The Union Budget has potential to unleash the lost animal spirits. Implementation is the key
The Union Budget for 2014-15 provides a roadmap for the revival of a floundering economy not just with proposals that seek to incentivise infrastructure growth, manufacturing, service industry and agriculture and agro-related sectors, but also by the creation of a strong foundation through enhancements in higher education and skill development. Put simply, Union Minister for Finance Arun Jaitley has presented a holistic, development-oriented, and not a 'pro-industry' or 'anti-aam aadmi', Budget. In the limited scope that he had, given the economic mess he inherited, he has managed to string together a series of measures that has the potential to unleash what commentators generally refer to as the “animal spirits” of the Indian economy. If he is able to successfully implement a considerable part of his proposals in the coming months, the turnaround which we have been hoping for can become a reality and the next Budget will be able build upon those strengths and offer a truly revolutionary change. For now, the markets have reacted cautiously to the proposals, as have industry and the people.Nevertheless, the Budget reflects the confidence of a strong and stable Government that does not have to constantly look over its shoulders to keep its allies happy with meaningless sops. For instance, Mr Jaitley has assured that the Goods and Services Tax regime will be finalised by this year-end, ensuring that all the legitimate concerns of the States will be taken care of in the process. The Congress-led UPA regime had failed to even set a realistic target for the implementation of GST, primarily because it could not convince many of its own dominant partners, let alone non-UPA parties, on the matter. In raising the limit for foreign direct investment in defence production and the insurance sector from the existing 26 per cent to 49 per cent, the Finance Minister has done what should have been long ago but was not, because, again, the previous UPA Government in its 10 years of rule lacked the political will to bite the bullet.
Yet another instance of the Narendra Modi regime's determination to change the status quo was evident in Mr Jaitley's opening remarks as part of his Budget speech on Thursday in Parliament that food and petroleum subsidies would be revamped to cut down on leakages and ensure that targeted beneficiaries are not the end losers; that a new urea policy would be crafted; and, that the UPA's pet scheme, the National Rural Employment Guarantee Scheme, would be reformed so that only productive, asset-creating, agriculture-related activities are undertaken. As things presently stand, all sorts of meaningless exercises are conducted in the garb of providing assured employment in rural India through the Mahatma Gandhi National Rural Employment Guarantee Act. The third major deviation from the UPA's policies has come in the virtual scrapping of retrospective taxation. While the Finance Minister has not ruled out a future exercise of the provision, observing that sovereign countries have the right to retrospectively tax, he has made his displeasure with the practice amply clear by categorically stating that the Government will not “ordinarily” resort to retrospective taxation. This, again, is the mark of a regime confident of its stability and convinced of its ability.
By providing a massive thrust to infrastructure growth across sectors ranging from National Highways (with an allocation of Rs 37,000 crore-plus, including around Rs 3,000 crore dedicated to the North-East) to ports (16 new port projects announced, with a focus on their connectivity to the hinterland) to power (Rs 500 crore for a new scheme that will work to realise a feeder-separation project for quality, 24x7 electricity supply in rural homes and adequate supply for farming needs) to real estate (positive changes in FDI structure for the development of 'smart cities', and the reduction in built-up area and size of projects to boost affordable housing), Mr Jaitley hopes to energise infrastructure that directly and indirectly impacts millions of jobs within and outside and has a straight bearing on GDP growth.
Besides the FDI route, Mr Jaitley has invested hope in the public-private-partnership route to infrastructure growth. Since he has acknowledged the pitfalls that had all but sabotaged many ambitious PPP projects, he has decided to institutionalise the scheme with the creation of the ‘3P India' organisation, to be set up with a corpus of Rs 500 crore. As the largest PPP market in the world, it is crucial that the experiment does not fail in this fresh attempt. There has been enough damage already; delays in 110 Central infrastructure projects due to regulatory hurdles have resulted in cost overruns of over Rs 1.57 lakh crore.
It is heartening that the Finance Minister has given the defence sector the attention it deserves and has not received in recent years. By enhancing the allocation to Rs 2.29 lakh crore — up 12.5 per cent from the previous fiscal — Mr Jaitley has made it easier for the Armed Forces to speed up modernisation and upgradation of their equipment, although it must be admitted that a large portion of the money that now looks so impressive is absorbed in salaries, pensions and other such expenses — leaving little in hand for actual investments. In this situation, the decision to invite FDI up to 49 per cent will not only boost defence production but also make it possible for the Armed Forces to access cutting-edge technology. Also, by setting aside a realistic sum of Rs 1,000 crore towards the ‘one-rank-one pension' scheme, Mr Jaitley has signalled his Government's intention to implement the scheme.
At the end of the day, though, the question is: How will the Government be able to manage the resources for all that it has dangled before the people? Regimes in the past had promised the moon but failed to deliver. Mr Jaitley cannot escape the reality of a high fiscal deficit that can destroy the best laid plans. This has led him to announce an ambitious target of mopping up more than Rs 58,000 crore through divestment in public sector undertakings. We had seen a similar measure meet with limited success when the UPA Government had tried it. But then, the investment environment had soured. Things are ‘different' now with a strong Government in place. This forms the basis of hope that divestment will succeed, growth will pick up and employment will accelerate (Mr Jaitley believes five million to eight million jobs can be generated in the next three to four years).