Union budget must strike at the root of inertia

  • Sunil Godhwani
  • Updated: Feb 27, 2015 01:15 IST

The annual budget exercise is always a keenly watched event. But this year's Union Budget, which will be tabled in Parliament on February 28 is already generating lot of expectation and curiosity. This will be the first full budget of the Narendra Modi-led government, which won a handsome mandate nine months ago on the promise of kickstarting the economy. The budget is expected to take steps to simplify norms, cut red tape, further ease FDI rules, and make it more convenient to set up businesses and factories. Importantly, the budget comes in the backdrop of a slump in energy prices, particularly oil, even as economic growth continues to be anemic and way below its true potential of 8-9%.

This government has the political mandate and it must use the platform of the budget to demonstrate its will to implement far reaching reforms. This budget should not merely tinker with a tax here or a duty there, repackage social welfare schemes, or restrict itself to being just a dole-out exercise. Instead, it must unfurl a series of measures that strike at the very root of the inertia that has gripped the economy, give more spending power to consumers, rekindle demand, reinvigorate growth and hoist a stable, democratic and investor friendly India as the first destination for global investments.

Among the key structural reforms in this budget, we expect the government to lay down a roadmap for GST implementation, improve tax administration by widening the net, correct inverted duty structures, reduce minimum alternate tax from the current 18.5% on special economic zones and simplify the land acquisition process.

The budget is also likely to rationalise subsidies and expenditure in line with the recommendations of the Expenditure Management Commission. The budget is expected to provide tax incentives to the manufacturing sector under its 'Make in India' programme that will boost investments in this area.

Given the government's focus on replacing slum clusters with houses, the budget is likely to announce specific measures to give an impetus to low-cost housing. The government has set a goal of "Housing for All" by 2022. The budget may also spell out specifics including timelines and a larger fund allocation for creating 100 "smart cities" as part of the government's plan to modernise urban India.

Domestic savings as a percentage of GDP have declined from 36.8% in FY08 to 30.1% in FY13, led by a sharp drop in household financial savings as more people purchased physical assets. The government may try and boost financial savings by further relaxing the threshold limit under Section 80C, raising the tax exemption limits for various allowances, and increasing the deduction limit for health insurance premium, among others. The budget may also raise the annual deduction limit available on interest paid on home loans from the current Rs 2 lakh to help revive demand for new homes. Given the government's emphasis on mega investments in the infrastructure sector, the budget may set aside an exclusive investment limit for infrastructure bonds that will offer tax breaks.

A key challenge for finance minister Arun Jaitley will be to strike a fine balance between a fiscal consolidation roadmap and loosening the purse strings for targeted spending across infrastructure and social sectors, given that investments from private sector remain tepid and banks are weighed down by non-performing assets. However, given that subsidies are expected to see a sharp drop due to the slump in oil prices, the budget can comfortably provide for higher capital expenditure and support economic growth amid still weak corporate sentiments without tinkering with the fiscal math.

While capital or plan expenditure goes towards creating assets, non-plan revenue spending is used for paying subsidies on food, fertilisers, and petroleum products. Thanks to a sharp drop in oil subsidies that are now expected at Rs 25,000 crore in 2015-16, the government's share of capital expenditure in overall spending is expected to significantly improve to 13.2%. In other words, a larger part of the money being spent by the exchequer will be used for the creation of productive assets.

At the same time, the government is expected to continue on the path of fiscal consolidation, with a likely fiscal deficit target of 3.6% of GDP for FY16, down from 4.2% (based on the new GDP figures) in FY15. Despite soft tax collections, the government will meet its FY15 fiscal deficit target of 4.2% led by expenditure cuts, pick-up in disinvestment, dividend payouts from the RBI/public sector companies, and higher-than-expected telecom auction proceeds.

If the budget sticks to the fiscal roadmap and offers a credible fiscal consolidation strategy over the medium-term, the Reserve Bank of India is expected to further cut interest rates and thus aid the government's efforts to improve growth. The RBI has said in the past that one of the key factors for future rate cuts will be the government's adherence to meaningful reduction in fiscal deficit. Further, India can expect a ratings upgrade from international ratings agencies and that will only give a fillip to the dollar flow.

The finance minister must unveil big ticket spending, show commitment to fiscal prudence, and convince investors and agencies alike that the government is not splurging but spending in a meaningful manner. The finance minister is known to be a fine orator. On the budget day, he will have to be at his eloquent best!

Sunil Godhwani is CMD, Religare Enterprises Ltd
The views expressed by the author are personal

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