The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Dhruv Shah, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
On February 29, 2016, the Union Finance Minister Arun Jaitely presented his third budget in the parliament which took care of the every section of the society while the opposition parties called it a pro-rich and anti-poor budget.
The budget 2016 predicted revenue gain of INR19,600 crores by virtue of INR20,670 crores revenue gain through indirect taxes and INR1060 crores revenue loss through direct tax proposals. In means that share of direct taxes in total tax collection is further reduced vis-à-vis direct taxes. Direct taxes are progressive in nature and are considered as good tool for income transfer from rich to poor. On the contrary, indirect taxes are regressive in nature and affects poor more than the rich. Therefore in an ideal society, the share of direct taxes must be higher than indirect taxes.
The Finance Minister has predicted the Fiscal Deficit to remain under 3.5% in the fiscal year 2016-17 which seems to be a herculean task. In December 2015, there was significant shortfall in non-debt receipts due to shortfall in disinvestment target. Though major subsidies declined by 1.7% during April-December 2015 but it was due to falling international crude prices. It also gave the room to government to fill its exchequer by increasing the tax on petroleum products. International oil prices are not expected to dip further as already oil companies are selling the crude at the price below their operational cost. Implementation of Seventh Pay Commission will further strain the government finances in the coming fiscal.
The Budget 2016 increased the service tax to 15% but as stated earlier, indirect taxes are regressive in nature as its impact is passed on to the ultimate borrower. Therefore they also fuel inflation which is a very sensitive issue in India. In order to increase the revenue, stress must be given on increasing the tax base rather than increasing the tax rate.
The Public Sector Banks are going through rough patch currently and are in urgent need of the recapitalization. On February 29, 2016, when the Finance Minister was delivering the budget speech, PSU bank shares witnessed bearish trend after the announcement of INR25,000 for the recapitalization. The Economic Survey has called for the need of INR 1,80,000 crores for PSU bank capitalization.
In the budget, agriculture got its due importance as the Finance Minister stressed for doubling the farmers’ income by 2022. Since more than 50% of the workforce is still engaged in agriculture, increase in agriculture productivity can raise the income of 50% of the work force. Secondly, increase in rural income further generates demand for the industry and service sector thus pushing the entire economy towards the higher growth trajectory. For that matter, the budgetary allocation for agriculture and farmers’ welfare was increased by INR35,000 crores. The entire rural sector also got a strong budget boost with an allocation of over INR 87,000 crore.
The Budget also proposed setting up of Higher Education Funding Agency (HEFA) with a fund of INR 1,000 crore. It will be mostly used for redressal of the problems of students seeking educational loan. It has been announced that 10 million youth will be provided skill training under Pradhan Mantri Kaushal Vikas Yojna (PMKVY) during 2016-19. A Digital Literacy Scheme has also been announced in the budget to cover 60 million additional households.
Another announcement by the budget which was hailed by the industry was promoting the ease of doing business in India. Government will bring in changes in Company Law to improve the ease of doing business in India by amending the solvency law. Budget also clearly stated that no law would be passed with retrospective nature. In order to strengthen ‘Start up India Stand up India’, it would now become possible to register a company in one day.
Thus, it is clear that in its third budget, the government tried to shed its image of pro-industry by as well as tried to sound progressive also. Nevertheless, most independent analysts have rated it as a progressive budget.