in Money Talks

It’s official and up for all to see. The Finance Minister’s budget 2016 is set to have a much needed impact on the Indian economy and expert opinions have surfaced on almost all media. While some have termed it as nothing remarkable, others are of the opinion that this has been aimed at the heart of India- our rural sector, the backbone of Indian economy. Throughout the budget, the finance minister had made it a point to construct on the current government’s accomplishments over the previous one and claims that despite the unfavorable political, financial and economic environment into which his government was thrust into power, they have against all odds, overcome all challenges and in the process strengthened the position of India both internally and externally. One of the highlights that came earlier on in the speech is that the fiscal deficit has been reined in at 3.9% of GDP during 2015-16 and is expected to be around 3.5% during 2016-17.

It is now pretty evident that the crux of this budget is in empowering rural India and the major constituents in the budget are aimed at benefiting the section of people living BPL. There is big relief to the small taxpayer with income <₹5,00,000 p.a. On the other hand, the budget has little to offer for the middle class. It would seem that the proposed tax structure is more complicated and the new procedures around the withdrawal of PF and taxation policies on this are likely to draw critical feedback. Entrepreneurs who belong to the SC/ST category have been provided a healthy allocation in the budget and have lots to look forward to. Significant investments in infrastructure specifically with focus on roadways and railways. Good news for those looking to avail affordable housing; the budget has incentives  for promoting purchase of affordable houses. However the catch is that it doesn’t make sense in most of the major cities.

“As for public sector banks, the budget plans to provide ₹25,000 crores to address the growing pile of  non performing assets and bad debts. What would really be interesting in this context is to view the actual value of these non-performing assets and bad debts and then compare that with the amount allocated”

There is however little to no relief for the big corporates and IT sector. A reduction in Corporate tax to 29% + cess compared to 30% during the previous year seems to have a negative effect in the face of programs to phase out all tax exemption plans and other tax incentives. The objective of the budgets seems to be loud and clear- this time it’s all about #Rural_India. While the budget may or may not be impressive in its form, content or execution; the vital aspect to keep in mind here is the ‘carry forward’ from the previous year. i.e to say the allocations to various sectors that have been made during the previous budget but which have not been met during the previous fiscal year and will eat into the current budget allocation, thereby reducing the scope of the present budgetary allocations. All said and done there is lot to look forward to in this budget, and we will focus on the impact of this budget w.r.t small & medium businesses, infrastructure, manufacturing and creation of jobs and demand.

In the light of the ongoing economic turmoil and instability worldwide, this budget could not have come at a better time. Sluggish growth rates, weak foreign markets, almost stagnant growth in China and the EU Brexit referendum – are all recipes for slowing global demand. In the light of such events, India has a chance to emerge as oasis of growth and stability. One way to do this is to create demand internally and thereby adding to the GDP and national growth. This is exactly what the budget is aimed at with it’s focus on creating this demand in the rural sectors. But don’t just go with the numbers;

“in order to fully understand the implications of these allocations, you will need to view them objectively in comparison with the budget as a whole and the allocation as a percentage. “

Let’s analyze a few of the gainers from this budgetary allocation:

Agriculture and Farmer’s Welfare Schemes

There are numerous incentives aimed at delivering the benefit of this budget to the agricultural sector and farmers. For a start, 100% of FDI is to be allowed for marketing of food produced and manufactured in India. Introduction of a Krishi Kalyan Cess of 0.5% on all taxable services which will be directed towards farmer welfare initiatives. ₹368 crore has been allocated toward soil health testing and ₹412 crore for the Parmparagat Krishi Vikas Yojana aimed to develop organic farming.

Rural Lenders, Banks and NBFCs under PMMY

There is the proposal to increase the allocation for this segment from ₹1,00,000 crore back in 2015-16 to ₹1,80,000 crore during 2016-17. This is ideally to foster an entrepreneurial environment as well as to provide better access to funding among the rural areas.

Ministry of Skill Development and Entrepreneurship

Allocation to the ministry of skill development went up from ₹1,038 crore in 2015-16 to₹1,804crore during this budget. This comes at the back of the government’s decision to promote entrepreneurship among rural segments of India and generate a landscape that’s acclivitous in terms of skill development.

  • Stand up India and Skill India: these ventures are to receive ₹500 crore for encouraging entrepreneuring women to start their businesses in the SC/ST classes. The PMKVY is set to soak in ₹1,700 crore of funding this year. Here as well the aim is to generate demand internally and aid rural growth across multiple sectors.

Infrastructure- Roads and Railways

On breaking down the budget, we notice that Roads and Railway infrastructure development authority received a combined allocation of ₹2,18,000 crore on development and expansion during 2016-17 . This translates into 10,000 Kms of additional National Highways and conversion of 50,000 Kms of State Highways into National Highways. As with all infrastructure projects, this ultimately generates jobs and employment opportunities.

Speaking of  job creation, the budget has also pitched the idea to allow entrepreneurs to run buses for public transport. This would be a novel step in a sector that has so far been dominated by the state government run transport corporations and provide further impetus for enterprising individuals to come forward.

Small Businesses, Manufacturing and Start Up Companies

The finance minister has on multiple occasions throughout his speech, paused to emphasise on the astuteness of SMEs and start-ups in promoting national growth and Innovation. The budget for 2016-17 sets aside ₹3,464 crore for the development of MSMEs. But compare that with the allocation the other sectors have received and one might find this insufficient for significant growth of these sectors. But the bright side to this is that the government has decided to provide 100% deduction of income tax for companies with a turnover of <₹5 crore. Provided that they meet some basic requirements.

Manufacturing sector is vital for any developing country to step up its national growth, however India seems to have defined all norms with it’s services sector overtaking the manufacturing sector. The government seems to have realized that and come budget 2016-17, the tax on the manufacturing has been brought down to 25% + cess. This is an excellent move to generate demand internally and boost the economy.

The Budgetary Approach to SMEs & Start-ups

Not surprisingly, the focus on financially empowering starts-ups and SMEs also revolves around the rural sector; just as the tagline for the budget states. For most of the start-ups and SMEs in bigger cities/ metros there is little to no benefit from these new measures. Everything seems to be aimed at rural India. Now, while the allocation of ₹3,464.77 crore for MSMEs could be considered an insufficient figure, diverting the entire amount to the rural sectors puts all the urban entrepreneurs at a disadvantage. Then again the focus has been about ‘rural India’.

All said and done, this budget is a step in a new direction. It helps to have an open view about the implications of the budget. One of the major growth concerns have been about the Job deficiencies in the market and how India would need a million jobs in the coming year to sustain demand and growth. The proposed budget has thrown a different perspective on the issue- why not create the opportunity for creating ‘enterprises’ instead? This way, you solve both the issues of Job deficiencies and demand creation. More enterprises would mean more job opportunities and a boost to the economy.

Long term vision is something that the government may probably have taken as it’s motto. If one were to consider the fuel prices; there has always been ire around the inflated prices in comparison with international prices, particularly when considering the drop in crude prices since November 2014. Plain fact is that taxes on fuels have been diverting the benefits of the low prices to the state. While this might be seen as damaging to the individual, it has reaped benefits for the government. The increased taxes in the face of diving crude prices has helped India outperform other emerging markets by almost 35%. Possibly also the reason behind the fiscal deficit standing at 3.4%.

No new reform or change in an economy in a particular sector can go without affecting the other sectors. While the focus of the budget may have been at empowering rural economy, the multiplier effects will be visible across sectors gradually.

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