This year’s budget is the first real opportunity for the Narendra Modi government to outline the direction it is going to pursue in terms of the economy and governance. Luckily for the government there are some good news: India’s external account has benefited from falling global energy prices; inflation seems to be moderating though there are questions about its sustainability, allowing the Reserve Bank of India to cut the policy rate by 2.5 percentage points and equity markets have risen almost 33% since March. So the objectives of the budget for the government are clear: Set out a path of sustainable recovery and growth by restarting the investment cycle.
That the investment cycle needs a boost is undeniable. The 2013-14 Economic Survey mentioned green shoots of recovery. But that it hasn’t been deep is obvious as both domestic and foreign corporate groups continue to sit on the fence. Gross capital formation has fallen below 30% for the first time in many years and investors have lost Rs 6,80,00 crore in the last three years in PSU stocks alone. It is this increase in risk as a consequence of decline in trust that must be addressed for investments.
India’s capital formation record is also not encouraging compared to China or countries in western Europe. In fact, the average annual growth of gross fixed capital formation fell to below 1% during 2013. The budget must serve as a catalyst to restart this cycle.
Public sector unit investments are another real catalyst for the economy. But the government must restructure managements and boards of public sector units to make them autonomous and accountable. The cumulative size of the balance sheets of the public sector units is Rs 2.6 lakh crore and their ability to leverage and drive investments is significant.
The proliferation of public-private partnerships, though grounded in the reality of finite financial resources of the government, has created many assets and services. But there have been many allegations and instances of private companies making windfall gains through flawed one-sided contracts.
Public-private partnerships are necessary for boosting investments but reforms and changes are also needed in them. A new framework of contracts and regulation is required to address questions of transparency, fairness, propriety, and, in several cases, questions of manipulation and corruption.
We need private capital and investors to propel our economy and capital formation. But the role of private capital needs to be redefined. It must move away from the cozy club of Indian businessmen and needs to expand to include the 140 million self-owned businesses that provide employment for millions of Indians.
Private investment must not take us back to a repeat of the UPA days when 10 groups accounted for 98% of the banking systems’ net worth and crowded out smaller companies from access to capital. It must also not mean that crony capitalists have preferred access and influence to government policy and contracts. The government must ensure equal opportunity for all entrepreneurs and investors. The focus must move to foreign direct investment instead of foreign institutional investors.
The government’s policy making must be seen as predictable, consistent and accepted, being driven by consumers and the economy rather than any particular industrial group or a political friend. Taxation reforms in both the tax code and administration are key to sustaining private capital flows. This kind of environment of fair play and transparency with performing regulatory institutions is what long-term investors wish to see before they invest.
There is a cache of goodwill with the government that remains intact despite the Delhi election debacle. The budget can set the course of delivering on that goodwill for all those who voted in 2014 for change and growth.
Rajeev Chandrashekhar is a Rajya Sabha MP. The views expressed by the author are personal