Investors, global and domestic, want Finance minister Arun Jaitley's first full-budget for 2015-16 to be a high-speed affair and set into motion the much-awaited push for a non-adversarial and a healthy business environment, aid investment and goad companies to add capacities.
Broadly, there could be five types of measures that Jaitley can announce in the budget to drive investment.
1) First, enable the creation of a greater pool of investible funds among banks and financial institutions that companies can dip into. Gross savings, as a percentage of GDP have fallen from a peak of 36.8% in 2007-08 to just above 30% currently. This fall gets directly mirrored in the extent to which companies are adding capacity lines. Gross fixed capital formation (GFCF) to proxy to gauge investment activity has fallen from a high of 33% to about 30%. Part of this solution could be in making it more attractive for households to park savings in financial instruments, deepen savings and wean people away from investing extra money in unproductive assets such as gold.
2) Second, a lower fiscal deficit is vital to increasing household savings and making more, and eventually cheaper, funds available for the private sector and push investment. A high fiscal deficit — shorthand for the amount of money the government borrows to fund its expenses — can ‘crowd out’ the private sector from the credit market by shrinking the banks’ pool of lendable resources to industry and households. With subsidies at Rs 260,657 crore, three out of every Rs 10 Jaitley budgeted to spend in 2014-15 was borrowed. It is, therefore, absolutely essential to stick to the medium-term fiscal policy roadmap and peg the fiscal deficit at 3.6% of GDP in 2015-16.
3) Third, the minister should not lose sight of the significant complementarities that exist between private industry and government investment. There is enough empirical evidence to show that higher public spending on infrastructure is followed by greater private investment as the multiplier effect plays out across sectors. Jaitley should, therefore, be acutely conscious that he should not wield the knife to cut capital expenditure. Capital expenditure as a proportion of the Centre’s total spending has fallen from 12% in 2013-14 to 11.7% in 2014-15. For a capital-scarce economy this is quite low and needs to be pushed up.
4) Fourth, as the majority shareholder of several cash-rich State-owned firms, the government should enable an investment push by such companies. Many of these companies are in the infrastructure space, and investment in these can catalyse asset creation and income growth from farms to factories.
5) Fifth, investors would still want to see tangible action on the government’s promises to eliminate red-tape to make India a favoured investment destination with a predictable tax system and easier rules. One of the proximate risks of the roiling investor sentiment is policy unpredictability.
The Economic Survey 2014-15, tabled in Parliament on Friday, talked of a “momentous opportunity” for the government to take reformist measures – implying elbow room for subsidy cuts and infrastructure spending, apart from legislative measures to boost investment.
For a capital-scarce country this may be just the right time for Jaitley to seize the moment and roll-out the red carpet to investors.