Wednesday, April 27, 2016

Union Budget 2016-17: Striking the Right Chords

The government’s Union Budget for the fiscal 2016-17 has a number of announcements, which could, if implemented effectively, augment the real and financial sectors of the economy. Stability has been maintained in tax rates and structures, with some benefits to smaller individual and corporate tax payers, and an orientation towards domestic manufacturing, as well as rationalisation and simplification. The budget with a much needed emphasis on the agricultural and social sectors is a step forward in addressing some of the supply-side issues in agriculture and in skilled manpower,1 at the same time this would also help in demand generation from the rural sector and weaker sections of the economy. A consolidated set of proposals for the housing sector should help the sector clear some inventory and augment demand for downstream sectors. The infrastructure sector not only has a high allocation but also high priority accorded to public-private partnerships, including introduction of a bill for dispute resolution, renegotiation of concession agreements, and a new credit rating system which gives emphasis to various in-built credit enhancement structures aimed at alleviating problems of mispriced loans. Financial sector reforms proposed earlier have been taken forward in the budget and are mostly aimed at broadening the product and investor base, as well as providing transparency, dispute resolution and exit routes. The scope of foreign investment has been further broadened,2 while retail participation in government securities market, deepening of the corporate debt market and introducing more products in the commodity derivatives market has been envisaged. A specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities has been proposed. Various steps announced for stressed assets and strengthening asset reconstruction companies (ARCs), which includes permissions for 100 per cent FDI and sponsor ownership on ARCs, would also help to unclog investment bottlenecks. The fiscal deficit target is being adhered to; this lends credibility to country’s fiscal consolidation efforts and improves the prospects for better sovereign ratings. This would help capital flows and the depreciating currency, and also allow for more expansionary monetary policy to counter sluggishness in private sector demand. [More...] [For a Summary of Measures see Sample issue of EUpDates below...]

This includes proposals for irrigation, electrification, e-marketing of produce along with amendments to the Agricultural Produce Market Committee (APMC) Acts, agricultural credit and interest subvention, crop insurance, increased warehousing facilities amongst others. There are also measures for affordable healthcare and health insurance, skill, education and entrepreneurship development and job creation.
FDI to be allowed in insurance and pension sectors up to 49 per cent under the automatic route, 100 per cent in ARCs under the automatic route and 100 per cent through the FIPB route in marketing of food products produced and manufactured in India. FPIs are allowed to invest up to 100 per cent of each tranche in securities receipts issued by ARCs subject to sectoral caps. Investment limit for foreign entities on Indian stock exchanges is to be enhanced from 5 to 15 per cent on par with domestic institutions. Limit for investment by FPIs in central public sector enterprises (other than banks) listed in stock exchanges to be increased to 49 per cent from 24 per cent. Basket of eligible FDI instruments is to be expanded to include hybrid instruments subject to certain conditions.

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