Budget 2015: charting the execution route
This year's budget is expected to announce concrete steps that can be implemented
Budget 2015 will need to be a magical event given the expectations riding on it. To be fair, it is important since it marks the government’s first attempt at addressing crucial financial issues. The budget presented in July 2014 was more a road map. This year’s budget will be presented on 28 February, but tracking expectations can help understand its impact on capital markets.
Experts unanimously expect infrastructure development to be addressed. They are also hopeful of announcements aimed at channelizing more individual savings into capital markets.
Fiscal report card
At the start of its term, the government spoke about its commitment to reduce fiscal deficit to 3.6% of gross domestic product (GDP) in financial year (FY) 2016. The slide in oil prices will surely aid this goal.
According to a recent report by Ambit Capital Pvt. Ltd, Economy and Strategy, a fine balance on fiscal objectives needs to be maintained. There could be short-term expansionary trend in fiscal deficit to accommodate activities such as enhancing India’s low tax to GDP ratio, incentivizing states, use of direct benefit transfer and government spending on infrastructure.
There is room to tolerate some slippage in the fiscal deficit target, so long as the use of funds is seen as contributing to growth.
Effective execution of the fiscal plan is equally important. Not just numbers, coordination in execution will also be key. “The budget is a statement of not just financial accounts but also policy priorities. It’s important to include states when it comes to execution and bring them to the forefront in terms of collaboration and competition. If there is healthy competition for foreign funds among states, it can improve the business climate,” said Pranjul Bhandari, chief India economist, HSBC Securities and Capital Markets (India) Pvt. Ltd.
Make In India and infrastructure
Make in India is a theme that the government has put forth vociferously. The website dedicated to this theme speaks of transforming India into a global manufacturing hub. Thus, experts are looking forward to announcements around the government undertaking capital spending and enabling private funding towards capital expenditure. C.J. George, managing director, Geojit BNP Paribas Financial Services Ltd, said, “We are likely to see foreign direct investment (FDI) being encouraged as it can be a major source of capital for infrastructure spending, in the form of joint ventures and partnerships.”
Moreover, making manufacturing more lucrative requires many a tweak to incentives across sectors. “Along with encouraging investment in manufacturing, there is a need to correct the inverted duty structure. There is room to revisit tax provisions and duty structures across sectors, including import of technology and taxation of Special Economic Zones,” said Rahul Garg, partner and leader, direct tax, PwC, India. This will help not only the domestic industry but also foreign companies that set up manufacturing projects in India.
Bhandari said, “We expect to see a shift from current spending to capital spending. The impact of government spending on growth is going to be positive; the capital spending multiplier effect on growth is much higher.”
While there is concern on how all this will affect fiscal deficit, Garg pointed out, “These changes will help in driving incremental activity. If this activity is missing, additions to the tax kitty won’t happen in any case.”
Lastly, we know that in previous years, even as funding wasn’t an issue, the lack of smooth business processes and complicated tax structures saw major multinational organizations exit India. “Ease of doing business in India has to be addressed. We need to see announcements to achieve targets of faster turnaround in business cycles, less paper work and targeted private and foreign investment in India,” said George.
Similarly, giving impetus to start-ups is important to encourage a healthy business environment. “It would help if risk capital is directed to the most relevant avenue. For example, venture funding provides a much needed push to new businesses; a pass-through structure for venture capital funds is useful,” said Satya Bansal, chief executive officer, Wealth Management, India, Barclays.
Domestic savings
It’s crucial to consider mobilization of domestic savings in a more productive manner. “Domestic savings not coming into the financial sector has a significant impact on investment pick-up. Increase in exemption under section 80C (securities such as Public Provident Fund, National Savings Certificate, equity-linked saving scheme and so on) can boost private investment,” said George.
Indian households don’t invest much in financial savings; as a percentage of GDP—financial savings is a mere 7.2% whereas physical assets are at nearly 15%. Improved tax incentives for financial investments can channelize much needed domestic funds into capital markets and instruments for long-term investments. Among those being talked about by market participants are removal of the 15% dividend distribution tax, and a change in equity taxation.
“Securities transaction tax (STT) hasn’t replaced short-term capital gains tax as was anticipated. A removal of the short-term capital gains tax on equity investments can shore up sentiment towards the capital markets,” said George.
Another avenue that can be used to direct domestic savings into productive investment is the corporate bond route; this market has remained complicated for the individual investor and illiquid for a long time. “Revival of the corporate debt segment is an area of priority. While the Securities and Exchange Board of India (Sebi) and the exchanges are trying, but what’s required is a process change,” said Bansal.
Mint Money take
It’s clear that the government has a large task at hand to revive growth in the economy and, more specifically, the agenda spelt out for itself to take forward manufacturing. All this has to be done while keeping the fiscal deficit in check.
What’s even clearer is that more than the road map, experts are looking forward to detailed announcements that can help in execution of plans. Moreover, much talked about land, labour, tax and financial sector reforms need to be brought back into focus. While some of this may be outside the purview of the budget session, indicative moves can go a long way in showing the right direction to investors, entrepreneurs and workers.
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First Published:17 Feb 2015, 07:04 PM IST
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