Introduction
India's real
economic growth is projected by CSO at
7.6% for 2015-16. This is a respectable
growth rate, despite two specific sectors that do not appear to share this
prosperity. The agriculture sector is clearly distressed given two contiguous
drought years. The other sector that hasn't seen the increase in growth anticipated
two years ago. The excess capacity and deflationary conditions in the global
metals and commodity is a major reason for this low growth. The global growth slowdown and heightened
risks in the global environment form a critical background for the budget
Fiscal Consolidation
The most important
and critical part of the budget is the fiscal balance. Despite suggestions by many economists, business men and corporates to let the fiscal
targets slip for another year to finance higher government infrastructure investment in
2016-17, the FM has rightly decided to stick to the 3.5% of GDP, fiscal deficit
targets for 2016-17, outlined in the 2015-16 budget. This will also bring the Primary deficit down
to 0.3% of GDP in 2016-17. This is the best insurance against heightened global
uncertainty. The pleasant surprise is
that the Revised estimate(RE) for Revenue deficit is 0.3% point lower than
projected in the BE for 2015-16. The revenue deficit is an approximate measure
of the dis-saving of the Government. A
reduction in this deficit adds to National savings and thus provides the most
effective way of raising the National saving rate and reducing dependence on
foreign savings.
Subsidy
The most important subsidy reform in the budget is the decision to introduce
a bill to give statutory backing to the use of Aadhar for providing benefits,
transfers and subsidies to the targeted population of the poor and needy. This
disconnects the general problems of secrecy & confidentiality and connects
it to the governments duty to ensure that government's social expenditures
reach the intended beneficiaries without being lost in administrative waste or
corruption. A few small administrative steps are also being taken to reform the
subsidy system. One is the program to provide LPG to BPL women so as to
eliminate the health hazards of wood fueled open Chulahs. The second is a
proposed test in a few districts of a
shift in provision of fertilizer subsidy from the current wasteful approach to
a Direct Benefit Transfer (DBT) system successfully tried in LPG. Reform of the
food procurement continues to make very slow progress through greater use of
online & digital technologies. Disappointingly there was no mention of
reform of the kerosene subsidy based on the previously started DBT experiment.
Infrastructure Investment
The budget also remains firmly on track
with the infrastructure investment programs announced in the last two budgets
and in the interim periods. This includes roads, electricity, ports, waterways, airstrips and digital connectivity. To this
has been added a greater emphasis on irrigation and on infrastructure
connecting rural areas to State highways. The attempt to provide an integrated
program for development of agriculture and rural areas has attracted more focused
attention to irrigation & other inputs and processing of agri products.
There also three proposals related to PPPs: A Public Utility Resolution of
Disputes Bill, Guidelines for PP renegotiations and Credit rating system for
Infra projects, which will help in resolving legacy issues while imparting
greater regulatory clarity to bidding for new projects.
Tax Reform
The picture on the tax reform front
also remains mixed as in the last budget. Budget takes the first steps to
reform the Corporate Income tax, by giving notice of phasing out of some
exemptions and lowering the tax rate for new manufacturing firms that opt out
of use of remaining exemptions to 25%. There is also a commendable effort to
expand the presumptive tax effort including to professionals. However there are
also a number of small tax changes that are an irritant to tax payers and slow
progress on simplifying tax administration, even though the intent is reflected
in adoption/acceptance of Administrative Reform Committee & Justice Eswar
committee recommendations. Numerous
changes in excise and customs duty also suggest a move back from simplification
to industry specific (dis)incentives.
Policy Reform
Policy reforms are essential for sustained
fast growth. There are three or four policy reforms that are noteworthy. One is a
reform of the Motor Vehicles Act to open the passenger bus transport service
sector to private competition. So far this sector has been a monopoly of the
State Govts. The proposed reforms will allow private sectors and even State
companies from other States to provide bus transport service. This will be a
model law which can be adopted by the States.
The second reform is the permission of 100% FDI in the Food Processing
sector, for processing and storage of Indian agricultural produce and
manufactures based on these products. This is a very important opening, that
one has recommended for many years, after trying many other schemes without
achieving the desired result of reducing the wastage of Indian grown
agricultural produce. The third important reform is the Financial Firms
resolution Bill, and related reforms of ARCs plus the amendment of the RBI Act
to formally set up a Monetary Policy Committee (MPC). Even though this has been
expected, the formalization of monetry policy system in the RBI Act will
enhance the global credibility of the monetary system.
Over all it was a good budget,
because of the fiscal consolidation and the policy reforms discussed above.
-------------------------
An version of this note appeared in the Economic Times, under the
Banner, "Fiscal Balance best Insurance against global knocks,"
on March 1, 2016 at,
http://economictimes.indiatimes.com/news/economy/finance/budget-2016-fiscal-balance-best-insurance-against-global-knocks-says-ficci-mentor-arvind-virmani/articleshow/51201750.cms
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