Finance minister Arun Jaitley has stuck to his fiscal deficit guidance of 3.9% for FY16 and shown a roadmap of how he would achieve 3.5% in FY17. After a difficult year for fiscal policy, the minister has tried to re-establish his credentials for sound fiscal management when he projected 3.5% for FY17 and 3% for FY18 and FY19. Based on the fiscal discipline and many other positive factors, the Reserve Bank of India is expected to cut its repo rate in the next monetary policy review or even before that.
The government has rightfully focused on ensuring macro-economic stability and prudent fiscal management, boosting domestic demand, continuing with the pace of economic reforms and policy and initiatives. There has been an emphasis on enhancing expenditure in the priority areas of farm and rural sector, social sector, infrastructure sector employment generation, and recapitalisation of banks.
The markets took solace and appeared relieved because of two reasons. One, that there has been no blanket increase in service tax rates; two, there is no change in long-term capital gains tax on listed investments. Other positives include focused spends on social sector schemes—an amount of R87,765 crore allocated to various social sector schemes, renegotiation of old PPP projects which would be essential for movement of stalled projects and improving project viability for stressed projects, and reduction in corporate tax for new entities.
However, there were some notable negatives in the Budget, as always. There is an increase in distribution tax for dividend received over R10 lakh. It is in line with the Economic Survey’s mention of higher taxes for the rich-class. STT on options increased significantly to 0.05% from 0.017%. This has rightfully meant to discourage speculation in the options market. Increase in excise duties and various taxes has been another negative. There has been no reduction in corporate taxes yet, and there is no clarity on the future roadmap. It could be that the fine print would carry details. Exemptions are gradually being taken off for corporates.
Sectorally, investment as a theme scores over consumption. While consumption would definitely get a leg up from reduced personal income-tax for certain income-tax payers, infrastructure as a sector has got increased allocation, particularly roads and railways which have got a whopping Rs 2,18,000 crore allocation. Imposition of infrastructure cess—1% on petrol, CNG, LPG cars; 2.5% on diesel cars below certain engine capacity; and 4% on bigger diesel cars and SUVs, and imposition of 1% service charge on vehicles above—is a negative for passenger vehicle companies. Cess on crude oil has been reduced from R4,500 per tonne to 20% ad valorem. This augurs well for ONGC and Oil India. In fact, no increase in customs duty on crude bodes well for oil marketing companies. While bank recapitalisation of Rs 25,000 crore (unchanged) is too less and hence negative for the public sector banking space, but with a strong fiscal deficit, rates are likely to soften, benefiting them as a whole.
Housing finance sector, especially affordable housing, got lots of positive provisions. All in all, it is a pragmatic Budget. India story gets stronger.