The Union Budget for 2015-16 will be unveiled by the Finance Minister on February 28. The exercise holds paramount significance as expectations are running high from the NDA government's first full-scale budget. Over the last few quarters, while business and consumer sentiment in the economy has shown a marked improvement, recovery in real economic activity has been sluggish.
The endowment of strong political mandate makes it imperative for the NDA government to accord top priority to reignite economic growth momentum using fiscal levers in a fortuitous environment of soft global commodity prices. If I were the Finance Minister, my approach would therefore focus on ensuring short and medium term outcomes, while creating enablers for long-term sustainable economic revival through a four-pronged strategy.
1. Focus On "Crowding In" Investments
The savings generated from recommendations of the Expenditure Management Commission and a lower subsidy bill should be diverted towards capital expenditure. I would budget for a threefold growth in government capex, from under 10% in FY15 to close to 30% for FY16. This will promote crowding in of private investment in an environment where domestic corporates are suffering from balance sheet slowdown with limited appetite for greenfield investments.
However, the investment focused approach of budget making should not come at the cost of fiscal discipline. I would continue to stick to the consolidation path outlined by the 14th Finance Commission and move towards a lower FY16 fiscal deficit target of 3.6% of GDP. This would enhance India's economic stability in the medium term, thereby improving the prospects of a sovereign ratings upgrade.
2. Channelize Investment Activity In Manufacturing And Construction
While capacity creation in manufacturing and construction takes 2-3 years to reflect on ground, the manufacturing and construction sectors have the largest backward and forward linkages with the rest of the economy. My aim would be to leverage the budgetary platform for initiatives like Make in India and Smart Cities for ensuring job creation and livelihood security in manufacturing, construction, and urban infrastructure.
In addition, I would also earmark for capacity expansion and modernisation of Indian Railways. One strategic intervention here would be an IPO for an IPO for Indian Railways' star eCommerce entity IRCTC which will be valued at least USD 5-6 billion today.
3. Emboss Ease Of Doing Business
A business friendly institutional and administrative architecture minimises deadweight loss and results in productivity enhancements for the economy. I would undertake the following steps for significant improvement in this sphere for both domestic and foreign investors:
• Formalise the implementation of GST, the biggest structural revenue reform by far, from April 2016 through budgetary allocations for requisite infrastructure and state governments (in line with the recommendations of the 14th Finance Commission).
• Review and postpone GAAR (General Anti Avoidance Rule) by at least two years in addition to substitution of DDT (Dividend Distribution Tax) with WHT (Withholding Tax) and broadening the coverage of Safe Harbour Rules for international transfer pricing.
• Correcting the inverted duty structure on manufactured products and rationalising MAT (in line with global standards) for SEZs.
• Complete adoption of digitisation across ministries for administrative clearances.
4. Leverage Finance For Furthering Investment Revival
The delivery of financial services through markets, institutions, access, and incentivised behaviour can significantly improve intermediation and allocation of capital through the economy. In this context, I would:
• Boost financial savings for funding infrastructure activities via tax free status for infrastructure/municipal bonds. In addition, reduction in STT (Securities Transaction Tax) and CTT (Commodity Transaction Tax), and upward calibration of increase in income tax slabs would incentivise 'aam aadmi' for diverting physical savings into financial savings.
• Introduce Finance SEZs through budgetary capital for developing India as a global hub for financial services exports.
• Remove tax distortions for bank deposits: Encourage deposits by reducing lock in period of bank deposits eligible for tax rebate to 3 years from 5 years and enhancing threshold for mandatory TDS on interest income to Rs 50,000 a year (from Rs 10,000 currently). I would also look at raising the investment limits under sections 80C and 80D to encourage more retail financial savings.
While the budgetary design would be pro investments, I would ensure that the icing lies in inclusiveness. Cooperative Federalism in execution of centrally sponsored flagship schemes, use of DBT (Direct Benefit Transfer) for subsidy disbursal, increased capital allocation for flagship programs on health, education & sanitation, and expansion of the Jan Dhan Yojana will improve social, financial, and technological inclusion. In my opinion, a budgetary exercise on these lines will unleash an era of synergy in monetary and fiscal policies for generation of sustainable growth impulses.Suggest a correction