The Union Budget will be assessed on the basis of the promises inflation, fiscal deficit and growth. The government has done well on all these fronts. Inflation is likely to be held at around 5% and the fiscal deficit has been slightly raised for 2016 from 3.6% to 3.9% and for 2018 from 2% to 3% to keep additional level buffer for pump priming.
Financial inclusion seems to be the major theme of the Union Budget with the JAM combination (Jan Dhan, Aadhar and Mobile) to be leveraged to focus on financial inclusion and ensure direct transfer of subsidy benefits. The government has also committed to stick to its commitment of implementing the GST on April 1st 2016.
The Foreign investors will have a lot to cheer about. There were strong reservations about the GAAR being implemented as well as on the timing of implementation of GAAR. This budget has set to rest these controversies. The implementation of GAAR has been postponed by 2 years and now it will be applicable from April 1st 2018 onwards. This will also give sufficient time to train the compliance teams as well as the IT authorities on this front so that unnecessary hounding can be avoided. Also GAAR will be with prospective effect and not with retrospective effect, thus putting to rest concerns that notices for past actions may be served.
The second area of concern for foreign investors was that many FPIs had received notices from the Income Tax department as to why they should not be liable for Minimum Alternate Tax (MAT). This confusion has been clarified that FPIs will not be within the ambit of MAT, of course assuming that these are market transactions on which STT has already been paid.
More importantly, the decision to eliminate the distinction between FDI and FPI will be a positive for stocks that are not able to permit FII investments due to these restrictions.
The housing for all scheme with a target of 6 crore houses is a major positive for housing activity in India. The budget has also announced a sharp increase in outlays for roads by Rs14,000 crore and increase of 1 lakh kilometer of roads. To give a big boost to infrastructure the National Investment Infrastructure Fund (NIIF) has been established with an annual flow of Rs.20,000 crore. The initial contribution will come from the government and this will be used by the special vehicle to leverage and raise additional resources.
At a macroeconomic level there is also an innovative method of using the unclaimed deposits with the PPF and EPF. The unclaimed corpus of Rs.9000 crore will be used to subsidize the social security schemes for senior citizens as well as for the vulnerable sections. This is surely a good measure to use the unclaimed funds.
Financial Markets focus…
The biggest decision was perhaps the decision to merge the FMC with SEBI, something that was long called for to ensure better regulation. The RBI Act and the SEBI Act will be modified to enable this merger. The government is also planning a Public Debt Management Agency which will bring both the domestic and external borrowings under one roof.
There is also an attempt to centralize more powers with the government. Section 6 of the FEMA will be amended to include that control on capital flows as equity will be brought under the ambit of the government. Effectively, while the RBI will continue to have full control over debt flows, the control over equity flows will largely rest with the government of India.
The Budget has also spoken about an Indian financial Code which will be a central legislation to cover all aspects of the financial market. It may also be the first step towards the creation of a super regulator who will regulate all aspects of the financial market.
How does the balance sheet look…
Fiscal deficit will be 3.9% of GDP in 2016. That still leaves room for work. The disinvestment target has been raised to Rs.69,500 crore for the year which will cover both profit making and loss making PSU companies. The budget has made a major effort towards bringing back black money into India. This has been done by imposing stringent penalties on people who do not report foreign income and foreign assets. The government has also permitted wealth tax to be exempt and imposed a Rich Man tax surcharge of 2% on the super rich.
All in all, the budget seems to be the beginning of a macro economic shift rather than one with big bang announcements. The budget has made a shift towards greater transparency in taxation, more thrust on infrastructure, greater help for MSMEs and small enterprises with an additional allocation for defense. The implementation of GST, control of fiscal deficit and global movement of oil prices will all decide how the FM lives up to its macroeconomic promise.