Union budget was awaited with bated breath, but after the presentation the markets were a tad sluggish. With all its good intent, the ambition and boldness expected from “Modinomics”, it connotes a lost opportunity. In the end, it seems politics triumphed over economics; making incremental change over making a visionary change; maintaining the ‘sarkari’ way of doing things over transparency and credibility; and the “NDA” way of doing things versus the “UPA” way. Somehow, the great expectations that the markets and investors had built up was kept in abeyance for another day.
The “NDA” way was highlighted by stress on domestic manufacturing, focus on small and medium scale enterprises. It provided a fillip to infrastructure creation. Manufacturing and infrastructure where most of the forward and backward linkages lie, have been used to jumpstart the economy. Providing investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery, mega textile clusters, seven industrial cities, FDI of upto 49% in defence, would be the bunch of arrows used to boost jobs and accelerating domestic manufacturing.
Similarly, special thrust to PPP, encouraging banks to extend long-term loans to finance infrastructure projects, alongwith faster clearances, will give a thrust to the infrastructure sector to accelerate investments. This is in contrast to the UPA emphasis on the social sector. This is expected to positively impact both the Current Account Deficit (CAD) through lower imports, and the fiscal deficit through higher production, (higher tax collection, lower relative allocation to social sector). In addition some demand push is also expected from increased jobs, and higher disposable income through higher tax slab exemptions.
The overarching positive from the budget was a huge commitment towards fiscal prudence and capping the fiscal deficit at 4.1% of GDP.
However, the budget was a replica of initiatives and intents that his predecessor, Mr. Chidambaram had laid out. Despite having a historic majority mandate, the finance minister failed to capitalize on this opportunity to usher in bold reforms. In essence, the budget was as cautionary and as incremental as the earlier budgets. For instance, it missed the opportunity of streamlining the government’s accounting system from a receipts based one to an accrual one.
Essentially, this is a tool used to show a ‘good’ fiscal deficit number. All the receipts are asked for and accounted for upfront, while expenditure is postponed onto the next financial year. Needless to say, this does not engender trust. Retrospective tax amendments are a big dampener for FDI (Foreign Direct Investment), as it changes the level playing field for the company which already has come in and invested. This disincentivises new companies from coming in. First instituted in 2012, the retrospective tax amendments have not been rescinded in this budget leading to continuing huge legal and tax disputes with the government, further eroding foreign confidence in the Indian economy.
The other fronts which could have been game changers include majority FDI limits in sectors like insurance; widening the tax base; dramatically increasing capital expenditure over revenue expenditure, and third generation economic reforms. The markets hence, were expecting a more revolutionary change. Though following short on expectations the markets continue to hope that this has been just a start and new government would do much better.