Budget 2016: Fiscal balance best insurance against global knocks, says FICCI mentor Arvind Virmani

India’s real economic growth is projected at 7.6% for 2015-16. This is respectable, despite two specific sectors – agriculture and the globalised corporate sector – not appearing to share this prosperity. The global growth slowdown and heightened risks form a critical background for the budget.
The most important part of the Budget is the fiscal balance. Despite suggestions by many to let the fiscal targets slip for another year to finance higher government infrastructure investment in 2016-17, the FM has rightly decided to stick to the 5.5% of GDP fiscal deficit targets for 2016-17 outlined in the 2015-16 Budget.

This will also bring the primary deficit down to 0.3% of GDP in 2016-17. This is the best insurance against heightened global uncertainty.

The pleasant surprise is that the revised estimate for revenue deficit is 0.3% point lower than the Budget estimate for 2015-16. The revenue deficit is an approximate measure of the dis-saving of the government. A reduction in this deficit adds to national savings, thereby providing the most effective way of reducing dependence on foreign savings.

The most important subsidy reform is the decision to introduce a Bill to give statutory backing to the use of Aadhaar. This disconnects the general problems of confidentiality and connects it to the government’s duty to ensure that social expenditures reach the intended beneficiaries without being lost in administrative waste or corruption.

A few small administrative steps are also being taken to reform the subsidy system. One is the programme to provide LPG to BPL women so as to eliminate the health hazards of wood-fuelled open chulas.

The second is a proposed test in a few districts of a shift in provision of fertiliser subsidy to a direct benefit transfer (DBT) system successfully tried in LPG. Reform of food procurement continues to make slow progress through greater use of online and digital technologies. Disappointingly, there was no mention of kerosene subsidy reform based on the previously started DBT experiment.

The Budget also remains firmly on track with the infrastructure investment programmes announced earlier. These include roads, electricity, ports, waterways, airstrips and digital connectivity.

To this has been added a greater emphasis on irrigation and on infrastructure connecting rural areas to state highways. The attempt to provide an integrated programme for development of agriculture and rural areas has been backed by greater allocation of central funds.

The picture on the tax reform front remains mixed. This Budget takes the first steps to reform the Corporate Income tax by giving notice to phasing out of some exemptions and lowering the tax rate for new manufacturing firms that opt out of using the remaining exemptions to 25%.

There is also a commendable effort to expand the presumptive tax effort including to professionals. However, there are also a number of small tax changes and slow progress on simplifying tax administration. The reform of the Motor Vehicles Act to open the passenger bus transport service sector to private competition is noteworthy.

So far, this sector has been a monopoly of state governments. The proposed reforms will allow private sectors and even state companies from other states to provide bus transport service. This model can be adopted by states.

Another important reform is the 100% FDI in food processing, for processing and storage of Indian agricultural produce and manufactures based on these products. The Financial Firms Resolution Bill, and related reforms of ARCs, plus the amendment of the RBI Act to formally set up a Monetary Policy Committee are also noteworthy.