Finance minister Arun Jaitley presented an excellent, well thought out budget. It paves the way, as much as Budgets can, for future economic growth. If the intentions contained in it are carried out (hopefully political opponents would not stall policies that are good for the nation), India will, once again, be on its way to achieve its potential.
Given that Jaitley had 10% less of tax revenue to play around which (after the Finance Commission enhanced share of the States by 10%), he has done a commendable job in curtailing the fiscal deficit to 3.9%. He has postponed, by a year, the aim to reduce this to 3%, in order to be able to spend more on sorely needed infrastructure. S&P, believing this one year delay shows a weak fiscal consolidation, has stated that it will not upgrade India’s credit rating for another year!
This is strange, because the Budget forecasts GDP growth of over 8% for 2015-16 exceeding that of S&P, of 7.9% in 2016-17. It is also strange, given that S&P recently paid a fine of $1.5 billion to the US SEC for its role in misleading investors whilst rating mortgage-backed products, and was also suspended by the SEC from rating commercial mortgages.
It is time emerging markets set up their own financial architecture and institutions, including a development bank, a rating agency and a payment gateway, to reduce dependence on others. Russia and China would be happy to join in such an endeavour.
Other agencies like Fitch or Moody’s may upgrade India’s rating; the finance ministry has called them in for discussion. An upgrade would be a bullish factor.
Jaitley has rightly identified that providing jobs is a major priority, and, given the inflexibility of our labour laws, the manufacturing job growth will come, as it has, from small and medium enterprises. The budget encourages this, and has established a new micro-lending institution called Mudra to provide loans to small units. The budget also stresses on improving skills, so that displaced workers are more easily able to get another job.
The budget provides an impetus to “Make in India”, by replacing the plethora of permissions required (daunting enough to deter any honest entrepreneur), upon pain of penalty, with pre-existing regulatory mechanisms.
Jaitley realises that the state would have to play a more dominant and risk taking role in public private partnerships (PPP) for infrastructure. He has taken several steps to create a more welcoming environment for foreign investors, including a deferment of General Anti Avoidance Rules (GAAR) by two years. Other steps include the setting up of a bankruptcy court of global standards, clarification of indirect transfer, via a foreign registered holding company, of assets in an Indian company (in order to avoid a repeat of Vodafone), and setting up of separate cells in high courts for commercial disputes.
The latter is extremely important. It is judicial delays that allow fraudsters like Saradha and NSEL to defraud investors; the ease with which adjournments are granted, and justice delayed, is disheartening. The government and the judiciary need to jointly take a serious look at the cost of judicial delays and the shaking of investor confidence, without which all of Jaitley’s plans will come unstuck.
So where does Jaitley expect to raise resources from? For one, he plans to monetise India’s huge reserves of gold, estimated to be 20,000 tonnes, worth some $850 billion at current prices. Jaitley will introduce a sovereign gold bond, purchasable either with gold or with cash. If only 5% of the 20,000 tonnes of gold stock gets monetised by purchasing the bond, it would raise Rs 200,000 crore. This would help the Indian rupee.
Jaitley is using a stick and carrot approach for offshore black money. The carrot will be an opportunity to come clean, after paying back taxes and a penalty. The stick is a 10-year non-bailable RI jail sentence. Given the conditions of RI hospitality, Indians would prefer the former, which should give large revenues.
Sale of telecom spectrum has already produced bids of Rs 65,000 crore, with proceeds going to the exchequer rather than to the politician.
Large savings are also expected from direct benefit transfer of subsidy payments. Service tax has been hiked, to generate revenue. Divestment will provide some Rs 65,000 crore, and will include sale of loss making public sector units.
The market reacted positively to the budget and to RBI’s surpsise rate cut by 0.25%, with the Sensex gaining 228 points over the week to close at 29,448.
The key now is to implement the budget proposals. Opposition politicians, with a majority in the Upper House, are stalling necessary legislative changes. How the government can overcome this would be one factor for a continued bull run. How GST will be introduced on April 1, 2016, is another
The opening pair of Jaitley and Rajan have done their job.