India Set To Stay On Fiscal Consolidation Path

India’s Finance Minister Arun Jaitley has kept the fiscal consolidation path intact and set the agenda for the financial year 2016-17 as ‘Transform India,’ focusing more on farm and health sectors and rural development.

In his second full year budget, the minister told lawmakers that India is a ‘bright spot’ in a gloomy landscape and the economy will grow 7.6 percent in the current fiscal.

The fiscal deficit in 2016-17 is forecast to narrow to 3.5 percent of GDP. He projected 3 percent fiscal deficit for FY18 and FY19.

The financial years 2015-16 and 2016-17 have been extremely challenging for government expenditure, the minister observed.

The next financial year will cast an additional burden on account of the recommendations of the 7th Central Pay Commission and the implementation of Defense one rank one pension.

The current account deficit is estimated at 1.4 percent of GDP at the end of this year, Jaitley said.

Shilan Shah, an India economist at Capital Economics, said the tighter-than-expected fiscal stance significantly raises the chances of a 25 basis point rate cut in the central bank’s next scheduled meeting in April, or at an unscheduled meeting before then.

From fiscal 2017-18, the plan and non-plan classification of government expenditure will be down away, Jaitley said.

The minister maintained the recapitalization limit for public sector banks at INR 250 billion.

He also said the government will ensure the passage of the Goods and Services Tax Bill and the bankruptcy code in the parliament.

Further, the minister said the Reserve Bank of India Act will be amended to provide statutory basis for monetary policy code.

Other policy reform measures unveiled today was related to listing General Insurance Companies in stock exchanges for improving transparency, accountability and efficiency.

Jaitely further proposed to amend the Companies Act 2013 to facilitate ease of doing business.

On foreign investment, the government allowed 100 percent FDI through FIPB route in food processing. Reforms in the FDI policy in areas of insurance and pensions, asset reconstruction companies and stock exchanges were proposed.

The minister allocated INR 2.21 trillion for infrastructure development for 2016-17. It will be spent on capital expenditure of roads and railways.

He set a divestment target of INR 565 billion for 2016-17, including INR 205 billion as strategic sales.

He announced INR 150 billion interest subvention for farmers. Also, he said farmers’ income will be doubled in five years and promised to bring more land under irrigation. He further allocated INR 55 billion for crop insurance program.

The minister also unveiled tax incentives for new manufacturing companies and some small enterprises.

Tax evasion will be countered strongly, Jaitley said. He announced a compliance window between June and September for tax payers to declare undisclosed income at 45 percent tax rate. Such tax payers will not have to face any legal action, the minister added.

The excise duty on certain tobacco products was raised by 10-15 percent.

The tax deduction for house rent payers was raised. While the tax surcharge on high income group was hiked to 15 percent from 12 percent, the tax rebate for small tax payers was enhanced by INR 3,000.

Jaitley also announced measures to promote affordable housing.

The material has been provided by InstaForex Company –