The stars are aligned for India, now FM has to deliver

Never before have the stars aligned so much in India’s favour as they have now, economically speaking! The advent of the new government coincided with a precipitous fall in global crude oil prices, leading to a significant correction to inflation, and provided an opportunity to better manage public expenditure, especially subsidies.

The US economy, the main engine of global economic growth, began to correct itself. And to top it all came the expansion in quantitative easing by Bank of Japan, while the European Central Bank recently announced its own bond buying programme, signalling the prospect of a flood of funds to emerging markets like India.

Ideally, the falling oil prices should have corrected the troublesome fiscal deficit to some extent as the government resorted to four excise duty hikes in the past three months. But we have not progressed much on that front. Revenue collections have been abysmally low, especially  tax revenues, and have not kept pace with government expenditure. Once again, the government has been lucky.

Last week’s move to alter the base year, along with changes in the conceptual framework for GDP calculations, will have a salutary effect on the 2014-15 fiscal deficit situation – another face-saver for the government ahead of the budget.

Road map on flagship programmes
Given this favourable environment, the government of the day will not be forgiven if it does not make use of it to revive languishing reforms. The Budget gives the best opportunity for this.

Finance Minister Arun Jaitley recently said his Budget is going to be all about unleashing second-generation reforms. Since this will be the first full budget of the government, it signals that he means business. Jaitley will be watched for the roadmap he gives to implement some of the flagship schemes announced by the Prime Minister like ‘Make in India’, ‘Swachh Bharat Abhiyan’, and Pradhan Mantri Jan Dhan Yojana (PMJDY).

Incentives to raise public savings are crucial. Domestic savings have to be spurred to fund such flagship programmes. India’s domestic savings have dipped by a whopping six per cent of the GDP. As a consequence, demand growth in India has gone muted too.

The government has to leave ample money in people’s hands through the Budget. Every budget raises the expectations of the common man, but the forthcoming Budget has taken it one notch further because of the manifold promises made by Prime Minister Narendra Modi. The Budget may be the best platform to deliver on them.

It will be interesting to see if the Finance Minister considers enhancing the tax exemption limit, along with announcing tax incentives on small savings schemes.

These measures, if implemented, hold the promise to increase domestic savings rate and minimise the government’s dependency on foreign capital which is volatile. Last year, Jaitley had raised the income tax exemption limit to Rs 2,50,000.

It augurs well to raise it to Rs 3,00,000 this time round. This would help people save more for the investments that are expected to revive economic growth.

Vigorous tax reforms awaited
The Budget will also be watched for the directions it gives on vigorous tax reforms. The government has removed the uncertainties on transfer of shares by Indian subsidiaries of multinational companies to their foreign parents.

Now, similar steps in other areas of disputes too are needed. The other worry for investors relate to retrospective amendments.

The deferment of General Anti-Avoidance Rules till the tax regime stabilises can be helpful.
Indian banks are grappling with the problems of bad loans. Non-performing assets (NPAs) of the banks are excessively high. According to estimates, the NPAs of public sector banks have reached nearly 6 per cent.

The Budget could allow more space for these government-owned banks to raise resources on their own.

The government’s share in PSU banks could be lowered to less than 51 per cent in a gradual manner. Resource-starved banks cannot fund the investment requirements of the day.

States are the major cogs in the wheel of development. State autonomy and participation in developmental work are important. States must also be given ample funds in the budget to implement the government’s programmes.

The frequent need for states to approach the Centre for funds must end with an increase in their corpus.

Industry may be looking for a tax holiday for new manufacturing facilities set up across sectors.

This will boost investment. Such new facilities could be given exemption from taxes under the minimum alternate tax (MAT) regime. SEZs, which have seen a revival under the new government, could be handed out tax exemptions.

The nationwide rollout of the goods and services tax (GST) and removal of numerous indirect tax laws will surely have a major impact on businesses. A clear roadmap for implementation of GST in the budget will enable investors to take early decisions on their investment/expansion plans.

Slowing oil prices have given a lifetime opportunity to the government to correct fuel subsidies. This can now be done without giving much hardships to the consumer.
Along with fuel, other commodity prices too have moved down very significantly. Coal, copper, iron ore, gold have all declined. India, which is going the whole hog on infrastructure development, could not have asked for more.

The government has increased excise duties to support the funding of road projects. It must now start on the business of infrastructure development.

The Budget must give clear directions on this as nearly 70 per cent of all new highway projects are going to be government-funded.

Realistic targets please
Last but not the least, the finance minister must do himself a favour by setting realistic targets for macroeconomic goals. In an emerging economy which takes up massive public investment programmes, fiscal deficit is bound to be a bit higher.

Global markets and rating agencies may not take such a negative view of a somewhat higher fiscal deficit which is used for productive investments. The targets, therefore, need to be achievable.

Similarly, tax targets should be such that they can be met with easily. The government’s net tax revenue collection till December end was Rs 5.46 lakh crore or 55.8 per cent of the Rs 9.77 lakh crore estimated for the whole year.

The government had also budgeted close to Rs 49,000 crore in revenue mop-up through disinvestment. It has so far reached only the halfway mark.

It is significant to note that the government has taken some major steps in the field of opening up of insurance, defence, construction and coal sectors. It must open up other areas of the economy and move at a faster pace on reforms.

The government is in the majority. The opposition is willing to co-operate as evident from former finance minister P Chidambaram’s remark two days ago.

The Budget needs to seize the opportunity. “There is much work to be done. We are willing to help. It is up to the government to reach out to everyone, build consensus, and work towards achieving higher growth in the years to come,” Chidambaram told Deccan Herald.