Union Budget 2015-16: Laudable attempt to balance need to boost investment with social goals

The Union Budget for 2015/16 has made a laudable attempt to balance the need to boost investment in infrastructure with deepening the social sector net for citizens, following the fiscal squeeze imposed by the sharp step-up in tax devolution to the States.

In addition to an increase in the allocation for infrastructure spending, the announcement of auction of projects in the power sector and other infrastructure sectors with all clearances and linkages in place would help revive investment sentiment.

The setting up of the National Investment and Infrastructure Fund, rationalisation of capital gains at the time of listing of REITs and InvITs, tax free infrastructure bonds for rail, road and irrigation sectors, rational allocation of risks to fix the Public-Private Partnership (PPP) model, earmarking of a higher amount of duty being levied on petrol and diesel as road cess, and proposals to monetise gold savings are positives. However, the modest outlay for recapitalisation of public sector banks is disappointing.

The Budget also provided a thrust to the 'Make in India' programme, with steps to improve the ease of doing business, correcting the inverted duty structure for some sectors, focus on skill development and bankruptcy law reform.

Access to credit for small and medium industries is expected to improve following the creation of the Micro Units Development Refinance Agency (MUDRA) Bank and Electronic Trade Receivables Discounting System.

The government's gross tax revenues are forecast to expand by 15.8 per cent in 2015/16, benefiting from the increase in the rate of and reduction of the negative list for services tax as well as higher surcharge on direct taxes.

However, the roadmap for rationalisation of corporate taxes , reiteration that the government would strive for a stable and predictable tax regime, and deferral of GAAR by two years are positive steps.

The likelihood of achieving the target of Rs 69,500 crore for non-loan capital receipts in the Budget estimates (BE) for 2015/16, more than twice as high as the Rs 31,350 crore included in the revised estimates (RE) for 2014/15, will depend on how swiftly the stake sale programme is started in addition to market conditions.

In light of the reduction in crude oil prices and the deregulation of diesel, the allocation for fuel subsidy for 2015/16 BE appears adequate.

However, the outlay for food subsidy may need to be augmented if the existing entitlements under the National Food Security Act are rolled out pan-India on April 1, 2015. In addition, the carried-forward backlog of subsidy and considerable delays in payments in 2014/15 suggest that the allocation for fertiliser subsidy may be inadequate.

Given the increase in the percentage of shareable union taxes to be devolved to the state governments to 42 per cent from 2015/16 onwards from the prevailing 32 per cent, grants to state governments have been curtailed by Rs 27,000 crore in 2015/16 BE as compared to 2014/15 RE.

Moreover, to augment fiscal space for capital spending, the government has fixed a higher fiscal deficit target for 2015/16 (3.9 per cent of GDP) and 2016/17 (3.5 per cent of GDP), as compared to the rolling targets published in July 2014 as well as the recent recommendation of the Fourteenth Finance Commission (3.6 per cent of GDP and 3.0 per cent of GDP, respectively).

In light of the emphasis placed by the Reserve Bank of India on fiscal consolidation, we expect Repo rate cuts to be limited to an additional 50-75 basis points (bps) over the course of 2015, even though inflation is expected to remain well below the target of 6 per cent that the government has set in the Monetary Policy Framework Agreement with the Reserve Bank of India.

The author is Group CEO, ICRA