While India continues to perform better than most major economies, our gross domestic growth (GDP) growth for FY18 is expected to hit a 4-year low. While the government is doing its best to pump-prime the economy by announcing massive investments in infrastructure projects, private participation in infrastructure has substantially slowed down. The gross capital formation figure too, has been on a steady decline. While this government has stuck to the path of fiscal prudence so far, the resources needed for bank capitalization and infrastructure investments demand relaxation in the fiscal deficit target. Thus, Finance Minister Arun Jaitley has got his task cut out for Union Budget 2018-19 to support massive investments in infrastructure and manufacturing by both government and private sector.
With non-performing assets (NPAs) worth more than Rs 8 trillion (as on September 2017) having brought banking activity to a standstill especially for public sector banks, bank recapitalization is very high on Jaitley’s agenda and he intends to allocate enough resources for that. The Insolvency & Bankruptcy Code (IBC) has been a good move by the government, but unfortunately the lenders seldom arrive at a consensus to revive the company, and rather push it into liquidation. Such an approach will only result in value erosion and job losses, and ultimately large sums of taxpayers’ money will need to be spent on recapitalizing banks.
As it is, many of the projects which have become NPAs are at advanced stages of completion with considerable ground-work already done. Therefore, some practical decisions on NPA resolution can lead to quick revival of companies leading to a quick pick-up in the pace of economic activity and benefits will be more immediate. FM may use this budget to lay out a framework for putting in place a structured revival process for NPAs. Banks need to be empowered to find solutions on their own rather than referring all doubtful cases to IBC or following standard models (like CDR, S4A, etc.) which have not been working.
India keeps adding almost a million to its workforce every month, and majority of them are either unskilled or semi-skilled. To absorb this workforce, the two areas where FM may focus on in this budget are infrastructure creation and rural development. These would strengthen the domestic economy and ensure there is adequate demand.
Stepping up of public expenditure in infrastructure projects seems to be the most viable option at this juncture, especially when private investment does not have a congenial environment. I am in favour of relaxing the fiscal deficit target, but FM must ensure that a dominant share of the additional spending is on account of capital expenditure. Also, he must make it adequately clear that this relaxation is only a temporary measure.
In particular, I would like to see measures aimed at addressing the problems of the power sector, like fuel supply, distribution reforms and financing, as power is a critical input for every sector and is a key factor for the success of the much publicized Make in India campaign. Also, with banks not in a position to take exposure in infrastructure, it is imperative to encourage and facilitate dedicated Infrastructure Financial Institutions so that they can fill in the void created by banks and help infrastructure investment to pick up.
In terms of rural development, I feel modernization of agriculture and allied activities and irrigation should be the two focus areas of FM. There is immense scope of entrepreneurship in rural India and this budget may be the perfect platform to announce initiatives aimed at tapping rural entrepreneurs in areas like mechanization of agriculture, agro-processing, warehousing and logistics of agro-produce, etc.
On the taxation front, under direct taxation, both personal and corporate tax slabs need to be rationalized and tax laws need to be simplified for easy compliance. Tax administration needs to be revamped by making tax officials more accountable for their decisions which often make life of taxpayers extremely difficult.
On the indirect tax front, while the implementation of GST has been a landmark achievement after years of debate and discussion, there are some teething problems at the ground level, especially for MSMEs. Some notable omissions from the GST regime have ensured that a full-fledged GST regime is still sometime away. The documentation work is taking up a lot of time for entrepreneurs. Multiple rates have further complicated matters. A simple documentation system is needed and we should aim for a regime with 2 GST rates along with certain categories of goods and services being totally exempt.
Skill development is another crucial area where FM may provide some thrust through this budget. Industry 4.0 calls for altogether new skill sets and competencies. India, taking advantage of its demographic dividend, should position itself as the global supplier of skilled manpower for Industry 4.0. This budget may provide a broad outline and incentive structure for setting up a network of such skill upgradation and training centres. PPP can be the way forward for creating such an ecosystem. Availability of skilled personnel will both increase their demand abroad as well as prompt global companies to set up outfits in India thereby providing a shot in the arm to the Make in India initiative. In addition, trained individuals will also be in a position to pursue entrepreneurial ventures.
To sum up, although Union Budget 2018-19 presents some formidable challenges to the FM in terms of rebuilding the growth momentum, it also presents him an opportunity to offer formidable solutions to many of India’s long-standing problems. Thus, a unique opportunity beckons in terms of shaping a future that would enhance India’s attractiveness to the domestic and global investors in multiple ways.
(The writer is Chairman & Managing Director, Srei Infrastructure Finance Ltd)
Updated Date: Jan 23, 2018 13:27 PM