The people of India voted in
change however the Budget for the first financial year of the new government’s
tenure lacked the change. The budget presented in the house today for the most
part lacked a clear direction and seemed like a chaotic presentation of some
good and some confused ideas. Given India’s precarious fiscal situation-
controlling deficit and inflation would have seemed like the most obvious goals
for the new government to work towards however this was not the case
Excessive and disorderly infrastructure spending
The total budgeted expenditure
for 2014-15 is 12.9% higher than the revised estimates for 2013-14. The
government aims to increase its net tax revenue receipts by 16.9% this year
which can only be seen as a gross over-estimation. The minimal direct tax
reforms including the increase in the income tax slab by INR 50,000 or increase
in the investment allowance for individuals is unlikely to raise the tax to GDP
ratio. It is not a laffer curve issue with the Indian masses but rather the
lack of a crackdown on the abundant tax offenders in the nation. The all-cash/
black money economy will not be tempted to convert and start paying taxes with
an increase in the income tax exemption limit.
The government will set up
Infrastructure Investment Trusts (InvITs), a modified REITs type structure for
infrastructure to reduce the pressure on banking for infra as well as increase
fresh equity available for the same. Infrastructure however for the most case
is depreciative in nature and public infrastructure rarely functions on the
given time schedule. The cash flow from these projects would be a distant
reality dampening the allure of such a product.
The most disheartening sight in
all of this is however the excessive government spending on public
infrastructure undertaken in a disorderly manner in an inflationary
environment. The government for example is awarding 16 port projects this year
with spending INR 116 billion on a single harbor development project itself.
This is despite the total traffic being handled at these ports witnessing a
decline for the past two years. With not a sizeable increase in export
production the construction of 16 ports seems mistimed. The focus on roads (INR
378 billion expenditure) is however welcome for a nation finally looking
forward to building a manufacturing sector.
Developing inland waterways and roads provides the manufacturers with
much needed transport infrastructure. These domestic networks need to be
prioritized over international transportation avenues and fiscal prudence would
suggest that the latter be saved for later. Maintaining the fiscal deficit at
4.1% of GDP is not likely to be a reality.
Inflation remains uncured
With such immense government
spending lined up for the coming financial year, price stability will be a
distant reality. In an emerging economy facing an annual inflation rate of 8%
and with 29% of the population staying below the poverty line food
affordability remains a major concern. The budget however lacked any provisions
to deal with the 30% of annual grain production that gets wasted in India due
to poor warehousing facilities.
Barring a minor cut in customs
duty on imported apparel, small TV’s and other non-essential consumer products
there was not much relief for the Indian consumer. The government additionally
imposed a 5% excise duty on imported met coal and a 7.5% duty on imported flat
rolled steel (to deal with idle Indian steel capacity).
Select sectors receive attention however the ‘wow’ factor was missing
FDI cap was raised to 49% (from
26%) in defense manufacturing and insurance sectors of the economy. The management
however is to remain completely Indian. The rationale for increasing the cap in
defense is to counter the flow of foreign currency reserves brought about by
the large amount of arms’ imports in India. The defense budget has also been
increase by 12.4% this fiscal year. Reforms in the rest of the industrial
sectors or for the business environment in general are missing.
The government’s recognition of
the need to implement for a unified, central sales tax code in India and the
conclusion of the debate around it is welcome. The business community however
hoped for a clear deadline for when this new regime would be in play. The hopes
for a streamlined tax administration were however not fulfilled in this budget.
This was the ‘wow’ factor that businesses were waiting for that would have
increase the ease of doing business in the nation.
Good developmental intentions are marred with misplaced allocation
There were several new
initiatives undertaken by the government in developing the human capital of the
nation. This was however not expected to be the focus of the budget. The budget
had more welfare undertones than expected, even though a lot of the initiatives
were marred with misplaced allocation. The starkest of these distinctions can
be seen in the fact that the cause of girl child (and her education) received
only half the money the construction of a statue warranted (33 million USD).
The most upsetting fact in this allocation would be the fact that the state
government had already spent 16 million USD on this statue.
The good intent of the government
was however visible in the healthcare allocations announced. The focus on TB
care (the pathogen is said to be present in 95% of Indians) shows the health
ministry’s focus in containing a disease that affects almost all Indians.
Construction of new All India Institutes for Medical Sciences coupled with the
new government central drug regulatory authority will help enhance the quality
of healthcare in India in a systematic, focused manner.
The expenditure (INR 5 billion)
on training programs and motivation for teachers in primary education is
crucial in improving the dangerously bad quality of teachers in public schools
in India. The creation of new IIT and IIM (technology and management
institutes) is however a populist move. These institutes are regarded as the
best in the nation however with quickly deteriorating quality except for in a
few locations has diminished the brand value of these schools. Other subjects
that needed impetus in higher education were once again ignored by the Indian
government.
