The Union Budget 2016 was largely on expected lines. This is welcome as budget should not become a guessing game for individuals and businesses alike. Both individuals and businesses need stability of policies and taxation.

The key priorities of this government, in our assessment, are as follows -

Fiscal Prudence

The table below gives the fiscal deficits over the last 5 years. What is interesting is the consistency with which the deficits are falling. Even in this budget, despite several opinions and expectations to the contrary, government has stayed firmly on fiscal moderation path. This is a welcome development as this will create a substantial room for lower interest rates and will also leave more resources for the private

sector.

Subsidies for the Deserving Only

There is a silent revolution underway in the way in which subsidies are delivered in India. We are quickly moving away from subsidizing goods for rich and poor alike and instead replacing subsides with targeted cash transfers (DBT or direct cash transfers). This has very positive medium and long term implications:

•  Reduction in leakages and costs
•  Limiting beneficiaries to the deserving only
•  Less hassle and more choice for the beneficiaries
•  Lower fiscal burden

In that regard, after the success of LPG, a pilot for extending the DBT to fertilizers has been announced in the budget.

Improving Agriculture

2/3rd  of Indians directly or indirectly depend on agriculture. Improving the income of this segment has both social and economic positives. The approach of this government is to do it on a sustainable basis by raising the productivity and reducing costs. Several initiatives are being mooted with this objective

•  Widen irrigation coverage, more watershed development
•  Soil health card to bring more objectivity to crop selection and use of nutrients
•  Creating an e-market for agriculture produce to bring more value to farmers
•  Effective crop insurance for farmers to reduce their risk.

Social Infrastructure.

This budget continues with higher allocation in key areas of health, education, low cost housing etc.

Improving Infrastructure Investments

It is difficult to grow in a sustainable manner without improving investments in the economy. With this in mind, there is for the second consecutive year a healthy increase in the allocation towards roads, railways etc. between the union budget, railways budget and the various entities like NHAI, public sector companies.

In summary, full marks to this budget for not deviating from the course of setting the Indian economy on not just a growth path but on a sustainable growth path. The Indian economy should experience better days ahead. Low oil prices driving down CAD, steadily falling fiscal deficit and low inflation have set the stage for lower interest rates. Steps taken in the key areas of roads, railways, mining, power and housing should start yielding results now and lead to faster economic growth.

The outlook for the equity and fixed income markets is also very positive. Indian markets have not done well for now eight years and this is reflected in the low market cap to GDP ratio.

In view of this and the improving outlook for the economy and specifically after the recent correction, markets are attractively poised for those with a medium to long term view.

Interest rates have fallen much less than inflation so far. With low commodity prices, low inflation and with the government having delivered yet again on fiscal front, the expectation of lower rates going forward is a very reasonable one. Thus there is merit in adding duration to one’s fixed income portfolio.

The following pages give a more detailed point wise impact of the various announcements in the budget complied by the HDFC AMC team. It is sincerely hoped that this will be useful.

Key Direct Tax changes in the Budget

•  Presumptive tax scheme turnover limits raised

o Businesses – Rs. 1 Cr earlier; Now Rs 2 Cr.

o Professionals – Rs. 25 lakhs earlier; Rs 50 lakhs now.

•  Income Declaration Scheme, 2016 (IDS) from 1st Jun to 30th Sep 2016

o Pay tax at 30%, surcharge at 7.5% and penalty at 7.5%, a total of 45%

o Immunity to assessee’s declaring under the scheme from prosecution in future.

•  Addressing concerns from earlier retrospective tax amendment

o  High Level Committee chaired by Revenue Secretary to oversee fresh cases where assessing officer applies the retrospective amendment.

o  One-time dispute resolution for ongoing cases – only tax arrears to be paid; interest and penalty to be waived.

• 13 cesses, levied by various Ministries in which revenue collection is less than Rs 50 Cr in a year to be abolished.
• Contribution by employer towards employee PF of more than Rs. 150,000 p.a. will be taxable. There was no limit earlier.

Alleviating Rural Stress & Allocations to Social Sector

•  Recognizing the need for income security for farmers. Goal of doubling net income of farmers by

2022.

•  Irrigation – Creation of Long Term Irrigation Fund in NABARD with initial corpus of Rs 20,000 Cr.

Fast-tracking of 23 irrigation projects. Productive use of MNREGA funds.

• Fertilizer subsidy under Direct Benefit Transfer (DBT) – Pilot for fertilizer subsidy being rolled out, after success in cooking gas.
•  Greater vigour in soil testing – To cover all 14 Cr farm holdings by March 2017. Improving market

access and income for farmers – Development and deployment of Unified Agriculture Marketing Scheme in selected 585 wholesale markets. APMC reforms made mandatory for states to join this platform.

•  Crop Insurance scheme – Rs 5,500 Cr provided in Budget for Prime Minister Fasal Beema Yojana.

Scheme, announced recently, provides for full cover for crop damage with premium subsidized by government.

• Widening of Minimum Support Price (MSP) procurement – States that were not participating in the decentralized procurement are now being encouraged to do so. Introduction of online procurement by Food Corporation of India, ushering in transparency. Effective arrangements being made for pulses procurement.
•  Promoting  dairying  activities  to  supplement  farmers’  income–  4  schemes  and  Rs  850  Cr

allocation.

•  Significantly higher allocations to Gram Panchayats and Municipalities.
  • Swachh Bharat – Provision of Rs 9,000 Cr. Priority allocation of central government schemes to villages becoming free from open defecation.

• Digital Literacy in rural India – Creation of National Digital Literacy Mission Scheme for rural India to cover around 6 Cr additional households within the next three years, out of total 12 Cr households who currently do not have access to computer.
• Digitizing Land records  – Creation of integrated land information management system and provision of Rs 150 Cr from FY17 Budget for it.
•  FDI in food processing – 100% FDI allowed for food products produced and manufactured in India.
  • Universal coverage of LPG cooking gas – Provision of Rs 2,000 Cr to meet initial cost of providing LPG connections to 1.5 Cr households below poverty line. Scheme to continue for two more years to cover at least 5 Cr households.
•  Health insurance – New scheme to provide health protection up to Rs 1 lakh per family.

Sector Specific Impact

Banking sector – Budget Impact: Positive.

Lower fiscal deficit, likely lower inte