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Fiscal deficit target of 3.9% by FY16

Fiscal Arithmetic for FY16

The government has recalibrated its medium term fiscal deficit target in view of higher devolution to states as well as to provide for higher allocation to public investment to uplift the domestic growth. The new framework slates achieving a fiscal deficit target of 3.9% by FY16, 3.5% by FY17 and 3.0% by FY18. Moreover, it should be noted that the impact of the 7th Pay Commission will increase Governments’ revenue expenditure during FY17.

The gross tax revenue (10.3% of GDP) is budgeted to increase by 15.8% in FY16 over Revised Estimates (RE) in FY15. The net tax revenue (less state’s share) as well as non-tax revenue is also budgeted to increase marginally by 1.3% and 1.8% during FY16. The lower estimates on the

net tax revenue largely emanates from the 42% devolution to the states. The share of states will increase from ` 3.38 tn in FY15 to about ` 5.24 tn in FY16 – a significant jump (55%). To meet the additional resources requirement following shrinking of tax revenues for the centre, the non debt capital receipts have been revised upwards and budgeted to increase by around 90% to ` 802.53 bn. Due to lower budgeted debt receipts, total capital receipts for FY16 will increase only by 9.3% over the RE for FY15. The Government projects the tax to GDP ratio to reach 10.5% in FY17 and 10.7% in FY18 which implies an average tax buoyancy of 1.25 in next three years to FY18.Total expenditure (12.6% of GDP) in FY16 is budgeted to grow marginally by 5.7% over RE for FY15. However, total expenditure budgeted for FY16 is lower by only 1.0% from FY15 owing to higher devolution of taxes to States as per the recommendation of the 14th fiscal commission.

Non-plan expenditure for FY16 is budgeted to increase by 8.2% over the RE in FY15, while plan expenditure is budgeted to decline by 0.6%for FY16 as compared to RE for FY15. Under the non-plan revenue expenditure, subsidies are budgeted to decrease by 8.6% in FY15 over RE for FY15, while Grants to State and U.T. Governments increased by 35.3%. Largely owing to the fall in crude oil prices in the international market, petroleum subsidies are budgeted to decline by around 50% to ` 300 bn. As ratio of GDP, major subsidies are budgeted to come down from 2.0% from RE in FY15 to 1.6% in FY16. However, under both plan and non-plan, the increase in allocation to capital expenditure is more than that in the revenue expenditure. The nonplan revenue expenditure is budgeted to increase by 7.5% and the revenue plan expenditure is budgeted to decline by 10.0% in FY16 compared to RE in FY15. While the non-plan capital expenditure is budgeted to increase by 16.3%, the plan capital expenditure is budgeted to increase by 33.9% in FY16 compared to RE in FY15. The gross borrowing of the Government is thus is budgeted to increase by 1.4% to ` 6 tn for FY16.

 Banking and  Insurance  sectors 

 The Government embarked on various steps for ‘Financial Inclusion’. 0.125 bn families are a part of Jan-Dhan Yojana in 100 days.  Government has embarked on JAM Trinity – Jan Dhan, Aadhar and

Mobile (JAM) to facilitate direct benefit transfer in a leakage-proof, well-targeted and cashless manner. 


Agricultural and Rural Finance 

 Allocation of ` 53 bn for micro-irrigation, watershed development and the ‘Pradhan Mantri Krishi Sinchai Yojana’.  Allocation of ` 250 bn in FY16 to the corpus of Rural Infrastructure Development Fund (RIDF) set up in NABARD.  Allocation of ` 150 bn for Long Term Rural Credit Fund; ` 450 bn for Short Term Co-operative Rural Credit Refinance Fund; and ` 150 bn for Short Term RRB Refinance Fund.  Aim for agricultural credit of ` 8,500 bn in FY16.

 Financial Inclusion

 Allocation of ` 200 bn for Micro Units Development Refinance Agency (MUDRA) Bank for refinancing all Micro-finance Institutions lending to SMEs through a Pradhan Mantri Mudra Yojana, and creation of credit guarantee corpus of ` 30 bn.  Creation of a Trade Receivables discounting System (TReDS), an electronic platform to enable financing of trade receivables of MSMEs. To introduce Comprehensive Bankruptcy Code of global standards in FY16 for ease of doing business.  Proposal to use the postal network with 154,000 points of presence across villages to enhance financial inclusion. Postal Department will utilise the services of its huge network for the proposed Payments Bank.  Parity for NBFCs with other financial institutions pertaining to recovery matters. NBFCs registered with RBI with asset size of over ` 5 bn to be considered ‘Financial Institution’ in terms of SARFAESI Act, 2002.

Capital Support and Funding

 To form a National Investment and Infrastructure Fund (NIIF), to allocate ` 200 bn.  Propose Tax-Free infrastructure bonds for road, railways & irrigation projects.  If tax buoyancy permits, to increase allocation to Pradhan Mantri Krishi Sinchai Yojana by ` 30 bn; and the initial inflow of ` 50 bn into the NIIF.


 To set up an autonomous Bank Board Bureau to enhance the governance of public sector banks and for selecting bank executives to aid in developing differentiated strategies and capital raising plans by way of innovative financial methods and instrument. This would be an interim step towards forming a holding and investment company for banks. Allocation of ` 79.4 bn for recapitalisation of Public Sector Banks to help them maintain CRAR in compliance with Basel III norms. 18


The Budget is expected to have a positive impact on the banking industry. A key growth driver of the Indian banking sector includes financial inclusion which will help the banking sector to achieve its aim of expansion and growth. Key measures announced towards enabling inclusive growth include utilising the postal network for improving access of people to the formal financial system and creation of universal social security system. The formation of MUDRA bank for SMEs will help in augmenting credit flow. Measures have also been announced to enable better flow of credit to various sectors; including agriculture, infrastructure, and MSMEs which is expected to encourage overall credit growth. In addition, the Budget has emphasized on boosting the governance of Public Sector Banks (PSBs) with the proposal to set up an autonomous Bank Board Bureau. The proposal for a new bankruptcy law is also a positive step and will aid in lowering bad loans for the banking sector. Banks also look to benefit from the composite limit for FDI and FPI, enabling FIIs to increase their stake in banks. Housing for all – 20 mn houses in urban areas and 40 mn houses in rural areas vision of the Government is also expected to increase the housing loan and in turn benefiting banks and housing finance companies.

Overall, the Budget is likely to have a positive impact on the banking industry by focusing on financial inclusion; boosting credit growth and loan management & recovery. With access of NBFCs to the SARFAESI act, NBFCs will be able to better manage their loan assets along with smoother loan recovery.


  Government to establish a universal social security system for all Indians, specially the poorand the under-privileged. Pradhan Mantri Suraksha Bima Yojna to cover accidental death risk of

` 0.2 mn for a premium of just ` 12 per annum. Atal Pension Yojana to offer a defined pension, depending on the contribution and the period of contribution.  Government to contribute 50% of the beneficiaries’ premium limited to ` 1,000 each year, for five years, in the new accounts opened before December 31, 2015.

 Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death risk of ` 0.2 mn at a premium of ` 330 per year, for the age group of 18-50 years. Unclaimed deposits of about ` 30 bn in the PPF, and ` 60 bn in the EPF corpus. The amounts to be appropriated to a corpus, which will be utilized to subsidize the premiums on these social security schemes through creation of a Senior Citizen Welfare Fund in the Finance Bill.  Employee should opt for either ESI or a Health Insurance product,recognized by the IRDA. Government to bring modifying legislationin this regard, after stakeholder consultation. 

Marginally Positive

The announcements made in the Budget would have a marginally positive impact on the insurance sector as measures have been initiated to increase penetration, thereby boosting investments and growth. The Budget includes proposals for insurance coverage for accidents, health, life anda pension scheme for all along with a universal social security system for all Indians, specially the poor and underprivileged.

Health insurance as an option to ESI contribution will promote choice forworkers and competition. Discouraging cash transaction and promotingelectronic payments will also benefit the insurance companies.

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