Budget 2016-17

Finance Minister Bishnu Prasad Paudel on May 28 presented the budget for the fiscal year 2016-17 focusing on productive capacity enhancement, infrastructure development and acceleration of post-earthquake reconstruction. With the ambitious target of 6.5 percent growth in next fiscal against the dismal 0.77 percent of the current fiscal, the Finance Minister also expanded the size of budget by 28 percent as compared to current budget. The budget sized Rs 1,048.9 billion has allocated Rs 617.16 billion for recurrent expenditure, Rs 311.95 for capital expenditure and Rs 119.81 billion for financing (debt and interest repayment) provision.

Rs 140.66 billion to accelerate post-earthquake reconstruction and rehabilitation works

Finance Minister Paudel has also targeted the generation of Rs 565.9 billion from revenue, collection of Rs 111 billion from domestic borrowing and mobilisation of foreign loan and grant worth Rs 195.71 billion and Rs 106.9 billion respectively for budget financing.

Envision to kick-starting critical projects

To address the country‘s infrastructure impediments, the fiscal budget has allocated substantial resources for road connectivity, hydro-electricity and transmission line projects and irrigation projects among others which are considered catalytic for boosting the country‘s economy. The government has allocated Rs 10 billion for the implementation of the much touted Kathmandu-Tarai fast track - the express way which connects Kathmandu valley, and the second international airport (SIA) Nijgadh. Upgradation of East-West Highway and completion of Postal Highway and Mid-hill Highway have been given utmost priorities. The budget has also laid priority for developing strategically significant North-South Road connectivity. Rasuwagadhi- Syafrubesi, Trishuli-Galchhi-Malekhu-Bhandara- Thoriroad; Jomsom-Korala; Dhankuta-Kimathanka roads will be initiated from the next fiscal, according to the budget. As the country is going to implement federal system as per the provision of new constitution, higher attention has been given for province to province road connectivity. The government has expected to upgrade the linkage between market and production area, expansion of trade volume and reduce logistics cost of trade through development of proper road connectivity and improvement of major highways. The budget has also committed to complete the construction of international airports in Bhairahawa and Pokhara within two years and four years respectively and has earmarked Rs 7.22 billion and Rs five billion respectively for the projects. The budget has provisioned funds to acquire lands and issue compensation for the 1,200 MW Budhigandaki Hydropower Project to help clear grounds for initiating the implementation of the same.The budget has floated the concept to develop some hydropower projects namely Tamor, Sunkoshi, Dudhkoshi, KhimtiShiwalaya, Naumure, SharadaBabai, Nalsing Gad and Uttarganga, among others. Each project will issue up to 49 percent shares to the public and the government has encouraged the public and Non-Resident Nepalis to invest in shares of the aforementioned projects. The fiscal budget has coined a slogan ‘Electricity in every household, share for every individual‘ to generate resources to harness the tremendous hydro power potential of the country. Unbundling of Nepal Electricity Authority (NEA)- single power off taker of the country - as distribution, generation and transmission companies, up-gradation of transmission lines and substations and improvement in distribution system through installation of high capacity transformers will be initiated in next fiscal. More importantly, the fiscal budget has announced to develop some critical transmission lines including Mechi-Mahakali, Karnali, Gandaki and Koshi corridor and the cross-border transmission lines including Duhabi-Jogbani-Purnia; Bardaghat-New Butwal-Gorakhpur; Nepalgunj-Lucknow; Attaria-Bareli and Chilime-Kyirong to boost energy cooperation with neighbouring India and China. Similarly, the budget has also announced to start implementation of Sunkoshi-Marin Diversion Multipurpose Irrigation Project from the next fiscal. Once completed, the project will provide irrigation facility to 122,000 hectors of arable land in Sindhuli, Dhanusa, Mahottari, Sarlahi, Rautahat and Bara districts. Apart from this, the government has aimed to complete the construction of, among others, ongoing mega irrigation projects - Sikta, Rani JamaraKulariya, Babai, BheriBabai Diversion, Mahakali III and Bagmati Irrigation Project within three years.

Efforts to address the supply-side constraints

Another major focus of the fiscal budget is to boost agriculture productivity to address supply-side constraints. As low productivity of the agriculture products are considered to be major cause for the rising import of major food and related commodities, the government in this fiscal has allocated over Rs 30 billion to boost agriculture production and livestock development. This intervention of the government is also expected to check high inflation. The budget has laid emphasis on production and development of value chain for agricultural products by announcing huge grants and subsidies. The budget has announced 85 percent cash grant to purchase agricultural inputs in special pocket areas, blocks, zones and super zones of the agriculture as announced by the Ministry of Agricultural Development. Similar amount of cash grant has been announced for collection centers of agriculture products, community seed banks and training centers. The developers of agriculture marts, processing centers, warehouse and cold storage facilities will get 50 percent cash grants and similar amount of grants has been announced to establish tissue culture laboratory of crops like banana, potato and also for fish farming. More importantly, as per the provision of fiscal policy farmers will be able to take agriculture credits from bank at interest rate not exceeding five percent in from next fiscal. The budget also announced to extend 75 percent premium subsidy to the farmers for agriculture, livestock and fowl insurance. The government has expected to boost agriculture and livestock production and contribute additional Rs 30 billion in the economy as the budget has initiated cheaper credit, insurance, irrigation and consolidation of small holder farmers through cooperatives. The budget has announced to develop altogether 2,100 pocket areas, blocks, zones and one super zone in each province for agriculture production. Some of them will be developed along the postal highway and mid-hill highway. The budget aims to be self-reliant on production of wheat and vegetable within a year and gradually make the country self-reliant on rice and potatoes; fish and maize every year starting from next fiscal. The government ensures abundant supply of power to the industries within two years to enhance production capacity of industries that are running below capacity due to lack of energy. Optimum capacity utilisation is expected to boost industrial production as well.

Reconstruction

The fiscal budget has allocated Rs 140.66 billion to accelerate post-earthquake reconstruction and rehabilitation works. Reconstruction budget will be mobilised through National Reconstruction Authority (NRA). As the NRA has formulated all the required policies and framework in this fiscal, the physical progress in reconstruction works are expected to accelerate in next fiscal. The fiscal budget announced to retain 400,000 individuals in domestic labour market in next fiscal in reconstruction, new construction and production sectors. The massive reconstruction going to be launched in next fiscal is expected to stimulate economic growth.

Expansionary and distributive approach

The budget presented by Finance Minister Paudel is expansionary and distributive from its nature. The budget has tried to please all segments of society. Guided by the distributive approach, the Finance Minister has doubled the social security allowances for elderly people and single women, grants to the village development committees and municipalities. Social security allowances and grants to the VDCs and municipalities are considered as flagship programmes of CPN UML as it was first introduced by the same party in 1994 with which Minister Paudel is associated. Fiscal budget 2016-17 has allocated Rs 32.64 billion to extend grant of VDCs and municipalities. At a time when there have been lots of complaints regarding misuse of funds due to lack ofelected bodies in local level, Finance Minister has doubled the grant of local bodies overlooking all the complaints. Finance Minister raised the grants for Constituency Development Programme from existing Rs two million to Rs five million to please the lawmakers. Further, he has also doubled the budget for Constituency Infrastructure Special Programme to Rs 30 million to each electoral constituency from Rs 15 million. Allocations to the Constituency Infrastructure Special Programme are against the spirit of scientific planning and it cannot cover the development needs of wide range of people. "Financing the projects handpicked by the lawmakers is absolute misuse of resources,” noted Rameshwore Prasad Khanal, former finance secretary and expert of public finance. The Finance Minister also allocated Rs 500 million to extend grant for the foundations established in the name of late political leaders of various political parties. The approach of the FM to please all segments of society has created additional liability on the state. The government has also increased the salary of government job holders by 25 percent, which is highest increment in the last decade. Even the government of former bureaucrats, led by then Chief Justice Khil Raj Regmi, had increased salary of government job holders by 18 percent in fiscal 2013-14. Salary increment of government job holders only has created additional liability of Rs 20 billion on the state.

Entrepreneurship development

The government, through fiscal budget, has announced credit in zero interest rate against collateral of academic certificates to support students to embrace entrepreneurship. Even though the government has not been able to implement Economic Revitalisation Fund, which was announced last year to provide soft credits for the revival of businesses hard hit by the earthquake and border blockade, implementation of the credit at zero interest rate against collateral of academic certificates is challenging, say bankers. The government has announced a populist programme without any mechanisms and resources to implement it. However, the private sector has lauded the initiative to expand the size of challenge fund to Rs one billion. The fund has been established to support people with innovative ideas, skills to embrace entrepreneurship. Similarly, the budget has allocated Rs 180 million to extend credit for women entrepreneurs without any collateral.

High growth, low inflation!

As the government prepares to spend Rs 1,048.9 billion in the next fiscal year to embark on a Rapid Growth Decade from the next fiscal, paradoxically, the expansionary fiscal policy aims to control inflation at 7.5 percent in the next fiscal year from nearly double digit inflation this year. The correlation between high growth and low inflation is a paradox in itself. Normally, when the government spends more to attain high growth, inflation automatically goes up due to high money supply in the market. Basically, it is duty of the Central Bank to tame inflation by introducing various tools through the monetary policy. In general, higher inflation poses threat to low income and middle income people of the country.

Mixed comments

Economists and private sector players have said that the fiscal budget 2016-17 is highly ambitious and the success of the budget depends on its implementation. Senior Economist and former Finance Minister Dr Ram Sharan Mahat has commented that the fiscal budget 2016-17 is expansionary and distributive which will create huge liability on the state. "This budget will bring fiscal anarchy,” said Mahat. The expansionary budget for next year will raise inflationary pressure as this budget has expanded the size of recurrent expenditure heavily. Pashupati Murarka, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has said that there is only little hope of the budget implementation because the capacity of the implementing agency has not been improved. "Success of the budget should be measured from the development outputs rather than revenue collection,” Murarka said. Hari Bhakta Sharma, President of Confederation of Nepalese Industries (CNI) sought time bound implementation of projects because cost of development projects escalating are every year due to low performance of implementing agencies and taxpayers have been paying cost of inefficiency of the implementing agencies. Similarly, Rajesh Kazi Shrestha, President of Nepal Chamber of Commerce, said that the budget has not done anything to lower higher cost of production so that the private sector could be benefited. "We have expected reforms in tax laws, administrative front also in labour sector and assurance of cheaper energy to expand our production base,” he stated.

Tax and revenue

The fiscal policy has not made changes in tax rates. The government has introduced infrastructure tax in petroleum products. The government started levying Rs 5 per liter in import of petroleum products to finance Budhigandaki hydro power project. It has expanded the income tax slab and increased excise duty in some products like cigarettes and alcohol. However, the government has slashed customs tariff on electric vehicles heavily to promote environment friendly transportation. Although the new fiscal year will start after one and half months the excise, customs tariff, infrastructure tax has been implemented as the Finance Minister tabled the Financial Bill in the parliament on May 28. However, the revision in income tax slab and value added tax (VAT) will be implemented from next fiscal only. Electric vehicles (EVs) will be cheaper in the local market henceforth. Only one percent customs tariff (of the cost price) levied for bus, mini bus and micro bus from exiting 15 percent. Similarly, the government has introduced 10 percent from existing 40 percent for jeep, car, vans and three wheelers. The road maintenance tax that is collected at the customs point has been increased from five percent (of the cost price) to seven percent. The government has also waived excise duty and road maintenance tax on EVs. Along with increase in income tax slab, now an individual earning Rs 29,167 per month and married individual earning Rs 33,333 should not have to file income tax. It has not changed any indirect (consumption) taxes. The Financial Bill 2016-17; however reduced VAT rebate of cell phones to 40 percent from existing 50 percent. It has increased customs tariff of alcohol by 33 percent. From next fiscal, business firms who have transaction up to Rs 10 million are not obliged for financial audit. The financial bill has also slashed the transaction tax to 0.75 percent from 1.5 percent for goods transaction and 0.25 percent from 0.5 percent for service transaction. The Financial Bill, 2016-17 also expanded the threshold of VAT to Rs two million from existing Rs one million in service transaction meaning that service traders who have annual transaction up to Rs two million need not be registered in the VAT net.