10 Things to Watch In Budget 2016: Morgan Stanley

Morgan Stanley expects Finance Minister Arun Jaitley's third annual budget to focus on fiscal consolidation, reforming tax structure, accelerating public investment, increasing productivity in agricultural sector and improving efficiency of social welfare spending.

The investment bank identified 10 issues that need to be closed tracked in the budget:

1) Fiscal deficit: For FY16, fiscal deficit could be lower than budgeted 3.9 per cent of GDP on higher tax collections and lower expenditure. For FY17, fiscal deficit target is likely to be fixed at 3.7 per cent of GDP versus the government's earlier stated target of 3.5 per cent because additional money is needed to implement the Seventh Pay Commission wage hike for central government employees. The government may defer by another year, to FY19, the target of reducing deficit to 3 per cent of GDP.

2) Impact of Seventh Pay Commission and OROP: Wage bill in FY17 will go up by 0.4 per cent of GDP on implementation of seventh pay commission recommendations. Taken together with One Rank One Pension (for defence personnel), the wage bill will likely go up by 0.5 per cent of GDP.

3) Tax changes: Tax revenue is likely to rise to 11 per cent of GDP in FY16 from 9.8 per cent of GDP in FY15. To drive incremental revenue from indirect taxes, custom duty may be hiked on crude and other products and service tax rate (currently 14 per cent) may also be revised. On direct tax front, corporate tax rate could be cut (along with reduction in exemptions). The requirement of MAT on special economic zones (SEZs) may be done away with, given the slowdown in external demand and contraction in exports.

4) Capital expenditure: The government is likely to keep capex steady at 1.8 per cent of GDP in FY17, but in order to support the domestic demand-led recovery in growth, the bulk of the public capex will be driven through public sector enterprises.

5) Infrastructure spending: Focus on roads and railways will continue. Dedicated freight corridors and industrial corridors will need to be fast-tracked. For smart cities, the government could spearhead a program to spur state governments to invest in metro networks in the top 25 cities.

6) Subsidies: The crash in crude oil prices will help keep subsidy payments lower at 1.7 per cent of GDP in FY17 versus 1.8 per cent of GDP in FY16. However, food subsidy bill may be higher at 1 per cent of GDP (Rs 1.50 lakh crore) in FY17 from 0.9 per cent of GDP in FY16 because of nation-wide implementation of the National Food Security Act, which aims at providing rice and wheat at highly subsidized rates to 67 per cent of the population.

7) Disinvestment: FY17 divestment target could be Rs 35,000 crore (0.2 per cent of GDP) versus an estimated Rs 20,000 crore (0.1 per cent of GDP) in FY16. There is also a possibility that the government takes the share buyback route, wherein it may ask the cash-rich state-owned enterprises (such as Coal India, NALCO) to buy back government stake.

8) Farm sector reforms: There will be greater focus on agriculture sector, given the lower crop output in the last four consecutive cropping seasons. Public investment in agriculture is set to go up from a mere 2.5 per cent of GDP currently to fight rural distress. Budget could focus on a national grid for water management and take steps to enhance cold storage facilities. A new law to recognize tenants and land owners as cultivators of land can be introduced. This will ensure that tenants get proper access to government benefits - credit, insurance, etc. Crop insurance scheme will be popularized.

9) National Employment Guarantee Act: Rural wage growth has remained on a decelerating path since April 2013, indicating that there has been no adverse inflationary impact. So allocation for MGNREGA is likely to be retained at 0.3 per cent of GDP in FY17 versus 0.3 per cent of GDP (Rs 34,700 crore) in FY16. The government could also take up some initiatives on health and other social sector schemes to provide a safety net.

10) Make in India: Lower tax rates for labour- intensive sectors will attract manufacturing investment in the economy. Tax concessions to the leather industry, and the gems & jewellery segment could also be announced. Steps to simplify the process of doing business to attract foreign investments through rationalisation of taxes, faster tax dispute resolutions, etc. could be announced. A seamless tax credit system (giving 100 per cent credit for taxes on inputs), which would make manufacturing in India more competitive, could be announced. More steps to attract foreign direct investment could be announced.