 1, 2016 given the option to
be taxed at 25%+surcharge and cess if they do not claim profit, investment or depreciation

related deductions. | Corporate income tax rate for the next financial year for companies with
turnover not exceeding INR 50 million reduced to 29% plus surcharge and cess. | Encouragement
for startups through 100% deduction of profits for 3 out of 5 years set up during April 2016March 2019. MAT will apply, but capital gains will not be taxed in specific cases.

#5. Continued financial sector

Major financial sector announcements

Public sector bank recapitalisation of INR 250

billion has been proposed to deal with NPAs.







strengthened for faster disposal of cases.


listed on the stock exchange to ensure higher

levels of transparency and accountability.

Steps already taken


Public sector general insurance companies will be




The Bank Board Bureau will start operations in

Revamping of Public Sector Banks

2016-17 and roadmap for consolidation of Public

Finance Bill 2016

Sector Banks will be spelt out.





#6. Irrigation improvements

Major irrigation related announcements

Irrigated Area

of Net
Area only

Pradhan Mantri Krishi Sinchai Yojana will be implemented in

mission mode. Specifically: (i) 285,000 hectares will be brought
under irrigation under it (ii) 89 irrigation projects will be fast
tracked, which will help to irrigate 8 million hectares. (iii)A

requirement of INR 170 billion crore next year and INR 865
billion in the next five years will be provided for. (iv) 23 of these
projects are completed before 31st March, 2017.

A dedicated Long Term Irrigation Fund will be created in NABARD with an initial corpus of about
INR 200 billion.
A programme for sustainable management of ground water resources has been prepared with an
estimated cost of INR 60 bn for multilateral funding. Also, at least 500,000 arm ponds and dug
wells in rain fed areas will be taken up.

#7. Health Security enhanced

Major health care related announcements

Annual Healthcare Spends

per person
India: USD 40
USA: USD 8,500

Source: Harvard School of Public Health,


A mission to provide LPG connection in the name of

women members of poor households has been

launched, with a sum of INR 20 billion and which will
benefit about 1.5 billion below the poverty line in
2016-17. The scheme will continue for at least two

more years to cover a total of 50 million BPL


A new health protection scheme which will provide health cover up to INR 100,000 per family to
provide for unforseen health events that push households below the poverty line has been
envisaged. For senior citizens of age 60 years and above belonging to this category, an
additional top-up package up to INR 30,000 will be provided.
3,000 Stores will be opened during 2016-17 under Prime Ministers Jan Aushadhi Yojana to
improve the availability of generic drugs.

#8. Skill development and

job creation
Major skill/job creation related announcements

Pradhan Mantri Kaushal Vikas Yojana: To promote

youth entrepreneurship, 1,500 multi-skill training
institutes are being established across the county,

with a funding of INR 17 billion.

Entrepreneurship education and training

to be

provided in 2200 colleges, 300 schools, 500 govt

Source: NSDC

ITIs and 50 vocational training centres through

Budget Speech on job creation in retail

Massive Open Online Courses.

Retail Trade is the largest service sector


employer in the countryIf Shopping Malls

sector, the centre will pay Employee Pension

are kept open all seven days of the week,

To incentivize creation of new jobs in

Scheme contribution of 8.33% for all new

employees enrolling in EPFO for the first three
years of their employment.

why not the small and medium shops? We

propose to circulate a Model Shops and
Establishments Bill which can be adopted
by the State Governments on voluntary


#9. Road transport systems

receive boost
In 2015,
Highest ever kilometers
of new highways
Highest ever
production of motorvehicles reached

Major road transport related announcements

550 billion has been proposed for Roads and

Highways. An additional INR 150 billion

Substantial increase in allocations to Pradhan

Mantri Gram Sadak Yojana to INR 190 billion in

2016-17 to advance completion from 2021 to 2019

Roads + Railways






habitations. Together with states share, INR 270

billion will be spent on it during 2016-17.

in 2016-17

will be

raised by NHAI through bonds.

Capital Expenditure on

INR 2.2 trillion

To speed up road construction, an allocation of INR

Motor Vehicles Act will be amended to open up the







entrepreneurs to operate buses .


#10. Focus on pulses, to keep

inflation in check
Major pulses related announcements

Food inflation on the rise


CPI inflation

Food and beverages

Incentives are being given for enhancement of

pulses production.

INR 5 billion under National Food Security Mission

assigned to pulses. The number of districts covered
increased to 622.

prices of pulses, the govt has approved creation of





buffer stock of pulses through procurement at

Source: CSO, OE Estimates

Food inflation on the rise

Pulses form major consumable

High pulses inflation is a policy


To deal with the problem of abrupt increase in

Minimum Support Price and at market price

through Price Stabilisation Fund.

The Price Stabilisation Fund has been provided a

corpus of INR 9 billion to support market


Union Budget 2016-17

Viewpoint: What is India's potential growth?
The Economic Survey answers


Viewpoint: What is India's potential growth?

The Economic Survey answers
- Manika Premsingh
The Economic Survey 2015-16 answers a key question

that has been on economy watchers' minds for a while:

What is India's potential growth rate?
The Ministry of Finance gives the answer: 8-10%.
While it should be unsurprising that the potential growth

rate for the Indian economy is higher than the rates at

which it is currently growing, the answer is still a loaded
one, for multiple reasons:
1. Recognising the New Normal: Despite the fact that the new base has bumped up India's growth rate, the
potential growth rate - assuming it to be around 9% i.e. mid-range of 8 and 10%, is hardly impressive. During

the 2005-08 period, GDP routinely grew at over 9% rates, even with the old base. If the expectation is the same
under the new base, it clearly implies an acknowledgement of the fact that India is in a 'new normal' phase for
the economy, where the potential growth rate is in fact lower. Given the continued instability in the global
economy as well as India's domestic challenges, this seems reasonable.


Viewpoint: What is India's potential growth?

The Economic Survey answers
2. Making a break from the past: In recognising that past bias has a tendency to colour future projections; the
methodology developed by the economics team of the Ministry of Finance, has derived its estimates for
potential growth based on (i) the level of economic development and (ii) degree of democratisation. Pointing to
the fact that there should be a 45 degree line representing the mean between these two critical factors
determining growth, It points to India and China being outliers to this line, with China showing high economic
development but low democratisation
and India showing the reverse. In this
context then, a mean revision would
imply that India would move up the
growth path, given its already strongly
democratic institutions and that would
in turn determine potential growth
rates (see chart from the survey).


Viewpoint: What is India's potential growth?

The Economic Survey answers
3. Turning underachievement into potential growth: By
implication, therefore, India is at present underachieving, as
pointed out in the graph above. Indeed, the survey's outer limit of
7.75% growth for 2016-17 is reflection of the fact that India is not
even likely to touch the lower point of its potential growth. In fact,
the survey goes on to say that the "convergence coefficient" or the
rate at which India can play catch up to the USA, should be at 2%
per year in terms of GDP per capita.

So how should India achieve this potential? In the words of the survey: "Hard policy choices and a cooperative
external environment will be required to convert opportunity into reality. With the external environment out
our hands, the next question is: Did the Union Budget 2016-17 bring India to its potential growth rate?


Union Budget 2016-17

Q&A: Union Budget and Economic Survey


Q&A: Union Budget and Economic Survey

Are the fiscal deficit targets achievable, especially in light of the increased expenditures on
OROP and 7th Pay Commission?
The centre has very well laid out the amount of expenditure on OROP and perhaps more widely
distributed but with a clear mention of 7th Pay Commission. Along with this, it also has reasonable
receipts' estimates, so we cant say that the numbers are not credible. A potentially higher nominal
GDP growth rates 2016-17, will also help keep the deficit in check. Moreover, a close look at
revised estimates for 2015-16 and budget estimates for 2016-17 reveals that they deficit numbers
are not that far apart in absolute terms in any case. If the centre can achieve the targets for this
year, it is quite likely that with a higher nominal GDP growth in the upcoming fiscal year, they will

achieve the deficit targets.

Is a 12.6% increase in direct tax collections possible as announced in the budget?

If we look at the direct tax collections for the year so far (April 2015-January 2016), they are over

11% above the numbers for last year. Even if the 12.6% number is a stretch, it will be a negligible
stretch, particularly if growth is somewhat better next year. Therefore, there is a good possibility of
achieving the target.


Q&A: Union Budget and Economic Survey

Why does the centre still have a fiscal deficit target, which is not in a range but a single
The budget document addresses this very question. It says that a committee will be appointed to
consider this matter. The fiscal deficit target at the present point in time is based on a number of
assumptions, which could be outside policy control. Factors such as weather, which impacts
agriculture output, global economic conditions and commodity prices can impact growth and
deficit targets. Hence, a range for deficit has been proposed in lieu of a single number.


All rights reserved. All copyright in this report is solely and exclusively owned by Orbis Economics
(OE). The same may not be reproduced, wholly or in part in any material form (including
photocopying or storing it in any medium by electronic means and whether or not transiently or
incidentally to some other use of this presentation), modified or in any manner communicated to
any third party except with the written approval of OE.
This report is for information purposes only. While due care has been taken during the
compilation of this report to ensure that the information is accurate to the best of OEs
knowledge, the content is not to be construed in any manner whatsoever as a substitute for
professional advice.
OE neither recommends nor endorses any specific products or services that may have been
mentioned in this report and nor does it assume any liability or responsibility for the outcome of
decisions taken as a result of any reliance placed on this report.
OE shall not be liable for any direct or indirect damages that may arise due to any act or omission
on the part of the user due to any reliance placed or guidance taken from any portion of this