India’s economy has been faltering, with GDP growth coming in below the 7% mark for 2018-19 and continued growth concerns in the June quarter. So when the Economic Survey, tabled in Parliament on Thursday, laid particular stress on India needing more and more private investment to boost economic growth, India Inc began to hope for a fiscal stimulus in the Union Budget.
They were hoping for a package of incentives from the government which would encourage further capex. By agreeing to three consecutive and unprecedented rate cuts, the Reserve Bank of India has already provided a monetary stimulus to boost economic activity.
It is the corporate sector which brings in the lion’s share of capex in India at more than 80% and a faltering economy had affected their capex. And there have been multiple suggestions from economists that instead of obsessing about keeping the fiscal deficit target of 3.4% of GDP, the government could, at least for a short term, hike spending through a stimulus package.
So when finance minister Nirmala Sithraman started her Budget speech on Friday morning and indicated that she would propose a host of initiatives for kickstarting investments, India Inc’s hopes were raised.
“All of India’s private sector industries — small, medium or large — have played a substantial role in growing our economy. I recall the words of an eminent industry leader, who said that his company’s growth has always aligned itself with India’s growth, before and post-Independence. So if before Independence, India Inc understood ‘Swadeshi’, today they understand ‘Make in India’. We do not look down upon legitimate profit-earning,” the FM said.
“Gone are the days of policy paralysis and licence quota control regimes. India Inc are India’s job-creators. They are the nation’s wealth creators. Together, with mutual trust, we can gain, catalyse fast and attain sustained national growth. I wish to propose a number of initiatives as part of a framework for kick-starting the virtuous cycle of domestic and foreign investments,” the FM said.
But what Sitharaman finally proposed is not all that stimulating for India Inc. She has managed to lower the fiscal deficit target to 3.3% of GDP for 2019-20 but seems to have left a lot to the success of what the government calls ‘Public Private Partnership’ mode of investing in infrastructure projects. There is no direct investment boost for infrastructure or other areas needing such a push.
The two incentives which should cheer India Inc are these:
1) The lower 25% corporate tax rate is now applicable to companies with a turnover of up to Rs 400 crore. This will cover a majority 99.3% of Indian corporates.
2) A scheme to invite global companies through competitive bidding to set up mega-manufacturing plants in sunrise and advanced technology areas should help boost overall investment climate.
And what’s disconcerting is this: Chief Economic Adviser at Ernst and Young, DK Srivastava, pointed out that there is little in the Budget which offers a direct fiscal stimulus, at least not of the kind industry was expecting. “In the Budget, there is heavy reliance on off-budget borrowings and PPP in infrastructure sector, particularly for roads and railways. Any fiscal stimulus then becomes contingent in PPPs succeeding and off-budget borrowings through Public Sector Enterprises and Special Purpose Vehicles.”
As per the BJP manifesto, which was released just before Lok Sabha polls, the second-term NDA government had promised Rs 100 lakh crore investment in infrastructure, which means pouring mega bucks into creation of roads, railway infrastructure, ports and airports in the next five years. But where is so much money going to come from?
Sitharaman said in her speech that Rs 50 lakh crore has been envisaged as investments in Railways infrastructure in the next 11 years and that a bulk of this money would come from PPPs.
“It is estimated that railway infrastructure would need an investment of Rs 50 lakh crore between 2018 and 2030. Given that the capital expenditure outlays of Railways are around 1.5 to 1.6 lakh crore per annum, completing even all sanctioned projects would take decades. It is, therefore, proposed to use PPP to unleash faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services,” the FM said.
Essentially, what she has indicated is this: mega investment in roads, rail and other infra will happen, but through PPP modes or by companies raising necessary debt.
The government just doesn’t have the fiscal space to put in its share of investments. Srivastava of Ernst and Young pointed out that the Centre has very little room for providing a fiscal stimulus, since tax revenues have not been showing necessary buoyancy and fiscal deficit is coming at almost 3%.
“State governments can be co-opted by Centre for investing in infrastructure sector as their combined fiscal deficit below 3%. The Centre is also relying on Central Public Sector Enterprises (CPSEs) to come forward and invest in infrastructure programmes through borrowings. This will basically constitute off budget financing.”
Not only did Sitharaman’s first Budget fail to enthuse India Inc, it also spooked the stock markets as one of her proposals was aimed at taxing the rich more. She has proposed additional levies on people earning more than Rs 2 crore annually and this added to the woes of the stock markets.
(The author is a senior journalist. Views are personal)
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