The wild swings in the stock market during Finance Minister Arun Jaitley's second full Budget speech perhaps captured the difficulty of assessing the impact of this Budget without poring over the details. My initial reaction to it is somewhat positive, in that it addressed some of the key concerns in the economy without either straying from the medium-term fiscal path (sticking to the 3.5 per cent fiscal deficit to gross domestic product, or GDP, target) or basing its fiscal arithmetic on grandiose assumptions on things like growth or tax receipts.
On the expenditure side, at least, Mr Jaitley seems to have ticked the right boxes with a continuing thrust on infrastructure, particularly roads. Budgetary allocations for road construction is at a hefty Rs 82,000 crore and large allocations to infrastructure capex keeps the Plan capital expenditure (a broad proxy for overall government capex) at one per cent of GDP, the same as 2015-16.This is no mean feat, given that in 2015-16 spending had grown by a whopping 35 per cent over the previous year. The Railways, the other possible engine of growth, has received fairly hefty government support of Rs 45,000 crore this year. It is now up to the ministries to get projects shovel ready to absorb these allocations.
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While there is a general tendency to view overtures to the rural sector as intrinsically populist, dire conditions in the agrarian economy seem to warrant immediate attention. The Budget tries to do this both through short-term income support schemes like the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and investments, particularly in irrigation and road connectivity, that would pay off more in the medium term. Construction activity under these investment programmes is known to have quick multiplier effects and this could drive an upswing in rural demand in 2016 itself.
The Rs 25,000 crore allocated as recapitalisation for banks seems to have disappointed many, and is indeed perhaps inadequate given the sheer size of the stressed asset problem. However, this infusion of government funds is perhaps the most that Mr Jaitley could afford at this stage and as he has promised to supplement it later. The allocation certainly recognises the fact that the tottering public sector banks (PSBs) desperately need government assistance and alternative funding sources are scarce. If stock and bond markets improve over the year, this initial handholding by the government could help to "crowd in" private investment in their capital.
The 11 per cent nominal GDP growth does not seem too aggressive if one considers a 7.5 per cent growth in real GDP and a GDP deflator that is likely to go up from this year's one per cent on the back of a base effect alone. While the large number of additional cesses could have some contractionary impact on the sectors that they have been imposed on, the absence of a service tax hike perhaps offsets this. The fact that the much feared redefinition of the "long term" to measure capital gains for stocks was absent should also bring some cheer to the markets. The finance minister lowered the corporate tax rate that he had committed to in the previous Budget cautiously if not half-heartedly. However, the fact that really small enterprises get the initial benefit is welcome since they have borne the brunt of the economic slowdown.
Which part of the fiscal arithmetic can raise a few eyebrows then? The gross tax collection growth of 11 per cent seems achievable given the new cesses and the continuing impact of the increase in oil cess introduced in the middle of last year. However, it is certainly possible to question the numbers projected for capital receipts. Conventional divestment is budgeted at Rs 35,000 crore, which seems unrealistic, given current market conditions. But then market conditions are known to change. The strategic sales target of around Rs 21,000 crore would succeed only if the government puts some of its profitable companies on the block - there's unlikely to be much of an appetite for chronically loss making units. A substantial amount of Rs 99,000 crore has been budgeted from telecom receipts, but that doesn't seem terribly out of whack with the valuations of over Rs 4 lakh crore that analysts have made for saleable 4G spectrum auction. However, whether telecom companies have the resources to shell out this kind of money next financial year remains a key question. One hopes that some of the potential shortfall under these heads can be made up from the money received through the tax amnesty scheme that has been announced.
There's another risk that one needs to factor in. An 'interim' amount has been assumed for the revision in government salaries in line with the pay commission recommendations and a panel has been set up to arrive at the final structure. There is always the risk of the final structure crimping the fiscal space available since the non-Plan expenditure budgeted does not seem to account for full implementation.
What the budget seems to lack a little is fiscal or financial innovation to augment government resources both for the short and medium term. For instance, much has been discussed earlier about the plans to leverage the equity base of the National Infrastructure Investment Fund (NIIF) and the pressing need for the government to contribute to the asset reconstruction process of the financial system through a 'bad bank'. Perhaps these ideas need to be fleshed out a bit more before actually being implemented. However, the finance minister could have started a conversation by an explicit reference in his speech. For me, the absence was conspicuous and disappointing.
Finally, let me highlight one positive aspect of the Budget that should not be overlooked. The adherence to the fiscal deficit to GDP target should enable the central bank to respond by cutting its policy rate. The finance minister has to fund his deficit by borrowing from the market and both his net borrowing and gross borrowing (grossed up from the money he needs to borrow for redemptions of past bond issues) are lower than median market expectations. This should arrest the rise in bond yields if not bring both yields and borrowing costs down for individuals and companies.