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Union Budget 2016-17
On the right track
Monday, 29 February 2016 OPINION
This report is not intended to provide personal i...
29 February 2015
2
FM takes a steady step further on the tight rope
A good balancing act
The Union Budget 2016-17 could at...
29 February 2015
3
Key highlights - Union Budget FY17
Strengthening the economic framework
 Focus on inclusion to support...
29 February 2015
4
Financial Sector Reforms
 A comprehensive Code on Resolution of Financial Firms.
 Statutory basis for...
29 February 2015
5
Make in India
 Changes in customs and excise duty rates on certain inputs to reduce
costs and improve ...
29 February 2015
6
 For non-residents providing alternative documents to PAN card, higher
TDS not to apply.
 Revision of...
29 February 2015
7
Budget highlights – Financial Markets
 Mobilisation of Rs.31,300 crore by NHAI, PFC, REC, IREDA, NABAR...
29 February 2015
8
.
Key tax proposals
Businesses
Phasing out deductions
 Section 10AA amended to provide for a sunset da...
29 February 2015
9
Lower tax option for new companies
 The new manufacturing companies which are incorporated on or after...
29 February 2015
10
Personal income-tax
 The ceiling of tax rebate under section 87A raised from RS.2,000 to
Rs.5,000.
 ...
29 February 2015
11
Special provisions
Establishment of International Finance Centers
 The companies located in internati...
29 February 2015
12
Budget Estimates
29 February 2015
13
Fiscal roadmap
Assumptions
 The tax to GDP ratio is estimated on conservative side at 10.8 per cent i...
29 February 2015
14
Based on the Economic
Survey 2015-16
Volume - I
Volume - II
Background of the Union Budget for FY17
Un...
29 February 2015
15
India has made great
strides in removing the
barriers to the entry of
firms, talent, and
technology in...
29 February 2015
16
External position robust
The external position of India has strengthen considerably:
(a) The current a...
29 February 2015
17
Mismanaged subsidies
Subsidies for the poor tends to attract policy attention. But a number of
policie...
29 February 2015
18
Important disclosures
It is important to note that InvesTrekk does not offer any portfolio management ...
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Union budget 2016 17

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The finance minister maintained a commendable balance between the evenly stronger and mostly diverging compulsions of economic growth, fiscal discipline and political expediency.
Most of the budget provisions are inarguably aimed at ensuring inclusive growth, and bringing in equity in taxation and provisions.
A record number of measures have been introduced, to bring predictability, transparency and conciliation in the tax regime of the country.

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Union budget 2016 17

  1. 1. Union Budget 2016-17 On the right track Monday, 29 February 2016 OPINION This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Readers should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. InvesTrekk Global Research (P) Limited does not provide portfolio management, stock broking or any other fund based service. The model portfolios mentioned in this report are merely to illustrate the investment style and strategy recommended in the present times. Please refer to the important disclosures at the end of this report. © Copyright 2012 InvesTrekk Global Research (P) Limited. All rights reserved. InvesTrekk – Trekking the path less travelled and InvesTrekk are trademarks of InvesTrekk Global Research (P) Limited. FM takes a steady step further on the tight rope The finance minister maintained a commendable balance between the evenly stronger and mostly diverging compulsions of economic growth, fiscal discipline and political expediency. Inclusive growth and equity Most of the budget provisions are inarguably aimed at ensuring inclusive growth, and bringing in equity in taxation and provisions. Notably, a good deal of emphasis is placed on facilitation of execution and accountability of peoples' representatives. Even a 60% attainment of target to connect villages, through electrification, digital connectivity, and road connectivity, irrigation channel connectivity, etc.; could possibly increase productivity and India realize its growth potential to the fullest. Higher tax on rich aims to enhance equity in the taxation system. Predictability, transparency and conciliation in tax regime A record number of measures have been introduced, to bring predictability, transparency and conciliation in the tax regime of the country. Prescribing sunset clauses for a large number of tax deductions; reducing discretions of assessing officers, simplifying assessment procedures, clarification on retro taxation, make the taxation predictable to acceptable degree. One time opportunity to come clean on undisclosed income and assets may not go down well with social activists, but put in right perspective with the other provisions like settlement of litigations, and creating an environment of mutual trust between the assesses and the department, this could be condoned. Plugging many loopholes and triggers for litigation is also commendable. The methods like dividend stripping, larger than mandatory contributions to EPF, conversion of large companies to LLPs, etc. used widely to avoid taxes are sought to be plugged . Union Budget 2016-17 Well intended. Inclusion and productivity primary themes. Well drafted. Professional draft - easy to understand. Well presented. FM avoided all provisions that could have created confusion in markets or provoked the opposition in the house in his speech. Execution is the key. Team InvesTrekk investrekk@gmail.com
  2. 2. 29 February 2015 2 FM takes a steady step further on the tight rope A good balancing act The Union Budget 2016-17 could at best be described as a good balancing act between, the diverging compulsions of economic growth, fiscal discipline and political expediency. The loss in Bihar elections and upcoming elections in 5 states have wakened up the government to the lower and lower middle class. There is a conspicuous effort in the budget presentation to address this constituency through affirmative action (higher provisions) as well relative preference (higher tax on upper middle class and rich). Smart Cities and GST were conspicuous by their absence in the budget speech. Robinhood with a soft corner for oppressors too Prima facie the budget taxes the rich and provides for the poor. However, going a step down we find that the finance minister has left on the table a half plate of delicious cookies for the rich also. LPG connections for BPL families, higher spending on rural sectors, higher public spending on health and education sector, digital connectivity for villages, funding for MSMEs, plugging the leakages in PDS through automation, incentives for new job creation, incentive for affordable housing, rebate of 40% in EET status of NPS, central legislation to stop fraud in fixed deposit mobilization, loans to MSME projects of SC/ST etc. are examples of focus on lower middle and lower class population. Higher surcharge on people earning over Rs1cr, Infra cess on buying of cars etc., tax on dividend income, higher tax on cigarette & expensive clothes, TDS on high value purchases, higher STT on options trading, higher excise on large jewelers, are some example of making upper middle class and rich people shell more for the economic development and social justice. However, rich have got more than what they could have asked for under the circumstances. The notable benefits being - amnesty for undisclosed income and assets; opportunity to exit costly tax litigation by paying minimum taxes, better opportunity for monetization of road assets through amendment of Motor Vehicle Act; tax holiday for start ups, lower holding period for LTCG in unlisted equity, exemption of DDT on REITS etc., dispute resolution mechanism to streamline stuck PPP projects, etc. Some positive deviations from the historical path • No region specific provision, or exemption. • Making MPs accountable for implementation of central scheme. • Higher devolution of resources to local bodies. • Change in the way disinvestment in CPSE is looked at. • A lot of resource raising taken out of budget (NHAI, REC, PFC etc.) • Monetary policy formulation taken out of RBI domain.
  3. 3. 29 February 2015 3 Key highlights - Union Budget FY17 Strengthening the economic framework  Focus on inclusion to support domestic demand - more money in the hands of lager section of people at the bottom of the pyramid.  Ensure macro-economic stability.  Setting up monetary policy committee.  Maintain fiscal discipline - adhere to pre-set FRBM targets, and setting up mid-term goals to allow flexibility to deal with crisis like situations.  Statutory status to Aadhar.  Proposal to privatize road transport sector fully.  Providing a credible exit to the stuck promoters and lenders through comprehensive bankruptcy code and dispute resolution mechanism  Two step forward on banking reforms  Making MPs accountable for implementation of centrally assisted schemes in their respective areas.  Enforcing "enablement" rather than "provisioning" through Stand Up India program a long term positive. Public expenditure reforms  Improve quality of public expenditure by focusing on high priority areas like priority areas of - farm and rural sector, social sector, infrastructure sector employment generation and recapitalisation of the banks.  Material rise in allocation to rural sector, especially irrigation, drought management, animal husbandry, and rural connectivity (electrification, networking, and digitalization).  Material rise in allocation to local bodies.  Higher allocation on health - LPG for BPL families, subsidized pharmacies.  Incentive for job creation through EPF contribution for new jobs. Infrastructure  Total outlay for infrastructure Rs2,21,246 crore.  Total investment in the road sector at Rs97,000 crore during 2016-17.  Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger segment  Action plan for revival of unserved and underserved airports to be drawn up in partnership with State Governments.  To provide calibrated marketing freedom in order to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas  Comprehensive LT plan to augment the investment in nuclear power generation.  Steps to revitalize PPPs.
  4. 4. 29 February 2015 4 Financial Sector Reforms  A comprehensive Code on Resolution of Financial Firms.  Statutory basis for a Monetary Policy framework and a Monetary Policy Committee through the Finance Bill 2016.  RBI to facilitate retail participation in Government securities.  New derivative products will be developed by SEBI in the Commodity Derivatives market.  Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts.  Comprehensive Central Legislation to be bought to deal with the menace of illicit deposit taking schemes.  Increasing members and benches of the Securities Appellate Tribunal.  Allocation of Rs25,000 crore towards recapitalisation of Public Sector Banks.  Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs1,80,000 crore.  General Insurance Companies owned by the Government to be listed in the stock exchanges Key Challenges  Risks of further global slowdown and turbulence.  Additional fiscal burden due to 7th Central Pay Commission recommendations and OROP. Fiscal Discipline  Fiscal deficit in RE 2015-16 and BE 2016-17 retained at 3.9% and 3.5%.  Revenue Deficit target from 2.8% to 2.5% in RE 2015-16  Total expenditure projected at Rs19.78 lakh crore. Plan expenditure pegged at Rs.5.50 lakh crore under Plan, increase of 15.3%. Non-Plan expenditure kept at Rs14.28 lakh crores  Mobilisation of additional finances to the extent of Rs.31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising Bonds.  Plan / Non-Plan classification to be done away with from 2017-18.  Every new scheme sanctioned will have a sunset date and outcome review.  Rationalised and restructured more than 1500 Central Plan Schemes into about 300 Central Sector and 30 Centrally Sponsored Schemes.  Committee to review the implementation of the FRBM Act.
  5. 5. 29 February 2015 5 Make in India  Changes in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of domestic industry in sectors like Information technology hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, Maintenance repair and overhauling [MRO] of aircrafts and ship repair. Resource Mobilization through additional cess  Krishi Kalyan Cess, @ 0.5% on all taxable services, w.e.f. 1 June 2016. Proceeds would be exclusively used for financing initiatives for improvement of agriculture and welfare of farmers. Input tax credit of this cess will be available for payment of this cess.  Infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs. No credit of this cess will be available nor credit of any other tax or duty be utilized for paying this cess.  'Clean Environment Cess’ of Rs400 per tonne on coal, lignite and peat. Tax simplification and predictability  New Dispute Resolution Scheme to be introduced. No penalty in respect of cases with disputed tax up to Rs10 lakh. Cases with disputed tax exceeding Rs10 lakh to be subjected to 25% of the minimum of the imposable penalty. Any pending appeal against a penalty order can also be settled by paying 25% of the minimum of the imposable penalty and tax interest on quantum addition.  High Level Committee chaired by Revenue Secretary to oversee fresh cases where assessing officer applies the retrospective amendment.  One-time scheme of Dispute Resolution for ongoing cases under retrospective amendment.  Penalty rates to be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts.  Disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed under rule 8D of Section 14A of Income Tax Act.  Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.  Mandatory for the assessing officer to grant stay of demand once the assessee pays 15% of the disputed demand, while the appeal is pending before Commissioner of Income-tax (Appeals).  Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from Rs.15 lakhs to Rs.50 lakhs.  11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT).  13 cesses, levied by various Ministries in which revenue collection is less than ` 50 crore in a year to be abolished.
  6. 6. 29 February 2015 6  For non-residents providing alternative documents to PAN card, higher TDS not to apply.  Revision of return extended to Central Excise assesses.  Additional options to banking companies and financial institutions, including NBFCs, for reversal of input tax credits with respect to nontaxable services.  Customs Act to provide for deferred payment of customs duties for importers and exporters with proven track record.  Customs Single Window Project to be implemented at major ports and airports starting from beginning of next financial year.  Increase in free baggage allowance for international passengers. Filing of baggage only for those carrying dutiable goods.  Expansion in the scope of e-assessments to all assessees in 7 mega cities in the coming years.  Interest at the rate of 9% p.a against normal rate of 6% p.a for delay in giving effect to Appellate order beyond ninety days.  ‘e-Sahyog’ to be expanded to reduce compliance cost, especially for small taxpayers.
  7. 7. 29 February 2015 7 Budget highlights – Financial Markets  Mobilisation of Rs.31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising Bonds.  Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.  The LTCG tax rate for private limited companies to be 10%.  Non-banking financial companies shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts.  Any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company subscribed by a non-resident shall be exempt from capital gains tax.  Any transfer of units in merger or consolidation of plans of a mutual fund scheme shall be exempt from capital gains tax.  Determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by one year.  Commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.  Minimum Alternate Tax (MAT) shall not be applicable to a foreign company, w.e.f. 01.04.2001 if the foreign company does not have as a permanent establishment under relevant Double Taxation Avoidance Agreement (DTAA) or a place of business in India.  Additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving dividend in excess of Rs.10 lakh per annum.  Securities Transaction tax in case of ‘Options’ is proposed to be increased from .017% to .05%.  New benches of SAT.  No capital gain tax on redemption of Sovereign Gold Bonds. In case of sale of such bonds in secondary market, indexation benefit to be allowed.  Interest earned on Deposit Certificates issued under Gold Monetisation Scheme, 2015 and capital gains arising from them shall be exempt from tax.  Tax concessions to the undertakings established in the International Finance Centers.  No tax on share acquired under the approved scheme of demerger or amalgamation.
  8. 8. 29 February 2015 8 . Key tax proposals Businesses Phasing out deductions  Section 10AA amended to provide for a sunset date of 31.03.2020 for commencement of activity of manufacture or production of any article or thing or providing services by a unit located in a Special Economic Zone for availing the deduction under said section.  Rule 5 of Income-tax Rules, 1962 amended to restrict the highest rate of depreciation under the Income-tax Act to 40% for all the assets (whether old or new) falling in the relevant block of assets with effect from 01.4.2017  Section 35 amended to reduce the weighted deduction under section 35(1)(ii), 35 (2AA) and 35 (2AB) to 150% from the financial year 2017-18 to financial year 2019-20 and from the financial year 2020-21 onwards the deduction shall be restricted to 100%. It is also proposed that deduction under section 35(1) (iia) and (iii) of the Income-tax Act shall be reduced from 125% to 100% with effect from 01.04.2017.  Section 35AD amended to reduce the deduction from 150% to 100% in the case of a cold chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertilizer and building and operating hospitals with effect from 01.04.2017.  Section 35AC amended to provide that no deduction under the said section shall be available from financial year 2017-18 (Assessment Year 2018-19).  Section 35CCC amended to restrict the deduction to 100% from financial year 2017-18 (Assessment Year 2018-19).  Section 35CCD amended to provide that the weighted deduction of 150% shall be available upto financial year 2019-20 (assessment year 2020-21). However, the deduction under the said section shall be restricted to 100% from financial year 2020-21 (Assessment Year 2021-22).  Section 80IA amended to provide that no deduction shall be available to enterprise which starts development, operation and maintenance of any infrastructure facility on or after 1st April, 2017. It is further proposed to provide that the development, operation and maintenance of an infrastructure facility beginning on or after 1st April, 2017 shall be eligible for investment linked deduction under section 35AD of the Income-tax Act.  Section 80IAB amended to provide that no deduction shall be available under this section where the development of Special Economic Zone begins on or after 1st April, 2017.  Section 80-IB(9)(ii), (iv) & (v) amended to provide that no deduction shall be available to an undertaking engaged in production of mineral oil or natural gas if the production commences on or after 1st April, 2017.
  9. 9. 29 February 2015 9 Lower tax option for new companies  The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Lower tax on income from exploitation of Indian patents  10% rate of tax on income from worldwide exploitation of patents developed and registered in India. Lower tax rate for MSME  Lower corporate income tax rate for the small enterprises i.e companies with turnover not exceeding Rs5 crore to pay tax @29% plus surcharge and cess. Exemption for affordable housing undertakings  100% deduction for profits to an undertaking from a housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019, and is completed within three years of the approval. Minimum Alternate Tax will, however, apply to these undertakings. Taxation of securitization trusts  The regime for taxation of Securitisation Trusts and their investors is proposed to be modified. It is proposed to provide complete pass through to securitisation trust and the income is to be taxed in the hands of investor in same manner and to the same extent as it would have been taxed, if the investor had made underlying investments directly and not through trust. Exemption for start ups  100% deduction of profits for 3 out of 5 years for startups set up during April 2016 to March 2019. MAT will apply in such cases. Capital gains will not be taxed if invested in regulated/notified Fund of Funds and by individuals in notified startups, in which they hold majority shares. Taxation of professionals and MSME  Section 44AB of amended to enhance the threshold limit for audit of accounts from Rs25 lakh to Rs.50 lakh for persons having income from profession.  Section 44AD amended to increase the threshold limit of presumptive taxation from Rs.1 crore to Rs 2 crore.
  10. 10. 29 February 2015 10 Personal income-tax  The ceiling of tax rebate under section 87A raised from RS.2,000 to Rs.5,000.  Exemption for house rent paid u/s 80GG raised from rs. 24000 to Rs60000.  Surcharge from 12% to 15% on persons, other than companies, firms and cooperative societies having income above Rs1 crore.  Tax at the rate of 10% of gross amount of dividend will be payable by the recipients, that is, individuals, HUFs and firms receiving dividend from domestic companies in excess of Rs.10 lakh per annum.  TDS at the rate of 1% to be deducted on purchase of luxury cars exceeding value of Rs.ten lakh and purchase of goods and services in cash exceeding Rs.two lakh.  It is clarified that the capital gain arising from transfer of a long term asset being share of a private limited company shall be chargeable to tax at the rate of ten per cent.  Acquisition of shares by an individual or HUF as a consequence of demerger or amalgamation of a company shall not attract tax liability under section 56(2)(vii) of the Income tax Act.  Deduction for additional interest of Rs.50,000 per annum for loans up to Rs.35 lakh sanctioned during FY17, provided the value of the house does not exceed Rs.50 lakh.  Deduction of interest payable on capital borrowed for acquisition or construction of a self-occupied house property shall be allowed if such acquisition or construction is completed within five years (previously three years).  Standard deduction of 30% shall be allowed against the amount received on account of unrealised rent while computing the house property income.  The date of agreement fixing the amount of consideration for the transfer of immovable property and not the date of registration shall be taken for the purposes of computing capital gains in case of transfer of immovable property if any payment in consequence of such agreement has been made by the purchaser of the property through any mode other than cash.
  11. 11. 29 February 2015 11 Special provisions Establishment of International Finance Centers  The companies located in international financial services centre shall not be liable to dividend distribution tax.  Minimum Alternate Tax shall be charged at the rate of nine per cent from units located in international financial services centre.  The transaction in foreign currency of sale of equity share or units of equity oriented funds or units of a business trust taking place on a recognised stock exchange established in international financial services centre shall not be liable to securities transaction tax. It is also proposed that the gains arising from transfer of such long term capital asset shall be exempt from tax.  The transaction in foreign currency of sale of commodity derivatives taking place on a recognised association established in international financial services centre shall not be liable to commodity transaction tax. Rationalization of provident fund provisions  EPF and NPS brought at parity in taxation.  Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National Pension Scheme (NPS).  In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made on or from 1.4.2016. Employees earning a salary of less than Rs. 15000 exempt from this restriction.  Exemption limit is proposed to be increased from Rs.1 lakh to Rs.1.5 lakh for annual contribution by an employer to a superannuation fund.  Limit for contribution of employer in recognized Provident and Superannuation Fund of Rs.1.5 lakh per annum for taking tax benefit.  Any amount received by the nominee, on the death of the employee at the time of closure of account under National Pension System referred to in section 80CCD of the Income-tax Act is proposed to be exempt.  Exemption is proposed to be provided for one-time portability from a recognised provident fund or superannuation fund to National Pension System. 
  12. 12. 29 February 2015 12 Budget Estimates
  13. 13. 29 February 2015 13 Fiscal roadmap Assumptions  The tax to GDP ratio is estimated on conservative side at 10.8 per cent in BE 2016-17 i.e. at the level of RE 2015-16.  Apart from the measures on expenditure rationalization, the fiscal consolidation strategy of the Government now hinges on reclaiming the past trends of high growth in tax revenues and also giving a boost to non- tax revenues. The base correction on gross tax revenues that has already been achieved during the current year and further policy initiatives being taken in Budget 2016-17 will help to build up on the higher base achieved in 2015-16. However, on the downside, with the easing of the inflationary pressure, the nominal growth is estimated to increase moderately compared to the previous high growth years. This may have some restraining impact on the growth of indirect taxes next year, particularly as a high growth base was achieved in the current year.  The telecom receipts including receipts on account of licence fees and levies and spectrum auctions constitute a significant portion of the non- tax revenues. The telecom receipts are expected to increase in BE 2016- 17. The renewal of licences issued 20 years ago are likely to come up in 2016-17.  Total borrowing requirement for 2016-17 has been budgeted at Rs.6,00,000 crore. Net market borrowings of Rs.4,26,670 crore through dated securities has been budgeted to finance nearly 80 per cent of GFD. A provision of Rs.16,649 crore is also made to be realised through treasury bills. Thus, in terms of both the short-term and medium term debt financing, the borrowings strategy during 2016-17 will continue to rely on market oriented domestic sources
  14. 14. 29 February 2015 14 Based on the Economic Survey 2015-16 Volume - I Volume - II Background of the Union Budget for FY17 Unusually volatile external environment This year budget is presented with an unusually volatile external environment with significant risks of weaker global activity and non-trivial risks of extreme events in the background. ...India is not insulated, needs to be fortified In past 25yrs, Indian economy has increasingly got correlated with global economy. If the world economy lurches into crisis or slides into further weakness, India’s growth will be seriously affected, for the correlation between global and Indian growth has been growing dramatically. Fortifying the Indian economy against possible spillovers is consequently one obvious necessity. ...flexible exchange rates necessary Many identifiable vulnerabilities exist in at least three large emerging economies—China, Brazil, Saudi Arabia—at a time when underlying growth and productivity developments in the advanced economies are soft. More flexible exchange rates, however, could moderate full-blown eruptions into less disruptive but more prolonged volatility. ...as China devaluation lurks One tail risk scenario that India must plan for is a major currency re- adjustment in Asia in the wake of a similar adjustment in China, as such an event would spread deflation around the world. Another tail risk scenario could unfold as a consequence of policy actions—say, capital controls taken to respond to curb outflows from large emerging market countries, which would further moderate the growth impulses emanating from them. ...and global demand will likely remain low In either case, foreign demand is likely to be weak, forcing India—in the short run—to find and activate domestic sources of demand to prevent the growth momentum from weakening.
  15. 15. 29 February 2015 15 India has made great strides in removing the barriers to the entry of firms, talent, and technology into the Indian economy. Less progress has been made in relation to exit. Thus, over the course of six decades, the Indian economy moved from ‘socialism with limited entry to “marketism” without exit’ Impeded exit has substantial fiscal, economic, and political costs. We document its pervasive nature which encompasses not just the public sector and manufacturing but the private sector and agriculture. A number of solutions to facilitate exit are possible. The government’s initiatives including the new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act as well as the broader JAM agenda hold the promise of facilitating exit, and providing a significant boost to long-run efficiency and growth. Indian economy failing to realize potential It is a matter of concern that the Indian economy is consistently failing in realizing its full potential, which is assessed around 8-10 per cent annual growth. Realizing this potential requires a push on at least three fronts: (a) Making the economy really pro-competition, minimizing the intervention of the state. (b) Major investments in people—their health and education—will be necessary to exploit India’s demographic dividend. (c) Implement serious farm sector reforms, including complete overhauling of current system of incentives and subsidies. ...nominal growth at historic low levels In an unusual trend even as real growth has been accelerating, nominal growth has been falling to historically low levels. According to the Advance Estimates, nominal GDP (GVA) is likely to increase by just 8.6 (6.8) percent in 2015-16. In nominal terms, construction is expected to stagnate, while even the dynamic sectors of trade and finance are projected to grow by only 7 to 73/4 percent. ...as global deflationary pressures increase the WPI has been in negative territory since November 2014, the result of the large falls in international commodity prices, especially oil. As low inflation has taken hold and confidence in price stability has improved.
  16. 16. 29 February 2015 16 External position robust The external position of India has strengthen considerably: (a) The current account deficit has declined and is at comfortable levels; (b) Foreign exchange reserves have risen to US$351.5 billion in early February 2016, and are well above standard norms for reserve adequacy; (c) Net FDI inflows have grown from US$21.9 billion in April-December 2014- 15 to US$27.7 billion in the same period of 2015-16; (d) The nominal value of the rupee, measured against a basket of currencies, has been steady. Although the rupee has declined against the dollar, it has strengthened against the currencies of its other trading partners. Fiscal sector stable The fiscal sector registered three striking successes: ongoing fiscal consolidation, improved indirect tax collection efficiency; and an improvement in the quality of spending at all levels of government. 1.34 Despite the decline in nominal GDP growth relative to the Budget assumption (11.5 per cent in Budget 2015-16 vis-à-vis 8.6 per cent in the Advance Estimates), the central government will meet its fiscal deficit target of 3.9 per cent of GDP, continuing the commitment to fiscal consolidation. However, the fiscal stance matters not just for macro-economic outcomes but also for the quality of spending. A need is felt to improve the quality by shifting expenditures away from current to capital expenditures. Medium-Term Fiscal Framework The 2016-17 fiscal stance needs to be assessed in two contexts. Most obviously, it needs to be evaluated against the likely short term outlook for growth and inflation. At the same time, it also needs to be framed in a medium-term context. That’s because the most fundamental task of budget policy is to preserve fiscal sustainability. The government needs to be in a strong position tomorrow to repay the debts it is incurring today. And it needs to be seen to possess this strength. ...Debt to GDP at worrying level For much of the period since the 2008-09 the government has run large annual deficits in order to reflate the economy. Initially, the impediment was the large annual deficits that the government incurred as it sought to reflate the economy. These deficits were eventually curtailed, but macro imbalances nonetheless continued to grow, leading by 2013-14 to the second impediment: a sharp exchange rate depreciation that inflated the rupee value of foreign debts. As a result, overall government debt continued to grow as fast as GDP, keeping the debt ratio of the consolidated government (Centre plus states) near 67 per cent of GDP. This ratio is high compared to some countries in Emerging Asia, India’s credit rating peers.
  17. 17. 29 February 2015 17 Mismanaged subsidies Subsidies for the poor tends to attract policy attention. But a number of policies provide benefits to the well-off. It is estimated that these benefits for the small savings schemes and the tax/subsidy policies on cooking gas, railways, power, aviation turbine fuel, gold and kerosene, making assumptions about the definition of “well-off” and the nature of neutral policies. It is found that together these schemes and policies provide a bounty to the well-off of about R1 lakh crore. We highlight that policies that are based on providing tax incentives will, in India, benefit not the middle class but those at the very top end of the income distribution. For example, the average income of those in the 20 percent tax bracket places them roughly in the 98.4th percentile of the Indian income distribution, and the corresponding figure for the 30 percent tax bracket is the 99.5th percentile.
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