An overview of Budget 2016

India Union Budget 2016 Analysis
  • Overview
  • Impact
  • Summation
  • Perspective
  • Key Positives/Negatives
  • Key Themes
  • Taxation


There is always hype around a Union Budget but this time around, the expectations were running sky-high in terms of it being the make-or-break Budget for the Narendra Modi-led government since it happens to be in the middle of his five-year term. I must say at the outset that the Budget speech was replete with so much detail that it sounded directionless, with too many announcements, most of which had very meager amounts. Unfortunately, however, it’s not just the speech but even the details, or the Budget numbers as they say which are as directionless.

The only thing which seemed clear and focused was the beginning when Finance Minister Arun Jaitley said that the global economy is in a serious crisis and does not seem to be coming out of it any time soon. With international scope limited for exports, therefore, what was required of this Budget was a direction to the economy in terms of generating demanddomestically, which in turn would generate employment for the fast-growing unemployed youth population of this country. This Budget does little or nothing on that count.

A hype has been created about the Indian economy being a bright spot in this gloomy international picture by pushing in some GDP numbers which are seen to be suspect even by the Chief Economic Adviser to the government. A simple analogy will help here. If you change the scale of measuring something from inches to centimeters, it is obvious that the year you make the change, the rate of growth might seem high whereas it actually is not. Far from being an exception in the global slowdown, India is as much a part of it as China is, even though the extent might not be the same.

A Budget in such difficult times should address the problem of a slowdown squarely. It can do it in two ways: directly by injecting demand into the economy; and indirectly by creating opportunities for other sources of demand to pick up. Big business and the media want the government to do the latter and not the former, whereas a pro-people government will push for the first. The strange thing about this Budget is that it does neither

An economy grows based on demand for its goods and services. There are broadly five sources of demand in an economy: (1) consumption by the poor,(2) consumption by the rich,(3) private investment,(4) fiscal deficit and (5)trade surplus. A gloomy external sector means the last source is not available. Contrary to popular belief, the indirect effects of a Budget are positively related to the direct effects of it, it indirectly increases private investment if ‘business sentiments’ are low otherwise.

The Finance Minister has maintained that he will adhere to the ‘fiscal consolidation’ map, which means bringing down further the fiscal deficit as a proportion of GDP. Fiscal deficit is essentially government expenditure minus its tax revenue.The revised estimate of the GDP for 2015-16 is less than the Budget estimate by about Rs. 5,41,753 crores. The ratio has been maintained at 3.9 per cent despite such a fall in the estimated GDP is through increased collection in the indirect taxes and excise duties even as the non-plan expenditure has declined.

For 2016-17, the Finance Minister has promised to bring this ratio down to 3.5 per cent primarily through a 20 per cent increase in indirect taxes and as much as 39 per cent in excise duties, even as the corporate taxes go down. This is ominous in itself since you are tightening the screws whereas what the economy needs is its loosening. It would mean drastic cuts in expenditure and increase in indirect taxes even further to meet this limit

A rise in indirect taxes as opposed to direct taxes is a clear case of regressive taxation because both the poor and the rich pay the same tax per unit of purchase of an item.. There is another problem an increase in indirect taxes brings to the table: inflation. The fact that the oil prices are at a real low, that might not be the permanent state of affairs in the coming year.

As far as the proposed increase in expenditure is concerned, it is important not to look at the absolute numbers but at their ratio with the estimated GDP since it is obvious that no government can afford to decrease the absolute amount of allocation. There has been a fall in the ratio of Union government expenditure to GDP under (1)Integrated Child Development Services,(2) health,(3) primary education,(4) mid-day meals,(5) under the Mahatma Gandhi National Rural Employment Guarantee Act and for the(6) food subsidy, it’s even worse. It requires the poor to pay through their nose through increased indirect taxes while the cushion of the social sector is consistently taken away from them.

Which ministry gained/lost the most?(A)Proposed allocation to Ministry of Women and Child Development has increased by 313 per cent, from Rs. 747 crores in 2015-16 to Rs. 3,094 crores in 2016-17. (B)Ministry of Land Resourceshas been allocated Rs. 230.51, a 437 per cent increase from Rs. 43.71 crore last year. (C) 13 per cent increase in Higher Education allocation, from Rs. 25,344 crore to Rs.28,765 crore. (D)Ministry of Civil Aviation has been allocated Rs. 2,590.68 crore, a 38 per cent decrease from Rs. 4,198 crore.

Comparison with BRICS Nations How does government spending vary across BRICS nations? Budgetary allocation to a sector as percentage of GDP is good indicator to compare government spending. Russia has the highest military allocation in percentage terms, followed by India and China. For education and health, India has the lowest allocation in percentage terms.

Subsidy Share of subsidies as proportion of total expenditure has decreased from 2012 onwards, when it reached a peak value of 18.23 per cent. In 2016-17, 12.66 per cent of spending Rs. 2,50,432.93 crores has been proposed for various subsidies. Food eats up bulk of subsidy …..A closer look at how subsidies are distributed across various sectors reveals that share of food subsidies has been the highest since 2013. Now, half of the total subsidy goes to food.

How does the government earn money? Corporation tax and income tax together constitute one third of the total government earnings.

How has the share of taxes changed? Of the total tax — Rs. 16,30,887.81 crore — collected by the central government, corporation tax has the major share, though it has declined from 39 per cent in 2009-10 to estimated 30.2 per cent in 2016-17. On the other hand, the share of service tax has gradually increased, now contributing 14 per cent of total tax collected by the government.

More revenue forgone -From 2006-07, the government has released a statement of revenue that is forgone, which analyses the impact on government revenue due to the tax incentives available under the Central Tax system. For 2016-17, this amount is projected to be Rs. 6,11,128.31 crores — approximately a third of the total government revenue — higher than last year,



STATE OF THE INDUSTRY: Domestic air passenger traffic is likely to have a relatively moderate growth of 12-14% and Lower crude oil prices and better passenger load factors are likely to improve operating performance over the next two years.

BUDGET IMPACT: An excise duty hike on aviation turbine fuel (ATF) to 14% from 8% ,

Exemption of excise, customs and countervailing duties on certain inputs procured by the maintenance, repair and overhaul industry,. Simplification of customs baggage rules for international passengers is likely to boost travel.


STATE OF THE INDUSTRY: An investment of Rs 25,000-27,500 crore—excluding the proposal to revitalize 160 old airports—is expected between 2016-17 and 2020-21, equivalent to the past five years. Around 80-85% of the investment will be earmarked for greenfield projects by 2020-21.

BUDGET IMPACT: Restoration of service taxexemption is likely to benefit qualifying greenfieldairports, as these will form 80-85% of investmentsover the next five years. Hub airports would benefit as travel to regional locations increases. Revitalization of public-private partnership projects would be a positive. The single-window project for customs at major airports would benefit, too. Exemption from excise,


STATE OF THE INDUSTRY: Credit off-take is expected to grow 12-14% in 2016-17, driven by narrowing spreads between bank base rates and money market rates, and healthy retail demand. Total gross non-performing assets are expected to remain high in the next financial year of 2016-17.

BUDGET IMPACT: (1)While the Rs 25,000 crore provided as capital support to public sector banks the amount is well short of the capital required to fulfil Basel-III requirements.(2) Commencement of the Bank Board Bureau operations and consolidation of public sector banks could improve governance and efficiency.(3)Non-banking financial companies’ net profit would increase as provision for bad debts, limited to 5% of their income, would be tax deductible.(4)Incremental interest deduction of Rs 50,000 per annum for first-time buyers of specified houses would boost the housing financeindustry.


STATE OF THE INDUSTRY: Demand is expected to increase 5.5-6% in 2016-. Low demand and weak profitability, and the resultant attractive valuations, are expected to encourage consolidation.

BUDGET IMPACT: The industry should get a boost(1) from the enhanced interest exemption for first-time buyers,(2) 100% deduction of profit for specific housing projects(3) and service tax exemption on construction of affordable houses(4)A 49% increase in investments in national highways and(5) Rs 17,000 crore government spend on irrigation projects under the Accelerated Irrigation Benefit Project would be positive(6) An 11% increase in outlay towards urban infrastructure would be another plus.


STATE OF THE INDUSTRY: Demand for fertilizers is expected to grow 3-3.5% in 2016-17, Capital expenditure is likely to rise to Rs 5,000-6,000 crore in 2016-17 from Rs 1,000 crore in 2015-16, mainly in urea.

BUDGET IMPACT: Government expenditure of Rs 368 crore on soil health card scheme that covers more than 14 crore farmers is likely to boost consumption of complex fertilizers, as awareness of soil quality improves. Most policies, though, will only be beneficial in the long run and are unlikely to provide immediate relief to companies.


STATE OF THE INDUSTRY: Both awarding of projects by the National Highways Authority of India and their execution have picked up significantly. New projects are expected to average 4,600km in 2016-17 Traffic’s increased 5-6% in the current financial year.

BUDGET IMPACT: The sector would get a big boost as investment in development of national highways has increased 49% year-on-year to Rs 1.03 lakh crore, of which Rs 44,000 crore is the budgetary outlay. The dividend distribution tax will not be applicable on distribution made from special purpose vehicles to infrastructure investment trusts.


STATE OF THE INDUSTRY: While subdued economic growth and tepid demand in rural areas hit consumer spend in 2015-16, higher realizations spurred 10-12% growth in revenue. Growth is likely to recover in the next financial year, assuming the monsoon is normal.

BUDGET IMPACT: Increased focus on improving rural income, with the highest allocation this year on MNREGA and a plan to double farmer incomes in five years, will benefit the consumer goods industry in the long run. A 10-15% increase in excise duty on cigarettes and 15-16% on several other tobacco products is expected to discourage consumption and impact revenue of key players such as ITC, VSTand Godfrey Phillipsadversely. Tax reforms, particularly with respect to GST and rationalization of rates, though, have been kept in abeyance.


STATE OF THE INDUSTRY: The current financial year will see car and utility vehicle sales grow 11-13%, aided by higher disposable incomes, seventh pay commission payouts and competitively priced launches.Two wheeler sales will grow 10-12% on higher farm incomes. Commercial vehicle sales will increase 7-9%, driven by improved industrial growth, steady replacement demand from large truck operators and higher private consumption and finance.

BUDGET IMPACT: The impact is expected to be neutral. While rural focus is a long term positive, levy of infrastructure cess would be a negative for passenger vehicles. CVs get a boost with a targeted Rs 1,03,286 crore spend on national highways. Rural schemes will indirectly aid motorcycle and tractor sales.


STATE OF THE INDUSTRY: The power generation segment is plagued by weak demand, considering the poor financial health of distribution companies (discoms) and aggressive project bidding. The government’s thrust on improving transmission and distribution (T&D) infrastructure is expected to boost investments in the segment.

BUDGET IMPACT: Doubling of clean energy cess on coal to Rs 400 a tonne will increase generation cost by 10-12 paise per unit. A 92% increase in outlay for distribution schemes to Rs 8,500 crore would improve rural power demand, increase investments in the distribution segment and lower losses. Allocation towards nuclear power projects aims to diversify fuel mix and lower power purchase costs


STATE OF THE INDUSTRY: Crude oil prices are expected to remain subdued due to oversupply and muted demand globally. Upstream companies could witness sharp erosion in profititability. Oil PSUs and the government are expected to benefit from lower subsidies. Domestic gas prices could fall 25%

BUDGET IMPACT: An additional 15 million rural connections—equivalent to 55% of rural connections added over the last five years—will see LPG demand rise 3% in 2016-17 year on-year. Ad valorem cess on crude oil would improve realizations of upstream companies .The proposal to grant marketing freedom for gas produced in a difficult terrain is a step in the right direction.


STATE OF THE INDUSTRY: In 2016-17, improvement in domestic consumption would boost apparel sales by 6.5-7% year-on-year. Demand for cotton yarn and MMF would, in turn, improve. Yarn exports have fallen due to demand slump in China.

BUDGET IMPACT: The excise duty on branded garments retailing at Rs 1,000 and above has been increased ,Additionally, tariff value (presumptive) for excise/countervailing duties on readymade garments and other textile materials has been increased to 60% from 30% of the retail sale price which will increase prices. Basic customs duty on specified fibres and yarns has been reduced


STATE OF THE INDUSTRY: Domestic formulation revenues are expected to grow 13-14% in 2016-17 on the back of anti-diabetic and cardiovascular drugs. Exports are likely to grow 9-11%, spurred by regulated markets such as the US. Profitability is expected to be unchanged.

BUDGET IMPACT: Lowering weighted R&D deduction to 150% from the current 200% would increase tax outgo by 2-4% from 2017-18. A new health cover of up to Rs 1 lakh would improve insurance penetration from 3.3% (as on 2014), and aid growth of hospital care and diagnostic services. Setting up of 3,000 aushadi stores to sell generics will improve poor patients’ access to medicines. The proposed National Dialysis Services Programme is a positive at improving patients’ access to affordable treatment in renal diseases.


STATE OF THE INDUSTRY: Average residential capital values were stagnant in 10 major cities tracked by CRISIL Research, and are expected to stay range bound in 2017.

BUDGET IMPACT: For first-time homebuyers, availing loans up to Rs 35 lakh, interest exemption under Section 80 EE would be increased to Rs 1.5 lakh from Rs 1 lakh (if the property is priced up to Rs 50 lakh). This would boost demand for apartments in this price bracket, which currently forms nearly 40% of upcoming supply in cities. Housing projects approved under the Pradhan Mantri Awas Yojana between June 2016 and March 2019 would receive full tax deduction on profits.. Service tax exemption for constructing affordable houses (measuring up to 60 square metres) will boost demand.


STATE OF THE INDUSTRY: Revenues of organized retailers are estimated to rise 18-20% in 2016-17, driven by same-store sales. Organized retail penetration is likely to improve 9% in 2016-17. Apparels, consumer durables and footwear are a few sectors where organized retailers continue to have a strong foothold.

BUDGET IMPACT: A 2% excise duty on branded garments. Additionally, the tariff value for excise/countervailing duty on readymade garments and other textile materials has been increased to 60% from 30% of the retail sale price.


The good news is that the NDA government — after spending more than a year in denial — finally seems to have woken up to the ongoing agrarian crisis and the worsening financial conditions of cultivators. But in terms of actual spending, the finance minister essentially resorted to a sleight of hand rather than real increases in allocations. Thus, while the documents show a significant increase in the ministry of agriculture’s allocation a significant chunk of that (Rs 15,000 crore) is because the interest subsidy for loans given to farmers, which was earlier under the ministry of finance, has simply been moved to the ministry of agriculture, so minor as to have little impact on the actual conditions of farmers.

The MGNREGA, which until very recently was unloved and much derided by PM Narendra Modi, has now been rehabilitated But even this declared amount falls well short of levels achieved earlier under the UPA, .Other social spending has fared even worse, total health spending continues to stagnate, at the embarrassingly low figure of 0.24 per cent of the GDP


(1)Theeconomy is actually not doing as well as the hype suggests.

(2)The rural economy is down,

(3)Investment rates have been falling,

(4)Employment, especially in formal jobs, is simply not picking up.

(5)Clearly, there is need for measures to increase domestic demand

(6)By improving wage incomes and

(7)Possibilitiesof positive business sentiment


The heartening thing is that fiscal deficit target is maintained, which is very positive from investors, credit rating, nation and currency point of view.

The Budget 2016 is structurally positive for the nation as a whole. This statement is on the back of three key pillars:

-Maintaining fiscal deficit target The government has targeted to reduce the fiscal deficit to 3.5% of GDP in FY17BE from 3.9% of GDP in FY16RE, The deficit math seems bit optimistic, as it based revenue receipts from telecom spectrum auction (Rs. 50,000 cr.), inadequate clarity on seventh pay commission wage hikes for central government employees, and divestment receipts (divestment work just handed over to NITI AYOG).

– Enhancing spend on agriculture, infrastructure

-Maintaining tax collection buoyancy



Key heads for spending shall be as under:

The government has stepped up spending in the transport sector i.e. roads which is contributing the highest of the overall spending. The overall spending is expected to be as under:

The transport, energy and social sector spend together aggregate for 75.9% of total spending. In fact, energy & transport i.e. PiyushGoyal and Nitin Gadkari have cornered ~61.7% of total plan spend..Further, the agriculture, rural & irrigation sector combined is expected to grow at 54%.


The non-plan expenditure contributes the major spending planned by government. The broad heads are as under:

The key spend heads aggregating for major share of non-plan expenditure are:

1. Interest & debt repayment (34.5% of total spend)

2. Subsidies (17.5%)

One of the key spend in the ensuing year shall be Pension, which is expected to increase by 28.9% in F17B vs., only 2.3% in F16R. This is primarily on account of OROP impact. The government has announced a scheme similar to VDIS scheme, wherein upon payment of aggregate tax of 45%, any person can bring his black money into books.

The FY16E GROSS TAX REVENUE is expected to be 10.8% of GDP, while for FY15e, it was 10.0% of GDP. Key tax numbers as % of GDP are expected to be as under:

The government has seen a seen a 5.8% growth in overall net tax revenues in F16R, while for FY17B it is Budgeted to increase at 10.8%.

-The government expects highest growth to come from Personal Taxes or non-corporate assesses primarily on the back on Seventh pay commission increase in salaries leading to higher TDS, new voluntary disclosure scheme and taxation on dividend in the hands of recipient.

-Service tax is expected to grow at ~10%, since there is no new service additions in the net, and the rate of tax expected to be same, this is a conservative assumption.

-Excise duty revenues are expected to grow at 12%,

-Further, the government expects Rs. 74,200 cr., to come from spectrum auction and

Disinvestment proceeds. This number is bit higher. Already telecom companies are facing

reduction in ARPUs, and further auctions and Reliance JIO coming in; this expectation can

suffer. This translates to ~0.6% of GDP



Positive Negative

Fiscal deficit target set at 3.5% of GDP in F2017 vs. 3.9% of GDP in F2016 Optimistic assumption on non tax revenue receipts from telecom spectrum auctions

Focus on public infrastructure maintained, with Budgeted expenditure on infrastructure segments to rise by 16%YoY. Including extra Budgetary support, infra investment spending is expected to go up by 24%YoY Optimistic assumption on divestment target set at INR 56,500 cr., for F2017

Focus on agriculture investment by creating a long-term irrigation fund at NABARD Increase in government employee wages and pension expenditure on account of seventh pay commission recommendations is not fully provided for in the Budget2016

Subsidy spending Budgeted to decline to 1.7% of GDP in F2017 from 1.9% of GDP in F2016. PSU bank recap funding kept at Rs. 25,000 cr, which we believe will not be sufficient

Tax amnesty scheme for individual tax payers Imposing KrishiVikasCess of 0.5% on all taxable services

Statutory backing for Aadhar to ensure direct transfer of benefits No immediate cut in the corporate tax rate. Corporate dividend income now attracts an additional 10% tax

Introducing a new dispute resolution scheme, to ensure stable and predictable tax regime. Un-necessarily taxing EPF at withdrawal with further complexities of annuity schemes……now rolled back



Infrastructure capex allocation (through the Budget2016 and via market borrowing) has increased to 2.8% of GDP in F2017 vs. 2.5% of GDP. Measures proposed include:

1. Reforms in FDI in insurance pension, asset reconstruction companies,

2. 100% FDI in marketing food manufactured products

3. Revitalizing PPP,

4. Amendment to the motor vehicles act to open up the road transport sector

5. Revival of un served and underserved airports in partnership – State Govts.

6. Spurring gas production through calibrated marketing freedom and

7. New policy for managing government investment in public sector, including disinvestment and strategic sales.

RURAL SECTOR To support rural credit, the government has allocated Rs1,000bn (0.7% of GDP). For developing rural infrastructure, the proposed measures are to put irrigation projects on fast track, set up long term irrigation fund with a corpus of Rs200bn under NABARD, electrify 100% of villages by May 2018, develop 300 rural clusters. etc. The government has maintained the allocation towards MGNREGS with expenditure to GDP holding steady at 0.3% of GDP (

SOCIALSERVICES The Budget2016 for the social sector includes schemes focused on health care, education, enhancing skills and job creation. In particular, the Budget2016 allocates Rs. 1,51,500 cr., (1% of GDP) for education and health. Key steps introduced in the Budget2016 include a new health protection scheme, a focus on quality of education under sarva siksha abhiyan, and setting up a board for skill development certification.


1. No change in the corporate tax rate except for new eligible manufacturing companies which are taxable at 25% without claiming specified deductions, and having a turnover not exceeding INR 5.0 cr., taxable at 29%.

2. LTCG derived by non-residents from the transfer of shares of a closely held private limited company are taxable at the rate of 10%

3. Equalization levy of 6% is applicable on the consideration payable to non-residents not having a PE for online advertisement or similar specified services..

4. Supporting startup: 100 per cent deduction for a period of 3 consecutive years out of the initial 5 years for eligible ‘startups’.

5. A buy-back tax is applicable to any buy-back of unlisted shares under the provisions of Companies Act, 1956

6. The exemption from DDT on the distribution made by SPV to REIT/ InvITs where REIT/ Inv ITs hold 100 percent of the SPV, would be available only with respect to the dividend distributed out of the current income..

7. A new pass through taxation regime has been introduced for a securitisation trust set-up in accordance with the SARFAESI Act.

8. Voluntary disclosure scheme with 45% tax rate.

9. No deferment of GAAR. It shall apply from 1 Apr 2017.

10. Rationalization of certain tax incentives’ (a). Profit linked deduction on eligible business of infrastructure facility ( b). Profit linked deduction of 100 per cent provided to the business of developing and building affordable housing projects approved by the competent authority before 31 March 2019.(c.) To avail benefit of tax holiday, units in SEZ need to commence operations on or before 31 Mar 2020.(d.) The accelerated depreciation under Income-tax Act will be limited to 40% from 01.04.2017. This was at 80% earlier This is negative for industries like solar.

11. Smoothening of overall tax administration, with reduction in discretionary powers in the hands of ITO.


Cess-pool is a negative connotation but that’s what government has done – Despite the hike in excise duty or newer cess, the overall excise duty collection by the government is expected to dip if remove the petro related excise collections; in fact overall increase in excise duty collection is expected to be only 12%.SERVICE TAX has been increased by 0.50%


1. No change in the income-slabs, tax rates and cess for individuals

2. Surcharge to be increased from 12% to 15% where income exceeds INR1.0 cr per annum.

3. Rebate from tax to be increased from INR2,000 to INR5,000, for resident individuals with total income below INR500,000

4. Tax exemption on withdrawal now limited to 40 per cent of accumulated balance. Amount received by nominee from NPS on death of assesse to be considered wholly exempt from tax.

5. Additional deduction of INR50,000 per annum towards interest on housing loan, for loans upto INR 35L (sanctioned during FY 2016-17), where the value of the house is less than Rs. 50.0 L

6. Presumptive taxation scheme extended to professionals: the presumptive taxation regime proposed to be extended to professionals having gross receipts not exceeding Rs. 50 lakhs in the previous year at a sum equal to 50% of such gross receipts.

7. Limit for deduction of rent paid, where assesse does not own a house and does not receive HRA, increased from INR24,000 per annum to INR60,000 per annum.

8. Gross Dividend would be taxable in the hands of recipients: The income by way of gross dividend, to be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm, who is resident in India @ 10%, if the same is in excess of Rs. 10 lakh.


7 April, 2016