As an exercise in mass sycophancy by the business community, the Union Budget is hard to beat. No sooner does the finance minister (FM) finish his budget speech in Parliament, corporate captains fall over each other to hail the budget on news channels. The sycophancy climaxes the following day in ghost-written newspaper columns where industrialists, stock brokers and sundry intellectuals discuss how the budget will “torque up India Inc” and help India “hit growth milestone(s)” while showing the “vision to propel India to double-digit growth and make the country a manufacturing hub of the world” (all snippets taken from the March 1st issue of a leading business daily). 

However, because this ritual has been repeated so many times over the past 20 years, the sycophancy has lost its resonance with the people who run the country — our rulers know that the same tycoons will criticise them three months down the line for “not creating an enabling climate for growth” or for “the lack of movement on the ground” (which I read as code for lack of policies which enable crony capitalists to indulge in rent seeking). 

All of that being said, the finance minister’s second budget presentation was a relative improvement over his understandably feeble first outing on July 10, 2014 (which obviously was hailed at that time as a breakthrough budget), with the acceptance of the 14th Finance Commission recommendations creating a fiscal drag of 1% of GDP for the Centre’s finances. 

What was in it?

The Union Budget for FY16 opted for the following key initiatives:

• An upward shift in indirect tax rates to boost indirect tax revenue growth. The government hiked the services tax rate from 12.36% to 14% while hiking the excise duty rate from 12.36% to 12.5%. These rates can be expected to be increased over the course of the next few years in a bid to prepare for GST implementation.
• Outlined a roadmap for a gradual reduction in corporate tax rate from 30% to 25% over the next four years and the simultaneous removal of exemptions. The first cut in the corporate tax rate, however, is expected to be administered in FY17. 
• Total expenditure growth curtailed; incrementally ₹0.7 trillion allocated to the capex component of public investments. The growth in total expenditure has been limited to 5.7% year-on-year in FY16 (versus 7.8% year-on-year in FY15) by keeping plan expenditure unchanged at ₹4.65 trillion while increasing non-plan expenditure by ₹1 trillion or 0.7% of GDP. Compared with FY15, the government decided to allocate an extra sum of ₹1.3 trillion for public investments in FY16 (that is 0.9% of GDP) with ₹0.7 trillion being the capex related component (that is 0.5% of GDP). The sectors that this incremental expenditure is likely to focus on include rural roads, defence and railways.
• Postponement of fiscal goal of achieving a fiscal deficit of 3% of GDP. In-line with expectations of the economics team at Ambit, the government opted to show a higher fiscal deficit of 3.9% of GDP in FY16 against the initial target of 3.6% of GDP. The government will now target a fiscal deficit of 3% of GDP in FY18 instead of FY17. 

Falling short

While, as is mandatory in budget speeches, the minister spoke about his focus on infrastructure, for once there was some substance in the government’s commitment to the sector. Firstly, there was an allocation of an extra 0.5% of GDP explicitly for capex (with a likely focus on roads and railways). Secondly, the FM introduced the intriguing concept of “plug & play” projects, which will have all the clearances pre-cleared by the relevant bodies in the government. Encouraging as these announcements are, the large listed private infrastructure companies are unlikely to benefit from them. The main beneficiaries are likely to be the smaller infra companies (that is small-cap road builders with healthy balance sheets) and public sector entities (such as NTPC) with strong balance sheets and a willingness to build for modest RoE. 

The one negative surprise was that the FM seems to be saying that all exemptions from the standard corporate tax rate will gradually be phased out from FY17 onwards. This would appear to suggest that corporates who currently pay minimum alternate tax (infra companies, SEZ developers) could end up paying higher taxes post-FY17. However, since many of these MAT beneficiaries are already locked into prolonged tax disputes with the authorities, it is unlikely that they will be materially disadvantaged by the gradual abandonment of corporate tax exemptions.

All said, the critical numbers in the budget are in-line with my colleagues’ expectations. In particular, we had expected the FY16 fiscal deficit to be 3.9% because we had expected the 14th Finance Commission’s hike in the state’s tax take from 32% to 42% to reduce fiscal headroom for the minister. In that context, the FM’s budget is a realistic affair amidst the unrealistic expectations created in the financial community going into the budget. From the perspective of incipient economic recovery, I see the budget as being a relatively neutral event — there is absolutely nothing in it that will help the economy over the next 12 months. 

There is no compelling vision or agenda emerging from the above mentioned key initiatives. If the government wants to revive the economy through public capex, then the outlay given is not good enough. 

On the other hand, if it wants to show fiscal rectitude given that the government is not embarking upon a major capex plan, then slipping on the self-stated fiscal deficit target of 3.6% for FY16 and 3% for FY17 does not make sense. Further, if the Centre wants to signal to India Inc that it is on their side, then the delay in cutting the corporate tax from FY16 onwards is perplexing.

Before I conclude let me highlight two baffling things about this budget. Firstly, the minister actually reduced the capital infusion for the public sector banks by 30% year-on-year. Given how badly cash-strapped these banks are, it is a mystery as to how the public sector banks (which account for over 70% of credit outstanding in India) are going to finance an economic recovery in India. Secondly, the minister articulated a hardline stance on black money — both in terms of saying that domestic transactions have to be through the banking system (rather than being done in cash) and in terms of saying that non-declaration of foreign assets will result in criminal prosecution under existing money laundering laws. While the sentiment behind such a crackdown on black money and hidden wealth is laudable, I cannot help but think that our real estate sector is heading for a big squeeze if the government follows through on the minister’s budget speech.  

The writer is also the author of “Gurus of Chaos: Modern India’s Money Masters”.