Budget Impact. Jaitley fails to break new ground

A good way to assess the Budget is to evaluate it against the challenges it was apparently expected to fix. Let me pick three issues — (i) stepping up public investment as private capital investment is not forthcoming, (ii) recapitalisation of public sector banks and (iii) focus on agriculture/rural sector to mitigate the stress that has arisen out of two consecutive monsoon failures.

A glance at the total (plan+ non plan) capital expenditure suggests that it is budgeted to grow at about 4 per cent in 2016-17 as against 21 per cent in 2015-16 (revised estimates). The revised estimate for 2015-16 shows that capital expenditure for the year was reduced by ₹3,713 crore compared to what had been budgeted for. Also, capital expenditure as a percentage of the GDP at 1.6 per cent for 2016-17 (budget estimate) is lower than the 1.8 per cent recorded in 2015-16. In his Budget speech, last year, the Finance Minister had said that he expected this to increase by 0.5 per cent till 2017-18.

This shift away from capital expenditure simply means tilting the scales in favour of revenue expenditure, which is budgeted to grow at 11.8 per cent in 2016-17 as compared to 5.5 per cent in 2015-16. The increase is partly due to the provision made for the implementation of the Seventh Pay Commission award and partly due to the higher spending on rural India.

An allocation of ₹25,000 crore for recapitalisation of public sector banks in 2016-17 is clearly insufficient, particularly when their internal accruals are low, their equity valuations have eroded, and there are risks of further slippages in their non-performing assets. They need much higher support as it is unlikely that they will be able to raise ₹1.1 lakh crore out of the ₹1.8 lakh crore which the government is expecting them to mobilise from the market. In fact, the government’s estimate of ₹1.8 lakh crore for recapitalisation is an under estimation. An India Ratings and Research calculation shows that public sector banks would need ₹3.7 lakh crore of capital infusion between 2016-17 and 2018-19 to meet Basel III capital adequacy norms.

Against the backdrop of mounting rural distress, the Budget has allocated more funds for irrigation, rural roads and MGNREGA. The target for agricultural credit has been increased to ₹9 lakh crore for 2016-17 from ₹8.5 lakh crore in the previous year. A provision of ₹15,000 crore for interest subvention too has been made. The average allocation to each gram panchayat has been increased to ₹80 lakh and the allocation to MGNREGA increased to ₹38,500 crore, up 7.6 per cent from the previous year. While the Budget has attempted to address rural distress, a lot would also depend on how the state governments deliver on this account.

So far as achieving the fiscal deficit target of 3.5 per cent (of the GDP) is concerned, it will largely depend on non-tax revenue. This was the case in 2015-16 too, where disinvestment proceeds were budgeted at ₹69,000 crore but are expected to be ₹25,300 crore only, based on the revised estimates. But the shortfall in disinvestment proceeds was adequately compensated for by the collapse in global crude prices. This reduced the government’s oil subsidy bill and also allowed it to garner more tax revenue by raising the excise duty on petroleum products. Clearly, in the absence of this windfall gain, meeting the 2015-16 fiscal deficit target would have been difficult.

In the 2016-17 Budget too, the Finance Minister is relying heavily on non-tax revenue (proceeds from telecom spectrum sale and disinvestments) to do the magic. So far, the disinvestment and the strategic sales targets have proven to be difficult to attain. Also, the hope of garnering ₹99,000 crore from the telecom spectrum auction looks ambitious, particularly when the balance sheets of telecom companies do not appear to be in the pink of health.

On the whole, while this year’s Budget did address some of the concerns facing the economy, it failed to break new ground.

The writer is Director & Principal Economist, India Ratings and Research Views are personal

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