Budget builds India’s balance sheet

Budget buikds India's- Ravi MehtaRavi Mehta

Introducing his government’s Budget to Indian Parliament on Febraury 28, 2015, Finance Minister Arun Jaitlety set out to build the balance sheet of the country.

By keeping the fiscal deficit at 3.9%, he moved closer to the longer term target of 3% but in a manner that recognises that the government has to invest in the short term.

While the gradual deduction in corporate tax rate could have been done more sharply, it acts as confidence booster for promoters and investors.

This, coupled with the widespread promotion of enterprise and innovation, indicates a balanced approach towards sustainable growth in the long term.

Corporate tax

For many years now, the tax/GDP ratio has been declining. In 2014-15, gross tax revenues (net to the federal government) had a shortfall of  US$24.7 billion or 8.3%.

India has an effective tax rate of 44% on corporate income, combining  corporate tax and the Dividend Distribution Tax (DDT), one of the highest in the world.

The intention to reduce corporate tax over the next four years from 30% to 25% is positive, but  they will not be reducing DDT, remains at 20%.  DDT is seen as punitive, as most foreign shareholders cannot receive a tax credit for this.

Budget builds India's- Budget in Numbers

Budget highlights

Following are the highlights of the Indian Budget for 2015-2016 financial year.

More funding to the unfunded, besides spending more on infrastructure, employment generation, health and education

Increase in Government capital expenditure of US$30 billion

Spending on roads to increase  by US$3.06  billion (2.5 times more)

Spending on railways to increase by US$ 2.18 billion (1.5 times more)

Off balance sheet borrowing to rise by US$ 4.37 billion

The deduction available for payment towards health insurance premium and preventative health check-up has been increased for individual, spouse and dependent children from US$328 to US$546 and for senior citizens, including payment for parents from US$437 to US$655.

Medical expenditure incurred for very senior citizens (80 years and above) will be deductible up to US$655 if no payment has been made towards an existing health insurance policy for such individuals.

Deduction available to a person/dependent with disability has been increased from US$1092 to US$1638 and from US$2183 to US$2729 for a person/dependent with severe disability.

The limit in case of very senior citizens (80 years or above) is proposed to be increased from US$1,310 to US$1,747.

Ravi Mehta is Tax and Private Business Partner and India Market Leader at PricewaterhouseCoopers based in Auckland.

Our Staff Reporter writes:

In his budget speech, Mr Jaitley said that the Ministry of Statistics and Programme Implementation recently introduced a new method for calculating GDP, according to which, the Indian economy registered grwoth at 7.4% during the 2014-2015 financial year.

“Our forecast is that growth will accelerate to an impressive 8.1-8.5% in 2015-2016, with annual inflation running at 5% by the end of 2015-2016. This is below the rate of 6% targeted by the Reserve Bank of India. The government has also recently announced the completion of a monetary policy framework agreement with the RBI for a formal inflation target of under 6%,” he said.

The big gap

Prime Minister Narendra Modi and his government are fortunate, in that the slump in global oil prices has given it ample leeway to manage its finances better than past Indian administrations. However, the administration has deemed it prudent to diverge slightly from the path of fiscal consolidation laid out by the previous, Indian National Congress-led government.

In 2014-2015, the fiscal deficit is expected to meet the target of 4.1% of GDP set by the previous administration.

However, Mr Jaitley has argued that the government is on target to achieve this goal through a reduction in Plan expenditure (consisting mainly of spending on infrastructure development).

Higher Spending

The budget includes higher spending on various welfare schemes, such as the rural employment guarantee programme, which receives an additional USUS$810 million. It also introduces new pension, insurance and social-security programmes aimed at expanding national savings and widening the social safety net at a lower fiscal cost than through the use of subsidies, in keeping with the government’s aim of nudging welfare programmes towards a market-driven model.

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