The challenge before the Budget

CHANDRAJIT BANERJEE

With little more than a month before the Budget for 2013-14, hopes and apprehensions abound over prospects for the economy and industry in the coming year.

The questions doing the rounds are: Would policies announced in the forthcoming Budget rekindle business confidence?

Would the Budget contain reform measures to trigger a strong growth impetus? Would fiscal deficit adhere to the target of 5.3 per cent of GDP without compromising on Plan expenditure?

Indeed, it is these fundamental questions which would determine how the next financial year pans out in terms of growth and investment.

The Budget comes at a time when slowing growth and downbeat business sentiment have emerged as major concerns for the economy.

GDP growth decelerated to 5.5 per cent during the first half of 2012-13 and the prognosis for the current fiscal is not particularly upbeat.

Though the slowdown is evident across all sectors, we are worried by the slow pace of capital formation, a crucial indicator for future expansion.

The precarious global economic conditions only add to our concerns. Such an economic scenario provides a unique opportunity for the Budget to re-ignite investor confidence and lift the current mood in the economy.

FISCAL DEFICIT REDUCTION

Recent economic moves have greatly lifted business sentiments. The two critical issues which we look forward to in the Budget are, first, a credible plan to reduce the fiscal deficit by pruning non-essential expenditure, and second, to revive growth with inclusion. In advance, de-regulation of diesel prices has already been announced, which would reduce bloating subsidy bill and restrict fiscal deficit.

However, further curtailing of subsidies on account of food, fertilisers, electricity, and so on, and rationalising of Centrally-Sponsored Schemes are the crucial next steps to reduce non-productive expenditure.

Similarly, revenue-augmenting measures such as fast tracking disinvestment, spectrum sales, clearing funds locked up in disputes, adoption of suggestions made by Kelkar Committee, including transparent auction of surplus government land and unlocking assets of sick PSUs, would be critical revenue augmenting measures.

Tax revenue as a percentage of GDP has declined from 8.8 per cent in 2007-08 to 7.5 per cent in 2011-12 and above measures would help reverse this trend. However, Government should desist from raising excise duties so that demand is not dampened.

INVESTMENT STIMULUS

The macro backdrop of the Budget also calls for revival of the investment cycle. Gross capital formation in the private sector as a percentage of GDP has been decelerating from 28.1 per cent in 2007-08 to around 25 per cent at present.

Fast-tracking infrastructure projects, providing accelerated depreciation on plant and machinery, incentivising companies to go green, maintaining a status quo on excise and Customs duty, abolishing MAT on SEZs and promotion of low-cost housing are some of the measures suggested by CII to encourage capacity creation. A move towards implementing GST and DTC would also improve business confidence and signal investment revival.

Infrastructure and power sector reforms must be a priority to boost investments and provide a fillip to growth in economy and industry. The gaps in our infrastructure are large and growing. The Planning Commission has laid down an ambitious $1 trillion target of expenditure during the 12th Plan to meet the gaping infrastructure deficit. Paucity of infrastructure finance is among the long-festering problems in this sector. Hence, some options for financing infrastructure such as developing an efficient corporate debt market, reintroducing infrastructure tax saving bonds, developing municipal bonds, and so on, deserve special attention in the Budget.

In the power sector, coal supply must be rationalised and fast-tracked along with distribution reforms and widening the scope of external commercial borrowings (ECB) for power sector. Other important measures to boost investment could include creating a shelf of bankable projects in infrastructure, exempting infrastructure companies from levy of MAT, extending sunset clause under Sec 80IA for five years, and others.

EDUCATION FOCUS

Policy initiatives are also required to boost agriculture production, which is crucial to promote inclusive growth.

Apart from enhancing public sector investment in agriculture supply chains, the Budget should incentivise the private sector to participate in irrigation, farm mechanisation, agriculture markets, cold chains, warehousing and research. Incentives to States for adopting the model APMC Act and delisting perishables from APMC act would lead to the much-needed capital infusion in this sector.

In the social sector, the status of progress in education remains far from satisfactory, as seen in the recent ASER. Only 15 per cent of our students reach high school, of which only 7 per cent make it to high school. Almost 80 per cent of schools are government run but they cater to less than 50 per cent of the school going population.

Low quality and inadequate capital infusion are the major worries. Similarly, investment in the health sector is also below potential.

In the last Budget, it was announced that capital stock in educational institutions and hospitals would be treated as infrastructure sub-sectors. Moreover, capital investment in these sub-sectors would be eligible for viability gap funding. We await detailed guidelines on these.

Indeed, the economy is passing through challenging times. A reforms-oriented Budget, which would reverse downbeat business sentiments, would go a long way in reviving the sagging animal spirits and fire the cylinders of economic growth.

(The author is Director General, CII.)