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Budget 2016: Acid test for FM Arun Jaitley; PM Modi confident

NEW DELHI: Finance Minister Arun Jaitley faces a tough task of balancing the needs of farm sector as well as the industry when he presents his third and challenging Budget 2016 on Monday as he seeks to garner resources to boost public spending for higher growth amid global headwinds.

“I have an exam tomorrow,” Prime Minister Narendra Modi said on Sunday referring to presentation of General Budget in Parliament as he gave a pep talk to motivate students appearing for board exams for which he even roped icons like Sachin Tendulkar and Vishwanathan Anand.

“Friends, your exams are starting. I too have exam tomorrow. The country’s 125 crore people are going to take my examination,” the Prime Minister said, while pointing out that Budget is being presented tomorrow. “But you must have seen how healthy I am feeling, how full of confidence I am. Let my exams take place tomorrow and yours day after and may all of us succeed so that the nation succeeds…Move ahead with a free mind, without any tension of success or failure,” he said in his 35-minute programme.

On the income tax front, the Budget 2016 may continue with the status quo on the tax slabs while it may tinker with the exemptions.

Rising rural distress because of back-to-back droughts has put considerable pressure on the Finance Minister to spend more on social schemes while at the same time he has to win back foreign investors craving for faster reforms.

His difficulties have been compounded by the huge payout of Rs 1.02 lakh crore that will become necessary on account of the 7th Pay Commission recommendations for government employees. How much he does this without compromising on the previously-announced goal of lowering the fiscal deficit to 3.5% of the gross domestic product (GDP) next year is to be seen.

Jaitley is also likely to fulfil his last year’s promise of gradual reduction of corporate tax from 30% to 25% over four years. It is expected that he may begin the exercise in the Budget 2016 on Monday that may be accompanied by withdrawal of tax exemptions to keep the exercise revenue neutral.

To shore up revenues to meet the increased expenditure, the Finance Minister may need to increase indirect tax rates or introduce new taxes. Service Tax, was raised to 14.5% last year, may see a hike to prepare for the level of 18% being envisaged in the goods and services tax (GST).

Further, a new Cess to fund initiatives such as Startup India or Digital India and other programmes is being speculated, similar to the Swachh Bharat Cess levied last year.

On his agenda, there would also be the revival of the investment cycle. While capital expenditure in 2015-16 increased by 25.5% over last fiscal, as a percentage of GDP it is still stuck at 1.7% and needs to go up to 2%.

He will have to steer spending towards sectors like infrastructure and raise public spending in view of private investment not picking up at desired pace. It remains to be seen if Jaitley will loosen his purse strings or continue to consolidate. In the event 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,” analysts at Moody’s Investors Service said earlier this month. Foreign investors have sold a net $2.4 billion (nearly Rs 16,495.2 crore) in shares this year, the second-biggest outflows in Asia excluding China.

The Budget 2016 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. Jaitley has shifted the proportion of expenditure toward infrastructure and away from subsidies in the last two Budgets.

Besides the implementation of the 7th Pay Commission, he also faces a challenge of bank recapitalisation. With agriculture 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 give tax breaks for labour-intensive sectors such as leather and jewellery.

In view of sharp fall in crude prices and low probability of increase over the next one year, the government may reintroduce customs duty on imported crude, petrol and diesel, which was removed in 2011, when crude prices had increased over $100 (nearly Rs 6,862) per barrel.

The government could increase import duty on gold since gold imports have increased over the year and has partly contributed to the trade deficit and weak rupee on account of foreign exchange outflows.

With Agency inputs

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