TIME FOR A DEFINITIVE PUSH FOR GROWTH
The year 2015 was a mixed bag for India’s economy. The Modi government, which is leading an economic transformation, should now present a brave budget riding on macro-economic fundamentals.
With less than 10days to go, North Block mandarins would be busy drafting the fine print of Budget 2016. From a macro-economic standpoint, the current fiscal has witnessed mixed results as India emerged among the fastest growing economies amidst muted growth in developed countries and a visible slowdown in China. Among the key challenges faced by the economy are a subdued pace of private investment and savings, several crucial reforms being held back due to parliamentary logjam reflecting in the downward revision of growth estimates, a slowdown in manufacturing and a material 20 percent fall in exports, and uncertain global cues.
Despite cynicism, the government, at the highest level, stayed committed to investors with several measures including liberalisation of foreign direct investment policy, broad-basing of external debt norms, strengthening of arbitration laws, legislation to enable expeditious settlement of commercial disputes and several administrative measures to overhaul tax administration.
The prime minister’s flagship programmes, Make in India and Digital India, coupled with economic diplomacy seems to have set progressive targets for other administrative wings of the government. Operationalising the $6-billion National Investment and Infrastructure Fund (NIIF) is a big leg-up for the capital-starved infrastructure space and will help catalyse long- term investments, given the interest expressed by foreign sovereign and multilateral investment funds. Initiatives for smart cities promise a gush of private investments with interest from select foreign governments—Japan, France and Singapore in particular. Programmes to promote digital transformation and the new startup policy are tipped to inspire entrepreneurial spirit and have the potential to drive the next decade of India’s growth momentum.
Globally, though, the dominant theme in financial markets seems to be that of volatility. Several unpredictable factors will likely shape the world economic outlook in 2016 with implications for India. To count a few which are visible: Low growth rates forecast for Brics economies amid which India seems like an oasis of growth, the impact of sustained low commodity prices on resource producing nations (with India being positively positioned), the impending presidential election in the US that will guide its fiscal stance and foreign policy, and a slowdown in the Eurozone, which can adversely impact Indian exports.
Finance Minister Arun Jaitley will be presenting his third successive budget amid a revised growth forecast of 7.3 percent, a receding current account deficit and about 3.5 percent fiscal deficit target. Though the overall tax collections look healthy, aided by higher duties on petroleum goods and a leg-up due to increase in service tax rates and overall cess levy, the direct tax target is likely to be missed by Rs 40,000-50,000 crore, primarily due to a fall in corporate profits.
Budget 2016 will have to come up with innovative schemes to fund the Seventh Pay Commission’s recommendations, OROP recommendations and the increased share of states from the divisible central pool under the 14th Finance Commission as all of these will cause fiscal strain in the short- to medium term. Not that any of the above changes were an option before the government, but they are likely to impact India positively with an increase in demand due to higher purchasing power and promotion of cooperative federalism.
The need to balance resource constraints should prompt the government to recalibrate its disinvestment strategy and achieve buoyancy in tax collections to enhance revenue mobilisation. A medium- to long-term plan on divestment and tax reforms by way of improved compliance will bring the additional resources.
India can afford to chase a material share of foreign investments at this juncture, riding on macro- economic fundamentals and a government that is leading the economic transformation. The focus, therefore, would be on addressing ease of doing business.
Here are the major themes we can expect in Budget 2016.
- Despite the RBI stance on interest rates, the debate on meeting fiscal deficit targets versus providing a boost to public spending is likely to settle in favour of the latter as private sector investment will continue to be weak and cleaning bank balance sheets will be a medium- term exercise. Admittedly, this will entail an increase in borrowing, but bets on growth by giving a boost to expenditure would outweigh (to some extent) the need for fiscal discipline.
- Budget 2016 is likely to target measures to revive the investment cycle in the private sector, which has fallen to single-digit levels as a percentage of GDP, compared with the highs of nearly 18 percent in FY08. This calls for an aggressive policy push to enable ease of entry and doing business—both domestic and foreign. There could be further push to legislative agenda by way of acceleration of bankruptcy code and implementation of recommendations for simplification of The Companies Act, 2013.
Simultaneously, there would be measures to encourage private long- term savings to fund large capex, especially in the infrastructure space. Budget 2016 should set out the government’s action plan under the new Public Private Partnership (PPP) model for infrastructure development in transportation, defence and port sectors. The new model, premised in Budget 2015, requires the government to provide 40 percent of the project cost during construction. Budget 2016 could witness a sharp increase in public spending, including in infrastructure, railways, roads and irrigation.
- Structural reforms in the banking sector to clean the inventory of Non-Performing Assets (NPAs) is the need of the hour. The RBI governor has set a deadline of March 31, 2017, for banks to clean up their balance sheets. The rising NPAs of PSU banks are also a major hurdle for infrastructure financing.
A major push on banking reforms can be expected.
- The commitment to usher in a robust yet progressive tax regime will be an important theme. From the standpoint of direct tax laws, the stated policy to scale down corporate tax rates and rationalise incentives will be an overarching principle. The key, however, will be to strike a balance between the protection of tax base and incentivising the growth of target businesses. For example, the new startup policy has already announced a three-year tax holiday for startups.
Budget 2016 may also lay down the framework and approach to adapting to the outcomes of the Base Erosion and Profit Shifting (BEPS) action plan to reassure foreign investors. A host of administrative reforms on simplification, some of which form a part of the recommendations by expert groups [Justice RV Easwar and P Shome], are likely to find their way into the Finance Bill.
Though the continued impasse of the legislation on Goods and Services Tax (GST) has been a dampener for trade and industry, rationalisation measures on the rates of service tax, excise and customs to align them with the revenue- neutral rate under the GST regime are likely to feature, besides ease of achieving a seamless credit mechanism under central levies.
Clearly, the budget team is faced with an arduous task as they deal with meeting expenditure demands committed to social schemes and public expenditure in a year when corporate tax rate cuts are expected. Having said that, most believe that PM Modi and FM Jaitley, known for their tenacious approach, will put out a brave show to steer the growth trajectory of the country’s economy, driven by fiscal policy and wisdom.