Increasing revenue key to maintaining fiscal balance in Budget 2016-17
Mumbai: India Ratings (Ind-Ra) believes having attained macroeconomic stability, though largely due to the collapse of global commodities prices especially oil, the topmost priority of the government in the forthcoming budget should be the revival of the investment cycle. While capital expenditure in FY16 increased by 25.5 per cent over FY15, as a percentage of GDP it is still stuck at 1.7 per cent and needs to go up to 2 per cent.
With two consecutive monsoon failures, rural distress has increased. Although a number of schemes such as ‘soil health card scheme’, agri-tech infrastructure fund, a technology driven protein revolution, a price stabilisation fund, and Prime Minister’s irrigation scheme with a special focus on micro-irrigation and watershed development etc. are at various stages of implementation, the government cannot relax on this front.
For augmenting government revenue, besides enhancing tax compliance and reducing tax disputes, the best way is to implement the direct tax code (DTC) and the goods and services tax (GST) at the earliest. As the fate of DTC is not known, implementing the GST appears to be the only way out for accelerating tax revenue. Although Ind-Ra would like a firm commitment about the introduction of GST in the FY17 budget, its destiny is likely to be determined by the politics than economics.
There is, however, a possibility of the government making a windfall gain in its non-tax revenue account in case the spectrum sale takes place in FY17. This may help the government to adhere to 3.5 per cent fiscal deficit target of FY17, despite the burden of implementing seventh central pay commission award. Fiscal slippage however is likely in FY16, due to the lower than anticipated GDP growth, fiscal deficit while as a percent of GDP is seen at 4.1 per cent in FY16, the absolute deficit will be close to the target of Rs 5.6 trillion.
India Inc will watch out for the fiscal stance of the government, if the government will loosen its purse or continue to consolidate. In the event the government decides to increase spending, will it be rightly channelized into capital investments, remains a challenge. The budget will need to focus on the commodity driven sectors by providing protection measures, since these sectors are stressed due to the collapse in global demand and oversupply.
Public sector banks (PSBs) the backbone of the economy require a well-defined path of recapitalisation till 2019. Ind-Ra’s calculation shows that PSBs would need Rs 3.7 trillion capital infusion between FY17-19 to meet the capital adequacy norms of Basel III.
Ind-Ra therefore, believes a higher budgetary support would be critical for the health of PSBs particularly when their internal accruals are low, equity valuations have eroded and the risk of further slippages due to their exposure to highly levered corporates is high. Ind-Ra will watch out for additional allocations to Mudra Bank or the expansion of the scope of the bank. We also eagerly await details on the implementation of Bank board bureaus which was announced last year.
Industry specific expectations, the infrastructure sector will be a priority for the government, with a focus on deepening the infrastructure debt market, providing a larger role to infrastructure debt funds and India Infrastructure Finance Company Limited, a push to activate Infrastructure investment trusts and reworking the private public partnership structure to make it more viable.
The government will need to provide alternative avenues for infra funding, an increase in the fund allocation for highways, a framework for revival of stalled projects and a roadmap for the road regulator.
The automobile sector may see the introduction of a ‘scrappage’ scheme for commercial vehicles and a reduction in excise duty on large cars and SUVs. The oil & gas sector may see rationalisation in the taxation structure for crude oil, a likely reduction on fixed cess on crude oil and higher import tariffs on crude oil and products.
The government will outline some steps to support low-cost housing and initiatives for overall infrastructure capex that would be the driver for cement demand. There is a possibility of the removal of the dividend distribution tax on dividend paid by SPVs to real estate investment trusts. The distribution tax is an impediment to the launch of such trusts, which will help real estate companies’ monetise commercial projects and reduce debt.
The steel sector may see reduction in import duty on coking coal, removal of the Clean Energy Cess on coal and a decrease in excise duty. In the non ferrous sector, the budget may increase export duty on Bauxite, Alumina, higher import duty on Caustic Soda, Coal Tar Pitch, Copper, Zinc and an elimination of import duty on Cu concentrates.
On the taxation front, the government is likely to reduce the corporate tax rate by 100 base point as part of its stated objective to reduce the corporate tax rate to 25 per cent by FY20. The budget may announce a schedule for the removal of exemptions available to companies and increase service tax rate by 200 base point to 16 per cent in order to align the rates with the proposed GST rate.
