.png)
.jpg)
The Union Budget is one of the most awaited events in the economy every year and this year was no exception. In fact, the hopes and aspirations of the people from the new Government, led by Prime Minister Narendra Modi, were at an all time high, expecting several sops and firm steps in the Budget to ease their pain from inflation and lack of jobs.
However, having inherited a depleted exchequer and facing hostile factors like uncertainty in oil prices and food prices, the new government and Finance Minister Arun Jaitley, one must admit, had limited options. Seen in this light, the budget this year, many would agree, is certainly not too glossy and glamorous but balanced and gives a sense of direction to the economy. In fact, it has laid the base for a whole set of reform measures that would come into place around the next budget. With little more than a quarter having passed in the current financial year, the budget is decent and has set a roadmap for the economy for the next 7 months.
One of the key sectors addressed in the budget and given the much needed boost is the infrastructure sector. However, only time will tell whether the measures announced would be enough for the scale and speed of the development needed. The inadequacy of quality infrastructure at internationally competitive prices has long been recognized as a handicap to the development of the economy. In this context, it was imperative for the Budget to address issues that constrain economic development and to pursue infrastructure reforms with more rigour.
Six key infrastructure and core industries -- electricity, crude oil, the petroleum refinery products, coal, steel and cement -- have a weight of 26.7 per cent in the Index of Industrial Production. Some of the key measures related to infrastructure in the budget are as follows. The government has given equal emphasis to all physical infrastructure including roads, rails, ports and aviation infrastructure.
Taking forward the legacy of the Vajpayee Government, the new government has allotted Rs 37,000 crore for national highway development and Rs 14,389 crore for development of roads under the 'Pradhanmantri sadak yojna'. The focus is to interconnect cities and achieve quality road network of 8,000 km national highway construction. The government has also announced 15000 km of pipeline to be developed through PPP mode to complete the gas grid, Rs 500 crore for solar projects, setting up of ultra modern solar projects in Rajasthan, TN and Leh and Rs. 100 crore for preparatory work of a new scheme on thermal power technology.
Following the example of Delhi where in the metro has become the life line of the people, the budget has given emphasis to development of metro rails in the PPP mode in different parts of the country. To begin with, Rs. 100 crore has been set aside for metro schemes in Ahmedabad and Lucknow. Attempts would be made to have a metro system in all cities with a population of more than 20 lakhs. Further, Rs 5,000 crore has been allocated to the National Bank for Agriculture and Rural Development (Nabard) for the development of rural infrastructure.
Aviation infrastructure in India has grown by leaps and bounds in the last decade owing to the increased demand in both passenger and freight traffic. Several airports have been revamped and expanded in the PPP mode in the last few years. In continuation of that, the budget has envisaged development of airports through the PPP mode in all tier 2 and tier 3 cities. Rs 7,060 crore for the development of 100 smart cities and new airports through PPP has been announced.
Similarly, Rs 11,000 crore has been allocated for setting up 16 new ports. The Finance Minister has announced that special economic zones will be developed in Kandla and Jawaharlal Nehru port at Navi Mumbai. The government also has a comprehensive policy to promote Indian Ship building Industry which will be in place in the current financial year itself. Further, Rs. 4,200 crore is set aside for the Jal Marg Vikas project on river Ganga connecting Allahabad to Haldia with over 1,620 km.
A key element of the budget is the novel step taken by the government to increase infrastructure spending. The budget has allowed banks to issue long term bonds without subjecting them to cash reserve ratio and Statutory Liquidity Ratio for financing infrastructure.
Underdeveloped infrastructure has been a reason for the country losing out in the context of FDI. An investor planning to set up an export base in developing/emerging economies has the option of choosing between India and other locations with better infrastructure. As the N. K. Singh Committee rightly points out, India is handicapped in attracting export-oriented FDI due to lack of quality infrastructure at internal prices. However, the Government having realised this has raised the FDI limit in select sectors as insurance and defence manufacturing.
The Finance Minister has announced several measures to boost India's external sector and thereby FDI. For instance, the government has promised effective steps to revive SEZs. Giving a fillip to the manufacturing sector is the need of the hour. For this, the government has announced investment allowance at 15 per cent for 3 years to a manufacturing company which invests more than Rs. 25 crore in plant and machinery.
The government has also announced setting up of special SEZs for women in 100 districts, FDI in manufacturing to come in via automatic route, raising of FDI in insurance to 49 per cent and in Defence manufacturing to 49 per cent, from 26 per cent. The Kakinada port would be developed with a special focus on manufacturing and importantly a National Industrial Corridor with headquarters in Pune was given 100 crores to oversee the industrial corridor. All these measures are expected to give a boost to trade and manufacturing and thereby growth in the economy.
The focus of the budget is to revive investment and investment sentiments. Higher levels of investment have to be supported by a sufficient expansion in domestic savings to bridge the investment savings gap, which is also the current account deficit, which has increased since the global financial crisis. The gross domestic savings ratio has reached 31% of GDP in FY 2013 from 37% in FY2007. The change in the composition of household savings heavily towards physical savings from financial has made matters worse. High inflation eroded the ability of households to save, while at the same time, much of their savings went into unproductive investments such as gold and real estate, in an attempt to preserve the value of their assets. In this context, the FM's attempts, though small, to increase the tax exemptions limit, hiking the taxable income limit, tax exemption on housing loans etc are encouraging and will incentivise financial savings.
Apart from giving boost to manufacturing, FDI and infrastructure, the government has laid a stiff target for itself in terms of fiscal consolidation. It has set a target of 4.1 % of GDP as the fiscal deficit for this year and 3% by FY 2017. The economy grew only at 4.7 per cent in 2013-14, slower than even the official estimate of 4.9 per cent, slightly higher than 4.5 per cent growth a year earlier. The budget is expected to sustain these growth rates and also take the economy to a higher growth trajectory of 8-9 per cent in the next 3 years.
Whether the budget can deliver on its stated aim of fiscal consolidation will have significant implications for the future of the ruling party - be they positive or negative. It is imperative that fiscal consolidation, inflation and GDP growth rate continue to be the focus areas of the government in the times to come. Given the current economic situation, the government has rightfully focused on infrastructure and manufacturing with a view to bringing back the economy on a high growth trajectory. There were no big reforms and no major policy turnarounds. It was a budget of small and tentative steps to help steady the ship and laid the foundation for big reforms in the months ahead.
By Special Arrangement with : Observer Research Foundation (www.orfonline.org)