Finance Minister Arun Jaitley sees the national budget as potentially transformative as it gives emphasis on reinvigorating the rural economy, agriculture, infrastructure, social and health sectors while leaving unchanged most taxes on the middle and lower income classes.
The single biggest achievement was holding on to the promise of fiscal discipline of 3.9 per cent fiscal deficit as a percentage of GDP for the year ending March 2016, and 3.5 per cent in FY17 and 3 per cent in the following two years. Bond markets rallied on the news.
Jaitley set up his plans for the year on nine pillars. The key areas include agriculture and farmers' welfare, rural sector, social sector including healthcare, educations, skills and jobs creation, infrastructure, financial sector reforms, ease of doing business, fiscal discipline, and tax reforms to increase tax compliance.
Standard & Poor's Rating agency said the budget highlights the government's commitment to encourage investment in manufacturing and infrastructure, and to bolster rural demand through welfare programs, while containing the fiscal deficit. However, its limited progress in fiscal consolidation only modestly reduces the vulnerabilities associated with India's low per capita income and weak public finances.
Increased spending on roads and railways will help fill up the inadequacy of private investment, Jaitley emphasised in and out of the parliament. He allocated Rs 55,000 crores for these sectors and an overall outlay of Rs 2.18 lakh crores, with promises to build more roads, especially those in rural areas. The government also promised all villages to be electrified by May 2018, compared with about 83,000 without electricity at present. He promised Rs 2.87 lakh crores for transforming villages and also increased allocation to MNREGA by Rs38, 500 crores.
Commenting on the budget, the architect of India’s economic reforms, Manmohan Singh rebuffed Jaitley’s ambitious plans of doubling farmers’ income in five years, saying it was impossible to achieve. Rural economy expert Yogendra Yadav too expressed deep disappointment saying the budget was a letdown for the farmers.
Describing the budget as well balanced, Jyoti Vaswani, chief investment officer at Future Generali India Life Insurance said adhering to fiscal deficit target is commendable.
"No long term capital gains tax on equity investments and no increase in service tax are the key positives from the budget," said Vaswani.
"There has been a clear focus on reviving the rural economy and continuing with spending on infrastructure which will boost economic growth."
On taxes, while leaving most income and corporate tax rates unchanged, the finance minister focused on using the route of indirect taxes to raise resources. His promise not to reintroduce retrospective tax was damped by plans to introduce GAAR from April 1, 2017.
The promise of 1.5 crore LPG connections to the families below poverty line this year and about 5 crores over the next few years, while taxing the dividend income of more than Rs10 lakh went well as a socialistic reform. Increase of securities transaction tax (STT) by three times on options too damped spirits of stocks traders.
Jaitley promised a committee for better monetary policy co-ordination with fiscal policy, and also a comprehensive bankruptcy code and measures to activate corporate bonds. He promised to crack down on what he described as the menace of deposit taking schemes from ignorant depositors.
"The recognition of gaps in the current insolvency and bankruptcy regime and the proposed introduction of the bankruptcy code is a step in the right direction," said Nikhil Narayanan, partner at Khaitan & Co. "However, much will depend on the insolvency related eco-system that will need to evolve to make these measures a success."
Stake In IDBI Bank
His announcement that the government could consider lowering its stake in IDBI Bank to lower than 51 percent almost triggered speculation whether it was a precursor to a large scheme, though it was not to be so. His allocation of Rs25,000 crores for recapitalization of public sector banks got lukewarm response.
Interestingly, in the initial six minutes the Sensex made a jump of 139 points, only to taper off gradually into the red as the finance minster decided to sit down and read his speech half an hour from the start, instead of the usual practice of standing. The Sensex plunged more than 600 points at one stage, only to recover towards the close of his almost one hour and 45 minute long speech, and later traded unchanged.
While the finance minister has his heart in the right place, one will have to watch if this dose can help the Indian economy in more than just the numbers.
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