Budget 2016 expectations: From OROP, 7th Pay Commission overhang to sectoral impact, here are 10 points to note

1. The FM’s priority in the 2016-17 budget will be higher growth, with fiscal rectitude, we believe. With the private sector capex yet to pick up, he will budget for higher plan capital expenditure (investments), in addition to the higher spends on OROP and 7th Pay Commission, which need to be factored in. These will be proposed to be financed by higher revenues from divestment/privatisation, higher indirect tax rates, telecom auctions and better tax compliance, apart from a cut in non-plan expenditure (subsidies) via DBT.
2. A lower fiscal deficit will leave more money available for the private sector, help in easing inflation, and moderate interest rates further. We expect targets under the FRBM Act to be largely maintained. We expect the FM to target a fiscal deficit of 3.7% for FY17 and budget for a gradual reduction in fiscal deficit per annum to 2.5% by FY19.
3. Expect FM Arun Jaitley to target real GDP growth of 7.7% in FY17 and bring it to over 8% next year. Larger and targeted plan expenditure capital outlays, with strict implementation timelines, would likely be announced, to ensure economic recovery and sustainable growth. We expect plan expenditure target to increase by 30% over FY16RE.

4. The budget will aim to provide an investment – led supply aid to growth (with private sector participation via Make in India campaign) as well as a consumption – led demand pull growth via 7th Pay Commission, OROP and DBT of subsidies.
5. On taxation front, we expect the Government to initiate reform process in direct taxes, in line with the announcements of the previous budget. The tax rate is expected to gradually come down from 30% to 25%, with a corresponding removal of exemptions / deductions available currently. On indirect taxes, we expect increase in service tax rate to bring it in line with the proposed GST rate of about 17-18%. Similarly, excise duties will likely be levied on various exempt items and increased for various items which are currently taxed at concessional rates. We are not expecting change in base rate of excise duty.

6. FM Arun Jaitley will have to restrict non plan expenditure to meet his FD targets. While the food subsidy burden will be taken up, we believe the FM will budget for lower fuel subsidy bill on the back of lower crude prices. He will also better target subsidies through the JAM trinity. The government has already announced on January 1, the launch of DBT for kerosene subsidy in a bid to cut down the diversion and black marketing of the fuel. The kerosene subsidy in FY15 was pegged at about Rs.248bn. As per reports, Direct Benefit Transfer (DBT) for LPG had resulted in savings of about Rs.140bn in FY15. We expect DBT to be gradually used for more subsidies. Implementation of DBT for fertilizer and crop subsidy could result in substantial savings.
7. To provide higher employment opportunities and to make the workforce employable, we expect measures to promote the ‘Make in India’ and ‘Skill India’ initiative. We also expect higher allocations towards agriculture and rural sector to support rural growth, after two continuous drought years in the country.

8. We expect the divestment target to be increased to Rs 500bn in FY17 v/s the FY16RE of Rs.200bn. Tax revenue targets (net) may be set at Rs.10.2trn, an 8% growth over FY16RE. Customs duty may be tweaked on several items to further the ‘Make in India’ cause. We expect implementation of GAAR to be postponed to FY18. We also expect tax benefits for the export-oriented sectors, in view of the consistently falling exports and some measures to restrict dumping.

9. SENSEX AND NIFTY TODAY: The 30-share index on Thursday opened 154.60 points up at 23,536.47 on account of firm global markets.

10. We believe that, the budget may have the following implications for the sectors: BUDGET IMPACT POSITIVE: Sectors – Auto, Banking/NBFCs, Capital Goods, Cement, Construction, Metals & Mining, Oil & Gas, Paints, Power, Shipping & Logistics. BUDGET IMPACT NEUTRAL: Sectors – Agro Chemicals, Aviation, FMCG, Information Technology, Media, Pharmaceuticals, Real Estate.

PTI Via financialexpress

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