Budget FY18 and Yojana March 2017 Analysis The scenario in which the budget is being presented o Internal Demonetization GST High NPA Lower investment o External BREXIT Fed Reserve policy Inward/protectionist policy OPECs decision regarding crude oil Hence the budget was announced at a very important point keeping in mind that it had a strike a good balance between stability, promote investment and also bring back the investor confidence So some of the questions that needs to be answered are o How the budget will impact the economy? o Has the budget been successful in reviving investments? o What has the budget done to overcome the impact of demonetization? o List the steps taken by the budget to promote employment and productivity o Budget is low on rhetoric and high on substance-evaluate (has followed the path of fiscal consolidation) The changes that are unique to this budget o Merger of railway budget with Union Budget o Has done away with planned and non-planned expenditure o Announcement of budget was preponed by a month Merger of railway budget with union budget o Some points East Indian Railways Committee was set up in 1920 under the chairmanship of Sir William Acworth
Based on the recommendations the finances of the railways were separated from 1924 It has been absorbed under the Infrastructure Category o Reasons Post-independence railways accounted for more than 75% of public transport and 90% of freight traffic which has been reduced to 15% and 30% respectively in recent times Size of Railway budget is small compared to Union Budget (during British era it accounted for more than 80% of the value of the budget but it has come around 10% compared to the size of union budget) Since the railways budget was prepared separately from the union budget, there was duplication of efforts, higher involvement of officials, higher expenditure etc One of the prominent features of Railway budget has been populist measures, with the merger, this would be somewhat brought under control Recommendation of Bibek Debroy Committee-the railway is presented separately as a convention and there is no constitutional provision which dictates that. Hence all it takes is the executive decision of the government to merge it with union budget. Presently there is an urgent need to have an integrated transport modal mix in India which can provide seamless transportation. To achieve this merger is necessary. The 7 th Pay Commission Recommendations will increase the burden on its wage bill. With the implementation of the 7 th PC, the salary burden on the ministry will be increasing by more than 50% - from 53,000 crore to 77,325 crore in 2016-17 (not accounting for other costs such as pensions) The investment and growth in the railways has been the focus of criticism-the railway lines are of 66000 kms of which only 17000 kms have been laid down postindependence o Having said so, some of the experts have said that the merger would be cosmetic as the recommendations of Rakesh Mohan, Bibek Debroy Committee, Anil Kakodkar Committee are more relevant Rakesh Mohan Committee Observed that Indian Railways over the past decade had fallen into a vicious cycle of under investment, mis-allocation of scarce resources, increasing indebtedness, poor customer service and rapidly deteriorating economics As per the committee, the root cause of this decline was an unstable political system increasingly driven by short-term political compulsions
Hence the committee recommended o Corporatization of Indian Railways to IRC (Indian Railways Corporation) o The IRC would be governed by Indian Railway Executive Board (IREB) o The government should set up an Indian Rail Regulatory Authority (IRRA) to regulate IRC s activities (since it would be a monopoly) o The government should be in charge of setting policy direction and constituting IRRA and IREB o The Government of India and the railway ministry would need to set up a special task force to frame new legislation enabling a new organizational framework Bibek Debroy Committee - recommendations The failure of attracting private investment is because the three activitiespolicy making, operations and regulations are concentrated and vested with the same authority o The stakeholders are not involved in the preparation of the policies o The monopoly of the Ministry of Railways, threatens the private sector o The schemes are designed wherein the risk is appropriated to the private sector Setting up of the regulatory body - Railways Regulatory Authority o Statutory body o Independent budget and independent of the Ministry o Monitor whether the tariff is market determined and competitive Financing of Railways is a challenge because o Investment is made in projects that do not have traffic and hence do not generate revenue o The unbalanced mix of passenger and freight traffic does not help generate revenue o The efficiency improvements do not result in increasing revenue o Delays in projects results in cost escalation Presently there are 17 zones which have been sub-divided into 68 sub-zones. These have been done historically without any strategic uses, there is a need for restructuring Railways also engages in peripheral activities such as running schools, hospitals and a police force. The zones need to reduce costs in the face of competition, hence will have to give away these peripheral activities
Anil Kakodkar Committee on Railway Safety (set up in 2011 and submitted the report in 2012) The Committee was of the opinion that the present environment on Indian Railways reveals a grim picture of inadequate performance largely due to poor infrastructure and resources, and lack of empowerment at the functional level There is an urgent need of concrete measures as the financial state of Indian Railways is on the brink of collapse. The Passenger fares have not been increased in the last decade and the infrastructure is under severe stress. All safety margins have been squeezed. This has led to a neglect of infrastructure maintenance Presently the important functions such as rule making, operations and the regulation are all controlled by the Railway Board. There is need for an independent mechanism for safety regulation. Hence, the Committee recommends the creation of a statutory Railway Safety Authority (with enough powers to have a safety oversight on the operational mode of Railways) The Research Design and Standards Organization (RDSO) which is the apex technical wing of the Railways, is highly constrained. Hence, the Committee recommends restructuring of RDSO for greater empowerment It recommends that a Railway Research and Development Council (RRDC) be set up directly under the government The Committee recommends the adoption of an Advanced Signaling System (similar to the European Train Control System) for the entire trunk route length of 19,000 km within 5 years All Level Crossings (both manned and unmanned) should be eliminated over five years The Committee also recommends a switch over from the ICF (Integral Coach Factory) design coaches to the much safer LHB (Linke-Hoffman-Bausche) design coaches Plan and Non-Plan Expenditure o The concept was introduced for the first time in the First Five Year Plan (1951-56) o Planned expenditure referred to the expenditure on the programmes and the schemes of the government being implemented in the present five-year plan
in included the revenue as well as capital expenditure (the salaries of the teachers and the construction of the school building respectively under the Sarv Shiksha Abhiyan) the non-plan expenditure referred to the expenditure incurred by the government which fell out of the purview of the FYP (ex-defence, law and order, interest payments, maintenance of infrastructure etc) the classification Led to the belief that non-plan was not as important as planned expenditure That the planned expenditure was developmental and non-planned expenditure was non-developmental Led to fragmentation of the resources/finances and the difficulty in ascertaining the overall cost of the service provided Hence from this year the entire expenditure will be quoted which will Help in linking outlays to the expenditure made Lead to optimal allocation of resources Having said so, too much focus should not be put on the revenue and capital expenditure as in some of the sectors such as health, education etc majority of the expenditure will be revenue expenditure Announcement of budget was preponed by a month o The advantage is that all the processes of getting legislative approvals can be completed before the beginning of the new fiscal year o It will lead to better fund disbursal in the first quarter by the ministries o The allocation and disbursal will happen before the onset of monsoon (previously it was after the monsoon) o Having said so, some of the challenges of the this preponing are Non-availability of comprehensive revenue and expenditure data The concern as to whether the standing committees and the house in general will get enough time to deliberate and discuss the important issues/concerns The projected growth rates o CSO-7.1% o Eco Sur-7% (with an adjustment level of 0.25 to 0.5%)
The Budget in order to promote the vision of the Government inclusive growth (or to assure that the fruits of development reach all segments of the society) - focuses on growth and development, while keeping the focus on strengthening the governance fabric of the nation The agenda for budget 2017-18 is TEC: Transform, Energize and Clean India o Transform the quality of governance and quality of life of our people o Energize various sections of society, especially the youth and the vulnerable, and enable them to unleash their true potential o Clean the country from the evils of corruption, black money and non-transparent political funding The finance minister has stated that the underlying approach of the budget is to give an impetus to rural sector, infrastructure and poverty alleviation. Based on this, ten thematic areas have been emphasized in the Budget 2017-18 o The farming sector o The rural population o Energizing youth o The poor and underprivileged o Infrastructure o The financial sector o The Digital Economy o Public Service o Prudent Fiscal Management o Tax Administration The present budget mandates the railways to focus on 4 areas o Passenger safety The government has announced the RRSK (Rashtriya Rail Sanraksha Kosh). This will be a corpus of 1 lakh Cr for the next 5 years. The seed funding (of 20000 Cr, the 1000 Cr is being provided from revenue expenditure and remaining from capital expenditure) will be provided by the government and the rest has to be arranged by the railways (last time such an effort was done was in 2001 when a Railway Safety Fund of 17000 cr was set up, it was non-lapsable fund, it was created to wipe out accumulated areas of overaged assets)
The budget has also outlines complete elimination of the unmanned level crossings by 2020 o Capital and Developmental Works The plan outlay has been increased from 131000 Cr Has targeted completion of 3500 kms of railway line (was 2800 kms for 2016-17) Another area of focus is station redevelopment 500 stations to be made disabled friendly 7000 stations to be using solar energy. The work has already begun in 300 stations and 2000 more stations will be taken up soon as a part of 1000 MW solar mission o Cleanliness All coaches to be fitted with bio-toilets by 2019 Coach Mitra a single window interface to register all coach related requirements o Financing and Accounting Reforms Accrual based financial statement will be rolled out by March 2019 (it will replace cash based accounting). This is considered to be a better methodology as it measures the performance of the company/business irrespective of whether the cash has been received or not. A key advantage of this methodology is that it matches revenues with related expenses which can be used in evaluating the performance of each of the services The service charges on e-tickes booked through IRCTC has been withdrawn Three railway PSUs IRFC, IRCON and IRCTC are proposed to be listed in the stock market The farming sector o Worries/concerns Although the farm credit outlay is 10 lakh Cr, most of the credit will go to agribusiness corporations The NSDC (National Skill Development Council) has announced to bring down the farming population from existing 58% to 38% The agriculture in India is under huge stress as it suffers from many uncertainties price uncertainty, monsoon uncertainty etc The agriculture will have a growth of 4.1% but this is because of abundant monsoon As per Shanta Kumar committee report, only 6% of the farmers benefit from MSP and the remaining are dependent on the markets
As per the economic survey 2016, the average income of a farming household in 17 states is 20000 per annum As per the NCRB, the farmer suicides have increased by 3% compared to last year (it has now reached 12602) Cash transactions o Above 2 lakh will not be permitted o To a single person in one day For a single transaction (irrespective of number of payments) For any transactions relating to a single event o If a person receives an amount in cash, higher than 2 lakh rupees in one transaction, he will be charged a penalty equal to the amount of the transaction Health o the allocation has been increased by 23% o this is the highest increase in the last 15 years o majority of the expenditure has been allocated to NHM and national health protection schemes o steps will be taken to create 5000 PG seats per annum o two new AIIMS to be created Jharkhand and Gujarat o Having said so, there are certain concerns Lower health spending is a legacy issue. The spending is around 1.3% of GDP. The central government spends only around 33% and the rest comes from the state governments hence if there is a need to increase the spending it has to come from the states. Apart from this there is also the issue of delivering the healthcare services and this falls solely on the state governments The government did not make any announcement regarding the NHPS (National Health Protection Scheme) Oil and Gas sector o Integration/Merger of public oil sector companies Pros The new entity can utilize economies of scale The large balance sheet/size will give the entity a better bargaining power in transacting with foreign companies The new entity will be in a better position to absorb the crude oil fluctuations
Cons It will be a monopoly and hence no choices for the customer (in retail sector) The core competencies, work culture of these companies might differ which would make the integration very tricky When it was proposed for the first time a decade ago by Mani Shankar Aiyar, a committee in 2005 had already recommended against it as the process would be too lengthy and problematic o Strategic crude oil reserve Proposed by the Expert committee constituted by the PC in 2006 The objective was to store reserves equivalent to 90 days of demand The government has set up Indian Strategic Petroleum Reserve Limited (ISPRL) to establish the reserves at three locations Vishakhapatnam, Mangalore and Padur The budget has proposed two more reserves Chandikhole (Odisha) and Bikaner (Rajasthan) Skill and Job creation o As per the government numbers only 1.35 lakh jobs were created in 2015 o the government launched the Skill India mission which promises to make 400 million youth employable in 7 years. For the first year it has skilled 1.76 mn of which only 5.8 lakh completed the course and of which merely 82000 found the matching jobs o the government has launched many more schemes to skill the youth o as of now around 20 ministries implement 70 different skill related programmes o in India the smaller companies account for 84% of the manufacturing jobs (whereas it is 25% in china) and by providing the tax cuts the companies have been prompted t stay small o as per the world bank study after 35 years an American company sells 10 times as much it did in the beginning and employs 10 times as much it did in the beginning. Compared to this in India, the companies hardly double the sales and the employment falls by fourth o To have higher productivity, growth and employment, the parameters that are important are Trade openness Infrastructure Innovation skilling o Sankalp Scheme Skill Acquisition and Knowledge Awareness for Livelihood Promotion Programme
It is a measure to leverage India's "huge demographic advantage" and maximise the employability potential of the youth "energising youth through education, skills and jobs" as one of the government's 10 important focus areas It is a Rs 4,000-crore programme 'SANKALP' is aimed at providing market relevant training to 3.5 crore youth across the country o Government has proposed to extend Pradhan Mantri Kaushal Kendras to more than 600 districts across the country, from 60 districts at present. The Kaushal Kendras are being set up as community skill centres focused on rural population with facilities for language lab, digital library, career guidance, skill room etc o 100 India International Skill Centres (IISC) will be established across the country to offer advanced training and also courses in foreign languages, which will help those of our youth who seek job opportunities outside the country o STRIVE the next phase of skill strengthening for industrial value enhancement (STRIVE) will be launched in 2017-18 at a cost of Rs 2,200 crore STRIVE will focus to improve on the quality and the market relevance of vocational training provided in ITIs and strengthen the apprenticeship programme through industry-cluster approach Two new World Bank Projects have been approved to scale up skill development in the country. This includes the Skills Strengthening For Industrial Value Enhancement (STRIVE) project to revitalize the ITI ecosystem and Skill Training for Employability leveraging Public Private Partnership (STEPPP), which will be implemented in mission mode through World Bank support to achieve the objectives laid down in the National Skill Development Mission (NSDM) Non-tax proposals in the Finance Bill o In case of Tribunals Merger of tribunals The central government may make rules to provide for the terms of service including appointments, term of office, salaries and allowances, and removal for Chairpersons and other members of Tribunals, Appellate Tribunals and other authorities The amendments also cap the age of retirement for Chairpersons and Vice- Chairpersons. Currently, these terms are specified in the laws establishing these Tribunals Change in the composition of SAT o Payments Regulatory Board Recommended by Ratan Watal Committee
Chaired by the RBI Governor and including members nominated by the central government This Board will replace the existing Board for Regulation and Supervision of Payment and Settlement Systems o Political Funding The changes which have been introduced are Anonymous donations have been brought down from 20000 to 2000 Electoral bonds have been introduced Political parties will be entitled to receive the donations electronically or by cheque or by digitally Regarding donations by companies to political parties o Existing limit of contributions that a company may make to political parties which currently is 7.5% of net profit of the last three financial years o Requirement of a company to disclose the name of the parties to which a contribution has been made has been withdrawn o Contributions to parties will have to be made only through a cheque, bank draft, electronic means, or any other instrument notified by the central government o Aadhaar made mandatory for PAN and Income Tax The Finance Bill, 2017 make it mandatory for every person to quote their Aadhaar number after July 1, 2017 While applying for a Permanent Account Number (PAN) Filing their Income Tax returns Those Persons who do not have an Aadhaar will be required to quote their Aadhaar enrolment number indicating that an application to obtain Aadhaar has been filed Deficit o Fiscal deficit is targeted at 3.2% of GDP for FY18 as compared to 3.5% in FY17 and will be 3% by FY19. In case of revenue deficit, it is targeted at 1.9% of GDP for FY18 as compared to 2.3% in FY17 o Fiscal Deficit The targeted fiscal deficit to GDP ratio of 3.5% has been adhered to in 2016-17.
Further, the FRBM Review Committee chaired by Mr N K Singh had submitted its report to the Government in January 2017. The Committee recommends a fiscal deficit to GDP ratio of 3.0% over the next three years and also introduces the concept of an Escape Clause which allows for deviations up to 0.5% of GDP from the stipulated fiscal deficit target. The Committee recommends a Debt to GDP of 60% for the General Government by 2023 (40% for Central Government & 20% for State Governments) Finance Minister has pegged fiscal deficit to GDP ratio at 3.2% for the year 2017-18 and at 3.0% for 2018-19. This is a slight deviation from the target suggested by the Committee and is in light of the need to undertake higher public expenditure given the backdrop of weak private investments o N K Singh Committee report The Committee proposed a draft Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal Responsibility and Budget Management Act, 2003 The Committee has recommended using debt as the primary target for fiscal policy and a debt to GDP ratio of 60% should be targeted (40% limit for the centre and 20% limit for the states) This ratio of expected to be 70% in 2017 and targeted ratio should be achieved by 2023 To achieve the targeted ratio, yearly targets have been proposed to progressively reduce the fiscal and revenue deficits till 2023 (here debt indicates the total outstanding liabilities of the government, while the fiscal deficit indicates new borrowings made in the year, and the revenue deficit indicates what part of these new borrowings have been used to cover revenue expenses) The Committee has recommended creation an autonomous Fiscal Council It will be chaired by a Chairperson and have two members (to be appointed by the centre) The functions of the Council would be o Preparing multi-year fiscal forecasts o Recommending changes to the fiscal strategy o Improving quality of fiscal data o Advising the government if conditions exist to deviate from the fiscal target, and o Advising the government to take corrective action for non-compliance with the Bill.
In order to maintain its independence, the committee has recommended a non-renewable four-year term for the Chairperson and members. It has also laid a condition that these people should not be employees in the central or state governments at the time of appointment Under FRBMA, the government can deviate from the targets in case of a national calamity, national security or other exceptional circumstances notified by it. The Committee has recommended that the grounds under which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances The government may be allowed to deviate from the specified targets upon the advice of the Fiscal Council under the following circumstances Considerations of national security, war, national calamities and collapse of agriculture affecting output and incomes Structural reforms in the economy resulting in fiscal implications Decline in real output growth of at least 3% below the average of the previous four quarters. These deviations cannot be more than 0.5% of GDP in a year The Committee has recommended that 15th Finance Commission should be asked to recommend the debt trajectory for individual states. This should be based on their track record of fiscal prudence and health The draft Bill restricts the government from borrowing from the Reserve Bank of India except when The centre has to meet a temporary shortfall in receipts RBI subscribes to government securities to finance any deviations from the specified targets RBI purchases government securities from the secondary market The committee has recommended establishing a committee to review the functioning of the Bill in 2023-24 Taxes o The growth in tax revenues and non-tax revenues is budgeted at 12.7% and (-) 13.7% respectively for 2017-18. Growth in tax revenue is anticipated to remain healthy. The budgeted growth for tax revenue in 2016-17 was 11.2%, while the revised estimate reported a growth of 14.9%. On the other hand, a fall is expected in non-tax revenue during 2017-18 on account of lower transfer of dividends and limited revenue expected from telecom receipts
o The likely implementation of GST from July 2018 should help in enhancing indirect tax revenue. However, a downside risk emanates from the likely rise in oil prices, which could trigger fuel duty cuts and significantly lower the tax collections from petrol and diesel o Direct taxes For Individuals, Hindu Undivided Families (HUFs) and Association of Persons (AOP), the tax rate to be reduced from 10% to 5% in respect of income between Rs. 250,000 and Rs. 500,000 For senior citizens (60 years to 80 years) tax rate to be reduced from 10% to 5% in respect of incomes between Rs. 300,000 and Rs. 500,000 Surcharge of 10% of tax introduced for incomes between Rs. 50 lakhs to Rs. 1 crore in case of Individuals, HUFs and AOP Tax rebate available to eligible resident individuals reduced from Rs. 5,000 to Rs. 2,500 in respect of incomes below Rs. 350,000 Corporate tax rate reduced to 25% for companies with a turnover of less than Rs. 50 crore in FY 2015-16. No other change in corporate tax rates The limit of deduction by way of contribution to the National Pension Scheme (NPS) for individuals (other than salaried individuals) increased to 20% of gross total income from the existing limit of 10% Cash donations above Rs. 2,000 will not be allowed as deduction under section 80G Cash transactions of Rs. 300,000 or more are prohibited. Person receiving cash of Rs. 300,000 or more is subject to penalty of an equal amount Currently, eligible start-ups have an option to claim 100% tax holiday for any three consecutive years out of five assessment years since incorporation. This time limit of five years is to be increased to seven years Land and buildings will qualify as long term capital assets if held for two years. The base year for imputing fair value as the cost of acquisition for computing capital gains changed from 1 April 1981 to 1 April 2001 The Central Board of Direct Taxes empowered to issue necessary directions in respect of levy of penalty for non-compliance with provisions relating to deduction / collection of taxes at source Authority for Advance Rulings (AAR) Advance Ruling means written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. The clarifications are sought by the MNCs entering India
Points about AAR o Set up under IT act 1961, started functioning from 1993 o Is headed by the retired judge of the SC and two other members o It provides speedy decisions, avoids lengthy court process, ease of doing business etc o The rulings given are binding on both the parties o The Tax authorities can appeal in HC and SC The Authority for Advance Ruling for income-tax, central excise, customs and service tax will be merged AAR has been merged with AAR under the Income Tax Act, 1961 Pending applications and proceedings under the erstwhile AAR are to be transferred to the proposed AAR under the Income Tax Act, 1961 at the stage they stand on the date the Finance Bill, 2017 receives the assent of the President The time limit of 90 days prescribed earlier for the disposal of cases by the AAR has been increased to six months Subsidies o The total subsidies in 2017-18 are expected to amount to 2,72,276 crore which is 4.5% higher vis-à-vis revised estimate for the previous year Disinvestment o The disinvestment receipts are targeted at 72,500 crore for the fiscal year 2017-18. This is 59.3% higher than the revised target of 45,500 crore for 2016-17 To attract investments o Total expenditure has been budgeted to increase by 6.6% in the fiscal year 2017-18. In 2016-17, this was budgeted at 10.8%, while the revised estimates indicate a growth of 12.8%. Both, revenue and capital expenditure noted an increase in growth based on revised estimates as compared to the budgeted growth for 2016-17. However, the rise was greater in capital expenditure which reported a growth of 17.7% in 2016-17 revised estimate as against the budgeted growth of 3.9%. For the fiscal year 2017-18, revenue expenditure is budgeted to increase by 5.9%, while capital expenditure is budgeted to increase by 10.7% (will help in crowding in of the private investment and promote growth) o Abolished FIPB
Weaker sections o the overall approach of the budget is oriented towards rural areas, infrastructure and poverty alleviation Worries/concerns o The government assumes that the revenue expenditure will increase by only 6%. But in reality it might overshoot forcing the government to divert the capital expenditure, thereby affecting the investments o The disinvestment targets too look ambitious o There is no doubt that the NPA is the biggest internal hurdle but the government has set aside only 10000 Cr to recapitalize the banks (not even 1% of the total NPAs of the banking system) o Infrastructure investment is not having a regional dimension. The investments should be made in order to reduce the regional inequality otherwise the regions already having an initial base will continuously attract investments leading to divergence (the industrial development in north eastern India is lagging) o The development of Inland Water Transport is very important but over the years the allocation to this is coming down