|"In my mind, the thrust areas
for this Budget are around the agricultural and social sectors
to ensure inclusive and sustainable growth and to address
India's infrastructure bottlenecks"
the history of independent India, this year has probably presented
the strongest backdrop for the Budget from an economic and fiscal
performance perspective. India's GDP has grown at over 9 per cent
this financial year and at over 8 per cent over the last three
years. Industrial production is up 11.3 per cent and we have a
combination of a high savings and investment rate, both of which
have been over 30 per cent of GDP in the last year. India's foreign
exchange reserves, at $180 billion (Rs 7,92,000 crore), are one
of the highest amongst emerging economies. Tax collections have
risen 28 per cent over the previous year and the fiscal deficit,
at 3.7 per cent of GDP, is well within the FRBM targets. Inflation
is the only area of concern and is possibly an outcome of the
growth that the Indian economy has experienced.
In this context, the Finance Minister was
batting on a very strong wicket from a macroeconomic perspective
and could have initiated some bold reform measures that would
go a long way in ensuring sustainable long-term growth for the
Indian economy. I believe that the Budget has taken some steps
in these areas but more could have been done in terms of setting
bolder targets and addressing the pressing issue of outlay versus
outcome in various Budget initiatives. In my mind, the thrust
areas for this Budget are around the agricultural and social sectors
to ensure inclusive and sustainable growth and to address India's
With agriculture growth at less than 3 per
cent over the last few years and the avowed inclusiveness agenda
of the government, the announcements for the farm sector are welcome.
Agriculture-based supply side constraints have also been key contributors
to the increase in inflation. This Budget provides for an increase
in outlays for programmes on increased farm credit, irrigation,
watershed management, seeds supply and agri research, and higher
allocations for safety net schemes, including flagship programmes
such as Bharat Nirman, the National Rural Employment Guarantee
Scheme, etc., are positives. However, the outlay versus actual
implementation (and addressing key issues such as corruption and
leakages) is paramount. In my opinion, creating linkages for the
agricultural sector through a more open policy on retail will
result in a much greater "pull-up" effect for the rural
sector in the years ahead.
The fm must be complimented for stepping
up the funding for education by 34.2 per cent and for health and
family welfare by 21.6 per cent. I have long maintained that India
needs both physical and soft infrastructure (read: skilled talent)
to sustain our growth momentum and leverage our demographic dividend.
Spiralling wage rates in most sectors in recent times are a result
of demand-supply mismatch in skilled labour.
The plan to address the problem of dropouts
after the eighth standard-by offering scholarships, etc.-is laudable,
but the education sector now needs transformational changes. Multiple
studies have shown that learning outcomes at most government schools
compare poorly with those of their private counterparts, leading
to high dropout rates in early years. Vocational education needs
a big push as also higher education. In this context, a clear
framework to better target public investment in education and
to provide incentives for increased private participation is warranted.
I don't think Indians have felt the pinch
of inadequate infrastructure more strongly than has happened in
the last 6-12 months, possibly as a result of unprecedented economic
growth across sectors. The privatisation of the airports in Delhi
and Mumbai has sent out a very positive signal about the commitment
of the government to set things right. The setting up of a $5-billion
(Rs 22,000 crore) fund to finance Indian infrastructure and the
attempt to attract global financial capital and investments in
capacity building at the central level are encouraging steps.
In order to realise incremental power capacity
additions of 66.4 GW and 86.5 GW planned for the 11th and 12th
Five Year Plans, policy initiatives in the power sector need to
be more favourable for companies at the generation, transmission
and distribution levels. The Ultra Mega Power Projects (UMPP)
were meant to leapfrog generation capacity. However, against the
planned five UMPP projects to be awarded last year, only two could
be awarded. This year, the government has committed to an additional
seven UMPP projects. The key question is: how many of these projects
will see the light of day?
|"There are parts of the Budget
that I believe are negative and bring back to my mind the
prevailing policy environment in India 15-20 years ago-the
tax on the cement industry being a case in point"
There have been a few laudable initiatives,
like the proposal to permit the issue of tax-free bonds through
state-pooled entities and for mutual funds to issue dedicated
infrastructure funds. This is likely to assist funding for local
development and urban civic bodies. The initiative to utilise
forex reserves for infrastructure development through the IIFC
is a positive move. These are only incremental steps to improving
infrastructure but the government could have done more in enunciating
bold targets to remove key infrastructure bottlenecks over the
next 3-5 years.
There are parts of the Budget that I believe
are negative and bring back to my mind the prevailing policy environment
in India 15-20 years ago-the tax on the cement industry being
a case in point. The reduction in excise duty rate to rein in
retail prices and reward those who hold the price line and the
decision to penalise those who don't is an indirect measure of
price control and counter-intuitive. Cement consumption is not
price elastic and I believe that the larger players will mark
up prices to account for higher excise anyway, defeating the underlying
purpose of controlling inflation.
Despite high growth in the industrial sector,
India's mining sector has been plagued by low growth and excessive
controls. The much-awaited fiscal recommendation of removing the
cap on the deductibility of exploration expenditure in the mining
sector did not find place in the Budget. This anomaly needs to
be corrected, given the input availability and cost-effect linkages
of mining to other core sectors of the economy.
On the taxation front, more needed to be
done to address the needs of a growing urban population. To my
mind, this was an opportunity for the Finance Minister to increase
the i-t exemption slab to Rs 2 lakh from the current level. The
minor increase in slabs, resulting in a tax saving of approx.
Rs 1,000, does nothing to address the needs
of people in the lower tax bracket grappling with the current
cost of living in our urban centres.
The Finance Minister has mentioned that we
will transition towards a Goods and Services Tax (GST) environment
by 2010, which is a very positive step. There is an urgent need
to address the multiplicity of taxes in our country that results
in a large amount of litigations and an inefficient tax administration
environment. As per various studies conducted by UNDP, India still
remains one of the highest taxed countries in the world. I believe
this Budget could have balanced the tax equation by increasing
the rates on short-term capital gains and STT while reducing the
rates on corporate tax.
In conclusion, I believe this is a Budget
that reflects the government's mood to encourage inclusive growth
and do more in the social sectors which is spot on. Corporate
India has been doing well and is fully supportive of this agenda.
The pressing agenda is to push through harder
second-generation reforms in the areas of pensions, labour laws
and foreign investment policies in key sectors such as retail,
insurance, infrastructure, etc. The early signs of economic benefits
that could accrue from these initiatives, including substantial
improvements in the supply chain infrastructure for agricultural
products are very positive.
Delays in second-generation reforms is akin
to swimming against the tide and could result in India not adequately
capitalising on its demographic dividend. I believe that greater
growth is a strong driver to generate additional resources that
can be ploughed back into education, agriculture and healthcare.
I hope that the Finance Minister has only tactically stayed away
from taking on a bolder stance to address these issues to avoid
the excessive media and political glare around the Budget event.
Rajiv Memani is Chairman
and CEO of Ernst & Young India