CRISIL’s Budget analysis:

■ Fiscal math mostly ties up

The government has done a fine balancing act and maintained its credibility by sticking to the Fiscal Responsibility and Budget Management (FRBM) target of bringing down fiscal deficit to 3.5% of GDP in fiscal 2017 after having met the 3.9% target for fiscal 2016.

The government has assumed realistic nominal GDP growth and gross tax collections target of 11% and 11.7%, respectively for fiscal 2017 and most of the tax collection targets barring “income tax” and to some extent “corporate tax” appear manageable.

While the overall subsidy bill is projected to come down to 1.66% of GDP in fiscal 2017 from 1.90% in fiscal 2016, thanks largely to lower oil subsidies, productive spending (capital spending + revenue grants for creation of capital assets) is only mildly up from 2.73% to 2.75%.

Higher salaries and pensions have kept the revenue expenditure burden sticky and restrained government’s ability to significantly increase capex.

■ Lower rates, new measures to boost bond markets

Sticking to the fiscal deficit target despite pressure to undertake stimulus measures to revive growth will pave the way for the Reserve Bank of India to cut policy rates. With expected improvement in monetary transmission with implementation of marginal cost of funds based lending rates, borrowing costs will decline.

Heightened hopes in the market of a rate cut are indicated by the fall in bond yields post the Budget. In the long term, the bond market will be boosted by the push for long-term savings and pension products, clarification of taxation on securitised papers, proposed code for resolution of financial firms and encouragement for large borrowers to shift part of their fund raising from banks to the bond market.

■ Budget takes note of rural distress

The rural flavour in this year’s Budget was strong. The farm sector saw a sharper increase in Budget spend, but the non-farm sector too got its fair share. The farm sector has seen a 94% increase in allocation, with crop insurance and irrigation being the biggest beneficiaries.

For the non-farm community, while there are measures to provide a safety net, the increase in allocation is moderate compared with last fiscal.

At an overall level, rural development spend (mostly non-farm) is budgeted to grow at a moderate pace of 11% on-year in fiscal 2017 compared with 15% in fiscal 2016. But within rural spend, the shift towards higher non-NREGA spend is evident.

Overall, after years of neglect, some key issues facing rural India have received attention, but there still are a few misses. These include poor focus on agri-markets development and push to agriculture investment, inadequate steps to increase farm profitability and absence of long-term solution to impart skills training and create employment in the non-farm sector.

■ Push for rural consumption

This push on rural sectors will propel consumption in rural-linked sectors such as tractors, two-wheelers and fast moving consumer goods.

The fast-tracking of irrigation projects, increase in farm credit, higher allocation to NREGA and extension of interest rate subvention to farmers will boost rural incomes.

By contrast, urban-driven sectors such as passenger vehicles will be negatively impacted due to levy of infrastructure cess. The higher excise duty on branded textiles and cigarettes could impact consumption marginally.

■ Getting public sector to revive investments

The focus is sharp on infrastructure investments, which will have spillovers on growth if implemented effectively. Despite pressure on fiscal consolidation, enough room has been created for infrastructure spending through the government’s own resources and by nudging PSUs to invest more, specifically on roads, highways, agriculture and rural development.

Also, outlined are measures to enhance the role of private sector in infrastructure development through better resolution of contractual issues and improving risk assessment and pricing of loans.

Overall, the budget is growth-enhancing as it supports a mild pick-up in public investments, which can draw in private investments over time. In the near-term, however, low commodity prices (which will inhibit investments in sectors such as oil and gas, and metals), depressed demand and low capacity utilisation will continue to drag recovery in private capex and delay the revival of the overall investment cycle.

■ Measures to boost demand and job creation

Tax incentives for home buyers and developers are aimed at lifting housing demand. This will not only have spillover effect on cement and metal sectors, but is also positive for job creation given the high labour intensity of construction sector.

Likewise, steps to encourage micro and small medium entrepreneurs to set up businesses are an effort at job creation.

Tax exemptions and incentives for investing in startups are also expected aid employment generation in the medium term.

The finance minister has tinkered with customs and excise duties to encourage domestic value addition and provide a fillip to the Make in India programme.

■ Provision for PSB recapitalisation low

Against the backdrop of sharp increase in non-performing and stressed assets and stricter Basel III norms, the Budget has fallen short of expectations. Though the Finance Minister reiterated the Government’s commitment to support PSBs, the actual allocation of Rs 25,000 crore for their recapitalisation is clearly inadequate and will hurt banks’ ability to fund growth. But, continuation of structural measures such as commencement of Bank Board Bureau’s operations (as part of the Indradhanush programme to revamp PSBs), and consolidation of PSBs could improve governance and efficiencies.

Introduction of bankruptcy code, relaxation of norms for ARCs and regulatory changes to speed up resolution of disputes/renegotiation of contracts in PPPs would help address asset quality issues in the banking system over the long term.