This is the silly season for speculating on how the forthcoming union budget for 2016-17 will address problems of the Indian economy. On the face of it, union finance minister Arun Jaitley’s priority in his third budget will be no different from his maiden budget for 2014-15; notably, to revive investor sentiment and boost growth. Then and now, the difference is that there are adverse headwinds blowing through the global economy which has resulted in falling exports, a sinking rupee and crashing stock indices. The big question is how the budget will strengthen the India growth story.
Although the RBI governor has again raised doubts about the growth numbers, India is today one of the fastest growing economies in the world. Growth in the current financial year is pegged at 7 to 7.5 per cent – a pace that is faster than China, the world’s growth engine till now. Although there are jitters over a global slowdown, Mr Jaitley thinks there is an opportunity for the country: “We are asking people from all over the world to become partners in India’s growth story”, adding that “the current rate of 7-7.5 per cent is not our real potential and we have the potential to add 1-1.5 per cent.”
Where is the headroom for faster growth in a bleak global growth landscape? In the recently concluded 46th World Economic Forum Annual Meeting in Davos-Klosters, he assured foreign businessmen that the reform process — like the Goods and Services Tax — is on track despite India’s ‘noisy democracy’! The additional scope to boost growth by 1-1.5 percentage points is mostly based on hopes that a GST can be rolled out soon. Unfortunately, this “noisy democracy” has come in the way of a faster pace of reforms despite the NDA government having won a massive electoral mandate.
As yet, there are no green shoots of recovery in private investments. There is no uptick in new industrial projects or those that were shelved earlier and have come on stream. Although the clearing of stalled projects has begun, there is still a backlog. Even if this is cleared, there is the problem of attracting private investments in infrastructure. Investor sentiment will revive with greater clarity in tax laws and a fair mechanism for resolving disputes. PM Narendra Modi has also firmly stated that retrospective taxes are a thing of the past. Will this be buried once and for all in the budget?
The finance minister would do well to note that there is no rebound in investment activity even in the latest official data. The rate of spending on factories and machinery adjusted for inflation was 30.1 per cent of GDP in the second quarter of 2015-16 that is not different from 30.3 per cent of GDP in the second quarter of 2014-15. Major investment goods manufacturers report lower earnings, operating income and a lean order book. Clearly, there is a mismatch between what the GDP data state and what the ground realities are of investments in plant and equipment.
The budget for 2016-17 thus should focus on reversing such dismal investment trends in a less benign global environment. At Davos, Mr Jaitley told foreign investors that any economy needs multiple growth engines. In the past, we have had fewer such engines and we need a few more. Public investment is one we are doing, he admitted, adding that we are concentrating on infrastructure. Accordingly, he urged investors to become part of this story. Thanks to weak global oil prices, the good news is that more resources will be potentially available as fuel subsidies have been rationalised for the first time.
On infrastructure-led growth, Japan’s premier Shinzo Abe has already made his move by inking a $15 billion deal to build a bullet train between Mumbai and Ahmedabad. Construction will start from 2017 and will be completed in 2023. Significantly, the Japanese extended virtually free financing for 80 per cent of this prestigious project. According to Reuters, they have agreed to do so on the condition that India buys 30 per cent of equipment including the coaches and locomotives from Japanese firms. The $12 billion loan is at an interest rate of 0.1 per cent and repayable over 50 years.
If Japan has led with such investments, can China be behind? In September 2015, China won a contract to assess the feasibility of a high-speed train between Delhi and Mumbai. The dragon has been competing with Japan in Asia and even won a $5 billion high–speed train deal in Indonesia by offering to finance it without recourse to Indonesia’s government. But for more FDI, India must improve the conditions for doing business that has dented its attractiveness for private investments. It must implement reforms as Mr Jaitley promised at Davos. The budgetary signals thus will be tracked by investors.
Ultimately, it is budgetary surpluses that can boost an infrastructure push to faster economic expansion. These can be generated only when the NDA government generates adequate tax and non-tax revenues (through offloading blue-chip public sector scrips and even privatising some of them) to meet routine housekeeping expenditures and reins in non-plan revenue spending. Only then will resources be freed for public investments in infrastructure. Doing so through borrowings has run its course. Jaitley’s priority must be to bolster the India story through the budget.
Equally challenging for Mr Jaitley is the political opposition to economic reforms. India is no doubt a “noisy democracy”. But the chances of the GST Bill going through Parliament are not good as the Congress Party that drafted it is not on board. The government is hopeful that the numbers in the Rajya Sabha will favourably change and be less of a barrier for its reform agenda. Investors, however, will roll out their plans to take long-term bets on the Indian economy only when reforms are implemented. A budget that boosts spending on infrastructure and faster growth is what is now needed when chilly recessionary winds blow through the world economy.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
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