The Budget has tried to address most of the pending issues in the economy and has taken a bold step in the fiscal consolidation roadmap. Although we think that the shift in consolidation path was warranted given our investment needs, however, we will closely watch for any slippages, which are unproductive in nature as they might easily become inflationary.
Balancing fiscal consolidation with the growth objective
The fiscal consolidation roadmap has been pushed back by one year and the FY2016 deficit has been pegged at 3.9% instead of the expected 3.6%. We will construe this positively as it signals the need for an increase in public capex spending especially for infrastructure. In an environment where private sector is not yet incentivized to add capex, the Government’s initiative is welcome to kickstart the process.
Encourage financial savings and leverage technology
In order to encourage the shift from physical saving towards financial saving, especially gold, the budget has taken a series of steps to monetise the significant gold stock in the economy and also to deter incremental consumption. Some such steps are introduction of sovereign gold bonds and modifications to gold deposit scheme. The thrust towards increasing exemptions for pension schemes is also positive. Further, the Jan Dhan, Aadhar and Mobile (JAM) number will be utilized for better targeting of subsidies, promote financial inclusion and achieve a cashless India.
Progressive change in tax regime
The introduction of GST by April 1st 2016 is likely to improve tax buoyancy by developing a common market and reduce the cascading effect on the cost of goods and services. In the process of implementing GST, service tax rate has been hiked to 14%. Other sources of boosting tax revenues have also been explored such as additional surcharge on the super-rich. The emphasis on having a non-adversarial tax regime by providing clarity on GAAR and making tax laws friendlier for foreign investors would help in boosting investments as well.
“Make in India” initiative to support manufacturing sector growth
The “Make in India” imprint was visible across various segments of the budget and the need for skill development was highlighted. To support industry, corporate tax rate will be reduced from 30% to 25% from next year onwards. Measures such as infrastructure fund, additional depreciation allowance for power, tax free bonds for infrastructure, single window clearance, etc. are welcome.
New monetary policy framework and movement towards DMO
The Government has accepted RBI’s policy framework of inflation targeting and has also signaled its intent to set up a debt management office, which is a commonly accepted practice globally.
Improved transparency and governance
The focus on improving governance and fostering increased transparency and compliance in the economy are most welcome. In this regard initiatives such as the black money legislation and PAN requirement for real estate purchases etc will go a long way in achieving this objective.
Source: ICICI Bank Treasury Research Group