(M.K. Venu is Executive Editor of Amar Ujala publications group)Finance Minister Arun Jaitley does not want the market to look at the forthcoming budget as "make or break" for the NDA government. So Jaitley is at pains to suggest that a lot of important "reform measures" are happening outside the budget. He cited 2 weeks ago as an example that the increase in excise duties to support the funding of road projects by the government because the private sector is not coming forward to build roads. Nearly 70% of all new highway projects will be government-funded. Jaitley also talked at a function hosted by a private TV channel 2 days ago of key legislative reforms which are already in place, though the Land Acquisition Ordinance is a political hot potato which can potentially derail the budget session.
Jaitley is downplaying the budget exercise and pointing to important decisions have happened outside the budget precisely because he wants to dilute the "make or break" tag which the stock market is giving the budget exercise. The burden of over-expectation is something the Modi government has been grappling with over the last 8 months. This remains a millstone around Jaitley's neck.
So what are the big ideas the budget can unveil that will lift the animal spirits of India Inc and the markets? One theme which Jaitley has already clearly underlined is that the budget 2015-16 will focus on public investment-driven strategy to revive economic growth. This is interesting because both India and the world economy are still caught in a business-down cycle which is expected to further deepen because of the recent crash in global commodity prices. History tells us that a secular fall in global commodity prices lasts for some years and it hinders growth recovery.
It is fascinating to note that the NDA government under Vajpayee had also got trapped in a five year global commodity slump( 1998 to 2003) which brought down the average GDP growth rate to sub 5 % from 2000-01 to 2002-03. That is also the period when Vajpayee embarked on a massive public investment programme in roads, power and other infrastructure projects. The fiscal deficit during this period was between 5.5 to 6% of GDP, quite high by normally acceptable standards.
So are Modi and Jaitley caught in a similar situation as Vajpayee and Yashwant Sinha/Jaswant Singh were back in 2000 to 2003? The parallels between the two periods are uncanny. Jaitley has also responded with the Keynesian idea of public investment led growth strategy. Suresh Prabhu, Minister for Railways, echoed a similar sentiment when he told me that modernization and expansion of Indian Railways alone will require close to $100 billion over the next five to seven years. If this is seriously implemented, about 2 percentage points could be added to India's GDP by the Indian Railways alone over the next five years, says Prabhu.
So, one clearly gets the sense that the NDA will use public investment strategy to boost the infrastructure in roads, power, transport etc. The question is how will Jaitley communicate to the market and global rating agencies that a public investment led strategy to fund productive investments in infrastructure is not such a bad thing? In his previous budget, Jaitley took up the challenge to follow a strict fiscal road map and take the fiscal deficit down to about 3.6% by March 2016. Clearly, the Finance Minister will have to give up this goal for now as he focuses on a public investment led growth revival against the backdrop of worsening consumer demand in India as well as the rest of the world.
The global markets and rating agencies may not take such a negative view of a somewhat higher fiscal deficit which is used for productive investments.
Since consumer demand-led growth will take time, the Finance Minister's best bet is to focus on an investment-led growth strategy, especially in infrastructure. To facilitate investment-led growth in manufacturing, Jaitley is likely to come up with some tax concessions for businesses participating in "Make in India" project. One obvious idea the Finance Minister could explore is to bring the corporate tax paid by foreign companies on an even keel with the Indian companies. Currently, foreign companies not incorporated in India pay about 10 percent higher corporate tax than their domestic counterparts. Many years ago, China had made the tax regime level playing for foreign companies to boost FDI in several sectors.
This seems like low-hanging fruit for Jaitley. It won't hurt anyone domestically while making it attractive for foreign companies to participate in the "Make in India" mission. Also, it must be kept in mind that foreign companies have cash (American corporations are sitting on $2 trillion of surplus cash which is equal to India's GDP). Indian companies are mostly strapped for cash today with over-leveraged balance sheets.
So the first phase of "Make in India" will have to be driven by either the government/PSUs or foreign companies. To revive consumer demand, especially in rural areas, the government needs to urgently widen its price stabilisation fund for farmers who have been badly hit by plunging agriculture prices. The budget is likely to have some measures in that direction. Indian businesses have asked for a stable tax regime and would expect Jaitley to articulate it more clearly than he did in his last budget. It remains to be seen whether the government will substantially cut welfare schemes of the UPA government. BJP President Amit Shah, addressing the cream of Mumbai businessmen in a function organised by a business news channel, said that the BJP does not agree with their definition of "reforms" and will strive to build a welfare state. Will this reflect in the Budget?
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