The Baton Passes to Fiscal Policy- Business News
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The Baton Passes to Fiscal Policy

Getting the Budget arithmetic correct was difficult this year, but the finance minister came up trumps.

  • March 15, 2016  
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SHUBHADA RAO, Chief Economist, Yes Bank

Some budgets please only the markets, some only the masses, and then there are some that maintain a fine balance between both. And Budget 2016 is one such effort. Not only did the government manage to adhere to the fiscal deficit target of 3.5 per cent, it also increased allocation for infrastructure and medium-term rural schemes, while abstaining from measures that may have led to transitory growth spurts.

Getting the Budget arithmetic correct was difficult this year, with markets and rating agencies keenly awaiting both the overall fiscal deficit reading as well as the underlying quality of the Budget. On the expenditure front, the finance minister had to provide for (1) a weak rural economy, (2) subdued private sector investment, and (3) spending commitment for OROP and the 7th Pay Commission.

This was challenging as direct tax revenues have been constrained on the back of below-par nominal GDP growth, while weak equity markets and policy delays have meant weaker-than-budgeted disinvestment revenues. Amid such competing needs, the FM opted to set this "Budget for Bharat" by proposing to enhance absorptive capacity of the rural economy and improve productivity through investing in infrastructure, rather than relying on temporary solutions for the rural sector such as farm loan waiver or higher MSPs.

Spending on rural infrastructure has been significantly enhanced by way of programmes on rural housing, roads and electrification . To address the weak capital formation in agriculture, which has languished at less than 3 per cent of GDP since liberalization, Plan spending for agriculture has been raised by 22 per cent, following an 18 per cent contraction in 2015/16. What comforted investors was a simultaneous emphasis on quality, realism and credibility.

Quality and effective consolidation not only disciplines the government, it also keeps inflation impulses in check, while helping crowd-in private investment in the medium term. The 11.2 per cent year-on-year expected growth in tax revenues seems achievable on the back of 11 per cent expected nominal GDP growth.

Expenditure on subsidies is expected to reduce by 20 basis points to 1.7 per cent of GDP due to lower global crude oil prices and incremental benefits from lower leakages. Ideally, on the back of available cushion from lower subsidies, we would also have desired higher spending on public capex. Moreover, higher provision towards 7th CPC dispensation during the course of the year is likely, which at this point seems under provided for.

Furthermore, over time, the government must rely less on lump-sum non-tax revenues such as disinvestments, which are susceptible to market gyrations. The annual budget exercise is an event. The process of budget making, however, should be geared toward tackling more long-term issues as well, such as those relating to increasing tax buoyancy and rationalising tax principles.

While the government has been taking measures to gradually trim the country's high corporate tax from 30 per cent to 25 per cent and address the inverted duty structure, other pertinent measures such as the GST, which has the capacity to simplify the current taxation system, still remain caught at the stage of Parliament discussion.

Written by  SHUBHADA RAO, Chief Economist, Yes Bank