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There were several key messages from the budget this year, but the three which seem to stand out are in the areas of boosting infrastructure growth, reinvigorating rural demand and the rebooting financial sector. 
 
For boosting infrastructure, the roads sector is given an unprecedented Rs 97,000 crore of investment allocated in this year's budget. It is expected to have a multiplier effect on the economy in the coming years and help in efficient transportation. This along with the Rs 1.21 lakh crore CAPEX in railways seems to be a major thrust of the union government going ahead. 
 
The government is expected to approve 10,000 km of National Highways in Fiscal 2016-17 apart from the plan to upgrade 50,000 Km of state highways to national highways. 
 
Apart from this, the move to develop airstrips of AAI in some of the towns in India is another positive step concerning infrastructure. Similarly, the plan to reinvigorate PPPs in infrastructure is also a positive one which may help private sector step in for some investment. 
 
Second, for reinvigorating rural demand two related sectors have been targeted. One is the agriculture sector which has seen two back to back seasons of scanty rainfall. For the farmers in the sector, the announcement of a Fasal Bima Yojana will provide relief. And so will the move to create irrigation infrastructure through the strengthening of the Pradhan Mantri Krishi Sinchai Yojana over the long term. 
 
The creation of the e-platform for farmers to sell their produce in wholesale markets across the country will aid in more freedom to the farmers to sell their produce. The change in the APMC Act in 12 states about the same is a progressive step. For the rural sector, which is the second sector, the structural step to give more funds to Panchayats and Municipalities (Rs 2.87 lakh crore) as per the recommendations of the Fourteenth Finance Commission is taken. It is an appropriate step as it will lead to a massive devolution of funds to the third tier of governance. Similarly, the steps for development of urban clusters for market access and job generation will aid in strengthening the rural economy in the long term. The substantial allocations to MGNREGS (Rs 38500 crore) and the rural sector overall (Rs 87,765 crore) underlie the impetus that is being given to rural economy and demand in the sector. 
 
Third, another major focus area for the budget has been addressing the challenges of the financial sector. The introduction of the comprehensive Code on Resolution of Financial Firms in Parliament, as well as the code on Bankruptcy when enacted, will help in resolution as well as help bring in more accountability in the financial system. Also, the PSU banks have been facing problems due to asset quality and rising NPA. 
 
In addition to the comprehensive INDRADHANUSH already being implemented, the budget has done well to provide an allocation of Rs 25,000 crore for the recapitalisation of PSU banks. Also, the motivation to solve people's problem at the retail level are worth mentioning. These include the intent to tackling the issue of illicit deposit taking schemes as well as the intent to provide better access to financial services in rural areas through the rollout of ATM's and Micro ATM's over the next three years. 
 
Apart from these broader sectors other things where the government has done well at the macro level include sticking to the fiscal deficit target of 3.9 percent and 3.5 percent for the years 2015-16 (R) and 2016-17 (B) respectively. 
 
The government has also announced a committee to look into the FRBM Act, 2003 which is a good thing considering that market conditions in India are different than they used to be in the past. On the personal tax front, not much is seen for the middle class and the EPF taxation seems to be a negative move that has seen some visible backlash on social media. Another negative on the personal front seems to be on duties on several items where almost everything seems to get expensive from jewellery to cars to mobile phones to air travel. The only thing that is getting cheaper it seems are shoes and footwear. All in all the budget seems to be good for the rural economy and infrastructure sector and seems to take care of the financial sector problems at hand but leaves much to done for the middle class. 
 
 
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness &amp; Editor of Thinkers. The views expressed are personal. Amit can be reached at <a href="mailto:amit.kapoor@competitiveness.in">amit.kapoor@competitiveness.in</a> and tweets @kautiliya)

Three key things that standout from other measures in Budget 2016

Commoners' understanding and expectations are often very different from a purely economic and strategic understanding of the budget. For many people, the budgetary exercise means some things getting more expensive and some getting relatively cheaper. 
 
However, the budget is not just about making some goods and services expensive and cheaper, but is a tightrope exercise of the government where it tries to match national priorities with the available resources in hand. The future expectations of resources (namely in the form of revenues to the government) and usage of these resources for different purposes (likely expectations of expenditure) is done in the budget. 
 
The Finance Minister and his team's task is a difficult one at present, especially after the six bimonthly review by the RBI on 2nd Feb clearly mentioned its expectation from the budget. The RBI stated that it expected the government to stay on the path of fiscal consolidation and expected to go ahead with structural reforms that will help the economy come on a sounder footing. This comes after the NCAER lecture of RBI central bank Governor alluding to the pitfalls of the fiscal profligacy which can lead to catastrophic results including high inflation, capital outflows and loss of value of the currency. He talked about the recent example of Brazil to drive home the point that fiscal profligacy can end up leading to a greater trouble than the expected gains of such profligate steps. 
 
On the side of the common people are concerns like income tax rates, tax deductions and a host of things about what will get relatively cheap and what will get relatively expensive. While it is too early to comment on the specifics of the budget, a welcome thing for people would be if the government accepts some of the recommendations of the Justice Easwar committee especially the concerns which pertain to the procedural aspects. 
 
Earlier this year Justice Easwar Committee had put forth several measures that could be seen to be beneficial to the ordinary people. The committee was formed to into looking into the direct tax laws especially the Income Tax of 1961, of the country and simplify them for various stakeholders including individuals, small businesses and companies. The other purpose was to reduce unnecessary litigation. The ten member panel's draft report had made 27 suggestions under the IT Act and eight for reform through administrative instructions. The committee among other things had recommended 'enhancement and rationalisation of the threshold limits and reduction of the rates of TDS. TDS rates for individuals and HUFs to be reduced to 5 percent as against the present 10 percent', the report had stated. 
 
Another important suggestion is the proposed deletion of the clause that allows the tax department to delay the refund due for a taxpayer beyond six months and suggests a higher rate for delays in refunds. 
 
Apart from this, another major recommendation was the treatment of stock trading gains up to 5 lakh to be treated as capital gains rather than business income, a move that could see more investments in the stock market from the side of the retail investors. 
 
These procedural aspects apart from the change in the personal income brackets could help the common people benefit from the budget. On the indirect tax side much is not clear as the Government has had a deadlock with opposition on GST. This budget could be an important one from the viewpoint of tax laws in the country, both direct and indirect. 
 
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness &amp; Editor of Thinkers. The views expressed are personal. Amit can be reached at <a href="mailto:amit.kapoor@competitiveness.in">amit.kapoor@competitiveness.in</a> and tweets @kautiliya)

Budget 2016 may or may not meet expectations of the common man

The budget for the year is slated to be presented on the last working day of February. This being a leap year the Budget is most likely to be a leap year budget as mentioned by the minister of state for finance (MOS- Finance), Jayant Sinha in a recent interaction with the Confederation for Indian Industry (CII). The question of a leap year is not so important, what is a more pertinent point at this juncture is whether this budget will help India take the leap into being an engine of growth for the world economy. 
 
Three important considerations that will have to been factored into the budget calculus of the government. These positions including those on consolidation versus the expansion debate, the position on how to deal with the international situation and the way on how to manage the domestic conditions are important at this juncture. 
 
The first point on fiscal expansion versus consolidation can be thought of in the following manner. The argument is basically about whether India should spend more on public investments vis-a-vis trying to meet the fiscal deficit targets? 
 
Some economists opine that the deficits should be given a slip since the government stands to gain from the global commodity price collapse. Also, since the private sector at present seems a bit stressed and rather pessimistic to invest it is important for India to go for public spending especially in public works that can help in growth later on. These include highways, irrigation, etc. A more radical form of this view is to do away the deficit targets completely as these are mandated by the Fiscal Responsibility and Budgetary Management Act, 2003 and don't reflect the realities now. Governments should mandate its responsibilities according to the realities of the present rather than a pre-determined deficit figures. 
 
Contrary to this view of fiscal expansion is another view of fiscal consolidation. This view talks about the quality of governance and fixes accountability and also targets as not doing this for the second year in a row amid low commodity prices can give a signal that the government is not serious about keeping its targets. Raghuram Rajan, the present RBI governor, has said recently in a lecture at NCAER that the government must not overspend as international experience with Brazil suggests that a country must not pursue aggressive policies at the cost of macroeconomic stability. 
 
Also, the returns to investment or the multiplier does not seem to be as high as investments, and this is where the public investment argument for growth seems flawed in the context of India. Both the arguments seem sound however from a macroeconomic viewpoint this year's budget should bat for macroeconomic stability. 
 
The issue of macroeconomic stability brings to another related point about the international situation. The growth of the world economy is expected to be modest at best as pointed by several reports from the IMF, OECD, ADB and the World Bank. 
 
Commodity exporters like Brazil, Russia as well as countries like China, Japan and the whole of Europe seem to be in a bit of a rough weather, but America seems to be moving towards a normalisation of interest rates. The situation for Indian exports is not going to improve drastically as in value terms there is shrinkage in exports. This is where the budget has to look at how to allocate resources here to prevent the slide that is being witnessed in the export figures. Another factor that seems to be a concern at an international level is FPI outflows as well as concerns on Fed hike as well as protecting the rupee. The government must be factoring in all the potential sources of volatility while framing the budget. 
 
The third important consideration pertains to the management of domestic resources and domestic factors. These include public resources like coal and spectrum as well as stakes in public enterprises as well as reducing the stressed assets in public sector banks, etc. Another feature is on the agricultural side where two successive deficit years have put added pressure on the government to look at structural solutions to the dependence of Indian agriculture on monsoon. This again brings us to spending on public irrigation works by the government. 
 
These are important factors that must be reconciled with much foresight and wisdom. At the end of the month, the country will know whether India can hope to take the leap. 
 
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness &amp; Editor of Thinkers. The views expressed are personal. He can be reached at amit.kapoor@competitiveness.in and tweets @kautiliya)

Will the leap year budget help India take a leap?

The ‘halwa ceremony’ that marks the printing of budget documents took place on Feb 19. It signals the move towards the auspicious budget session. Media reports point that the PM is closely involved in the budget which is a great thing for the country. The government has also received suggestions from more than 7000 people who are to be seen in a positive light. The past few weeks have focused on 'Make in India' that saw pledges of more than 15.2 lakh crore, and steps for startup India and entrepreneurship, etc., which is a significant first step. There seem to be some areas where interventions from the government are likely to benefit people and institutions. This include: 
 
1. Infrastructure: The pace of infrastructure development has picked up in the recent past, but a need is felt for greater steps towards bettering India's still improving infrastructure. It is because South Asia as region reels under an infrastructure deficit. Infrastructure development is also imperative for garnering investments for key sectors of the economy like manufacturing that have traditionally underperformed. Particularly important areas to look for would be clean energy, inland waterways, ports and airports. The digital infrastructure will be another critical area that the government should be interested in improving. 
 
2. Manufacturing, Jobs and Exports: Manufacturing has the potential to create jobs not only in the manufacturing sector but also a far greater number of jobs in the service industry something known as a multiplier effect. That the 'make in India' week has been able to get pledges well over 15 lakh crore on investment is an important first step. Startup India also aims to solve the jobs conundrum which the youth of the country face. Also, exports have been falling for well over a year which is seen to be an area of concern that needs some policy level interventions. It will be important to see how the government looks at these related issues and tries to solve them. 
 
2. Education: Education is a key sector and can broadly be divided into school education and higher education. The budget must allocate adequate resources for not just creation of new institutions but must also focus on improving the functioning of existing institutions. The priority of the government should be on ways and means to develop several academic institutions for education in various fields, and higher education opportunities need to be expanded through measures to help entry of foreign educational institutions. 
 
3. Healthcare: For a productive population a critical prerequisite is a healthy population. The three-tier system of government needs to work alongside private hospitals to ensure people to have an adequate access to healthcare. Innovative and new age technologies can also solve some of the problems within the sector. The announcements in this area will be particularly important as there has been a feeling that healthcare has sector not been given due consideration in the present dispensation. 
 
4. Law and order: The justice delivery mechanism in the country as a system gets delayed and to tackle the issue of pendency the government must allocate adequate resources to improve the functioning of the legal institutions of the country. There is a long felt need for improving the efficiency of the legal processes in the country. 
 
5. Boosting the rural sector: Another fundamental challenge that is being felt is that promoting the rural sector that has lagged behind overall demand. Two consecutive seasons of scanty rainfall have led to rural distress, and the government must step in to prevent rural distress. Bank NPA's of the public sector are especially high, and that ties the hands of the banking sector and the government for not just the corporate sector but solving rural distress. It is where it is necessary to look at rural infrastructure development projects that help farmers and communities. The national agricultural market too appears as a good idea in progress. 
 
Apart from these broader focus areas the government needs also to work on widening the income tax base so that it may reduce some of the burden that the existing taxpayers face. Overall the stage is set for a historic budget. The question is how will the government structure the resources for addressing some of these key challenges? 
 
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness &amp; Editor of Thinkers. The views expressed are personal. Amit can be reached at <a href="mailto:amit.kapoor@competitiveness.in">amit.kapoor@competitiveness.in</a> and tweets @kautiliya)

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