Budget 2016: Union Budget implications on the Macro Economy

From a macroeconomic perspective there are three themes that stand out in the Union Budget. Firstly, there is a huge allocation made in the budget to rural economy and basic infrastructure. Secondly, despite the pressures of higher outlays, OROP and 7CTC, the finance minister has still opted for fiscal prudence over fiscal license. Thirdly, bank recapitalization has disappointed with an allocation of just Rs.25,000 crore.

Allocations for the Rural economy:

The budget has made massive allocations for the rural economy. Farm allocations at Rs.35,984 crore is intended to double farm incomes by 100% in the next five years.  This is a major positive for companies and industries that are linked to rural incomes. There is an allocation of Rs.38,500 crore for the MNREGA which means the government has focused on creating rural employment and incomes rather than just making allocations.

Big thrust to infrastructure:

There has been an aggressive allocation to road and rail infrastructure put together. The government has already substantially increased the completion of roads per day. Nearly 85% of the road projects that were stuck due to a variety of reasons have been restarted in the last year The total allocation of Rs.218,000 crore has been made by the government for road and rail infrastructure. This is likely to have a huge multiplier effect on the overall economic growth

Fiscal Responsibility maintained:

That is probably the big story of this budget. Despite the policy hawks talking about breaching the fiscal deficit target for the next two years, the government has stuck to its target of 3.9% this year and 3.5% next year. This, despite the higher allocations to OROP and 7 CTC, is truly commendable. This fiscal responsibility is likely to be positive for India’s external ratings.

Bank Recapitalization:

The allocation of Rs.25,000 crore for bank recapitalization may sound quite disappointing as the markets were expecting something closer to Rs.35,000 crore. There is not much clarity on how the $60 billion of NPAs of the banking system is going to be addressed. But the finance minister seems to have kept window open for greater recapitalization on a case-by-case basis.

On the Revenues front:

The real story is on the revenues front. Here are few key highlights:

  • The voluntary disclosure of income scheme has been set at a more reasonable rate of 45%, as compared to the 60% in the global black money case. This could be a key revenue generator for the economy this year.
  • The Voluntary Dispute Resolution Scheme is also likely to be positive as the thousands of crores that are stuck up in various litigations can be partially released and revenues can be raised. This simplicity will coax a lot many of these disputed cases to be closed voluntarily
  • Disinvestment targets have been slashed down sharply from Rs.70,000 crore last year to Rs.36,000 crore this year. It will have to be seen how much of this target this government manages to collect.
  • Reading the fine print, the ATF and fuel have been subjected to higher excise duty. Similarly, cigarettes have been the standard target this time around too.
  • The budget has also a streak of being pro-poor. Dividends have been taxed for the rich in the hands of the shareholders. Similarly, there is an additional cess on luxury cars. But the government has decided to keep off raising the service tax as it hits the masses more flatly

In a nutshell, the government has done a commendable job within the financial constraints.  The biggest takeaway has been that the FM has not succumbed to the temptation of going easy on fiscal targets. Of course, time will tell how successfully the government manages to match its earnings capacity and yearning capacity.

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