This Article is From Feb 29, 2016

Budget 2016: Sluggish Economy, Rural Distress to Test Arun Jaitley

Budget 2016: Sluggish Economy, Rural Distress to Test Arun Jaitley

Finance Minister Arun Jaitley will have to walk a tightrope when it comes to deciding the fiscal math.

India's economy continues to be sluggish, nearly two years after Prime Minister Narendra Modi-led government assumed power at the Centre. Consumer demand has not picked up, while industries are struggling with overcapacity. The sharp jump in bad loans in the banking system and rural distress caused by back-to-back droughts have made Finance Minister Arun Jaitley's task tougher. The good thing is expectations are fairly low, given the sharp decline in stock markets ahead of budget.

Here are 10 key things to look out for in Mr Jaitley's budget speech being tabled in Parliament today:

1) Fiscal deficit: The biggest challenge before the finance minister is to strike a balance between fiscal consolidation and economic revival. There is a view that fiscal deficit should be relaxed as funds are needed for 7th Pay Commission salary hike, recapitalization of banks and infrastructure development, but the move may not go down well with rating agencies and foreign investors. Mr Jaitley will therefore have to walk a tightrope when it comes to deciding the fiscal math.

2) Infrastructure: The government last year fixed its fiscal deficit target at higher-than-expected 3.9 per cent of GDP, but Mr Jaitley won over investors by allocating an extra Rs 70,000 crore for investment in infrastructure. Analysts expect Monday's budget to focus on roads and railways like last year. (Read: 10 Big Numbers To Track In Arun Jaitley's Third Budget)

3) Rural distress: The budget may increase spending towards rural infrastructure and mega irrigation projects to provide relief to the rural sector, which accounts for nearly 50 per cent of India's population. A bump-up in allocation for Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) ahead of crucial state elections may also be on the cards.

4) GST: The government has missed its April 1, 2016 deadline to implement the Goods and Services Tax, dubbed as most tax reform since independence. But analysts expect Mr Jaitley to hike service tax to around 16 per cent to bring it closer to the revenue neutral rate of 18 per cent under the proposed GST.

5) Subsidies: The crash in global crude oil prices will help keep subsidy payments lower this year. Monday's budget may raise food subsidy bill in order to implement the Food Security Act across the country. The FSA is aimed at providing rice and wheat at highly subsidized rates to 67 per cent of the population.

6) Disinvestment: The government is well short of its disinvestment target of nearly Rs 70,000 crore because of the sharp fall in domestic stock markets. Analysts hope that disinvestment target in Monday's budget would be more realistic.

7) Corporate tax: India Inc expects Mr Jaitley to reduce the corporate tax rate in line with his commitment to reduce tax rate by 5 percentage points over four years. The budget may also announce a schedule for removal of tax exemptions, in line with previous budget announcement.

8) Recapitalization of banks: The government last year announced a revamp plan to infuse Rs 70,000 crore in state-owned banks over four years, but experts hope the budget to come out with more resources to boost state-run banks' lending capacity.

9) Markets: Concerns that Mr Jaitley will tweak rules with regards to capital gains tax, dividend distribution tax and securities transaction tax in order to raise additional revenues have spooked stock markets. Investors will keenly await tax-related announcements in budget 2016.

10) Personal income tax: There have been incremental tax benefits for common taxpayers in the previous two budgets. Mr Jaitley may increase tax exemption limit to boost consumption or announce more tax deductions to incentivize savings in budget. 

(Read:10 Income Tax Expectations From Arun Jaitley Today)