BackUnion budget 2016: Implications for ease of doing business
Government's focus in terms of ease of doing business has been not just for corporate entities but also for ordinary people
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The Union budget is sharply focused on a few key themes, which had already been spelt out by the finance minister earlier. The budget focuses on an efficient and effective government, rationalization of taxation, de-stressing the rural economy with an infusion of funds, soft and hard infrastructure with more than ₹ 2.2 trillion in allocations for railways, roads, airports and waterways. It also focuses on human resource development and de-stressing the financial systems. It will be a welcome step to move from a fixed fiscal deficit target to a range, which will provide necessary fiscal space to the government. Overall, the budget’s emphasis is on building the fundamentals of the economy and economic and financial institutions.
The government’s focus in terms of ease of doing business has been not just for corporate entities but also for ordinary people, with attempts being made to remove irritants in their dealings with the government.
The overarching theme in terms of ease of doing business has been to minimize government and maximize governance. With that focus, the government has constituted a task force for rationalizing human resources in the government and in autonomous bodies.
Clearly, accelerating investments in infrastructure, both hard infrastructure and soft infrastructure, stands out as a key priority for the budget. This is also a critical enabler for ease of doing business.
Last year saw bids for the highest length of roads being awarded. The budgeted capital expenditure for railways was increased by 50% in 2014-15, compared to the year before that, and has been further increased by 20% this year. One of the key pre-requisites for healthy infrastructure growth is robustness of the financial institutions that can support investments. Unfortunately, the banking sector is laden with bad loans, and the private sector’s balance sheets are stressed. The move to recapitalize banks with a total budgetary outlay of ₹ 25,000 crore would help enable the financial institutions to support infrastructure growth. In addition, the amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act would help banks recover loans from defaulters more efficiently.
The other key pre-requisite for infrastructure growth is enabling public-private partnerships (PPPs) and the steps taken to strengthen PPP through a proposed dispute resolution mechanism and provision for renegotiation of PPP contracts would help bring back pure PPP as a potential mechanism for funding large infrastructure projects.
There are also very significant outlays for rural infrastructure, especially on irrigation, with plans to make Indian agriculture less dependent on monsoons. This would help increase the irrigated land ratio from the current low of 47% of the total 141 million hectares of cultivable land.
The budget also trains its sights on other social infrastructure such as skill development infrastructure, quality primary education through more Navodaya schools, massive open online courses (MOOC) and so on.
It is also interesting to note a large number of digital infrastructure being proposed, including a very bold online national e-marketplace for farmers. It may have implementation challenges but would definitely be a critical pillar for farmer enablement and for making the rural economy healthier. This also enables ease of doing business for farmers. In conjunction, the price stabilization fund to enable procurement of pulses through a minimum support price (MSP) mechanism would help farmers get appropriate prices for their pulses, also giving them an incentive to grow pulses and not shift out to cereals.
Automation of 300,000 fair price shops and nationwide rollout of automated teller machines (ATMs) and micro-ATMs through the postal system would again make it easier for ordinary citizens to deal with the government.
One of the key pieces of this budget is the creation of a social security platform enabled through a bill for targeted delivery of subsidies, benefits and services using the Aadhaar framework. This would greatly ease access to subsidies for the deserving segments of the population.
Extending direct benefit transfers (DBT) to fertilizers subsidy, albeit on a pilot basis, is going to improve targeting of beneficiaries while reducing subsidy leakages.
To reduce its own internal efficiencies, it is proposed that Directorate General of supplies and Disposals will establish a technology-driven platform to facilitate procurement of good and services by the government. This will also help the industry in selling to the government more efficiently.
Coming to corporate entities, the Companies Act is being proposed to be amended to improve the ease of doing business and also to make the business environment for start-ups more conducive. It proposes to enable registration of companies in a single day. Industry has raised several issues, and we anticipate that these issues will be addressed through amendments to the Companies Act.
There are also a slew of changes proposed in foreign direct investment (FDI) and related policies. It is proposed to allow 49% FDI in insurance and pensions through the automatic route. Hundred percent FDI is being proposed to be allowed in Asset Reconstruction Companies (ARCs) through the automatic route.
It is also proposed to increase the investment limit of foreign entities in Indian stock exchanges from 5% to 15%, on par with domestic institutions.
In order to obviate the need for prior approval of government for foreign portfolio investment (FPI), the existing limit of 24% for investment by FPIs into central public sector enterprises, other than banks, in stock exchanges is proposed to be increased to 49%. It is also proposed to increase the basket of FDI instruments to include hybrid instruments. This will provide greater flexibility for FDI and possibly increase the velocity of investments into India.
In addition, the budget also proposes to allow FDI in areas beyond the 18 specified non-banking financial company activities, using the automatic route.
To promote ‘Make in India,’ the budget proposes to grant residency status to foreign investors, beyond the current practice of giving them a five-year business visa. This will surely increase the emotional connect of foreign investors and make it easier for them to set up manufacturing units in India.
An interesting proposal is for a centre-state investment agreement that will ensure efficient and effective implementation of bilateral and multilateral treaties in the given federal structure.
The budget is, overall, in the right direction insofar as ease of doing business is concerned. However, it is not an issue that can be resolved in a single budget or through a single action, but is a process and a journey to which this budget contributes significantly.
The author is partner, infrastructure and government services, KPMG India.
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