Budget 2016: A tightrope walk lies in store for Jaitley today
NEW DELHI: Finance minister Arun Jaitley faces the tough task of balancing the needs of the farm sector as well as the industry when he presents his third budget on Monday, even as he seeks to garner resources for boosting public spending for higher growth amid global headwinds.
On the income tax front, the budget may continue to observe status quo on tax slabs while tinkering with the exemptions.
Even though rising rural distress due to back-to-back droughts has put considerable pressure on the finance minister to spend more on social schemes, he also has to focus on winning back foreign investors craving for faster reforms.
His difficulties have been compounded by the huge payout of ` 1.02 lakh crore that will become necessary on account of the 7th Pay Commission recommendations for government employees. How he handles this without compromising on the previously announced goal of lowering the fiscal deficit to 3.5% of the GDP next year is something that remains to be seen.
Jaitley is also likely to fulfill his previous year’s promise of gradually reducing the corpo- rate tax from 30% to 25% over four years. It is expected that he may begin the exercise on budget day, keeping things revenue-neutral through the withdrawal of tax exemptions.
To shore up revenues to meet the increased expenditure, the finance minister may need to increase indirect tax rates or introduce new taxes. The Service Tax, raised to 14.5% last year, may see another spike to achieve the 18% level envisaged in the GST.
Furthermore, a new cess to fund initiatives such as Startup India or Digital India – similar to the Swachh Bharat cess levied last year – is also being speculated.
The revival of the investment cycle will also be on Jaitley’s agenda. While t he capital expenditure in 2015-16 increased by 25.5% over the last fiscal, it remains stuck at 1.7% as a percentage of the GDP and needs to go up to 2%.
The finance minister will have to steer spending towards sectors like infrastructure, and raise public spending in view of private investment not picking up at a desired pace. Now, it remains to be seen if Jaitley will loosen his purse strings or continue to consolidate. In the event that the government decides to increase spending, it would be a challenge to ensure that the funds are channelised into capital investments.
“Even if budgetary consolidation continues, India’s fiscal metrics will remain weaker than rating peers in the near term,” said analysts at Moody’s Investors Service earlier this month.
Foreign investors have sold a net $2.4 billion in shares this year, the second-biggest outflows in Asia – excluding China. The budget will need to focus on commodity driven sectors by providing protection measures because they are stressed due to the collapse in global demand and oversupply.
Jaitley had shifted the proportion of expenditure towards infrastructure and away from subsidies in the last two budgets.
The finance minister also faces the challenge of bank recapitalisation. With the agricultural sector reeling from drought and lower crop prices, the government is likely to retain spending on the rural employment guarantee programme, expand crop insurance and boost irrigation outlays.
On reforms, he may open more sectors to foreign investment and provide tax breaks to labour-intensive sectors such as leather and jewellery.
In view of the sharp fall in crude prices, Jaitley may reintroduce customs duty on imported crude, petrol and diesel. The duty was removed in 2011, when crude prices increased over $100 per barrel. The government could also increase import duty on gold, considering that gold imports have increased over the year and has partly contributed to the trade deficit and weak rupee through forex outflows.