True Intent
It isn’t ours: we
accelerate slow things. An opening hand is already action
Rainer Maria Rilke
Narendra Modi, at the head of the first majority Government
in thirty years, has sworn to transform India over the next decade. This will
entail massive financial investment and decisive, unprecedented ,good governance. The budget session of
parliament, coming up, will enunciate and delineate the economic thrust areas
of this new vision. The nation, agog with anticipation, can hardly wait.
Prime Minister Narendra Modi himself, as well as some of his
ministers, have been keeping their noses close to the grindstone for gruelling
12 hour work-days. But Modi did take time out to blog, on completion of his
first 30 days in Government, wryly stating that his honeymoon in office did not
care to last more than 100 hours, let alone a hundred days. This can, of
course, only change when the jaundice-eyed courtiers and opinion-makers of the ancien regime are unceremoniously turfed
out and replaced.
Still, the Modi administration has not let the grass grow.
There is a long-list of initiatives, far more than any other previous Indian
government has taken in such short order, with a lot of them stretching into
matters well beyond the exigencies of the annual budget. But overall, the
impression is of a Government eager to get the country, its economy in
particular, moving again, and fast.
And while all attention is presently on the budget, it is by
no means going to be the end of the economic initiatives this Government will
take this year. A number of the ‘bitter pills’ NaMo has spoken of may well be
calibrated and spread out. A general theme of this Government will be to reduce
and eliminate subsidies, re-engineer doles, and go in for more productive
investment.
The boldest move made so far is the hike in the Railway
fares and freight rates, fearfully avoided by the predecessors. The railway network,
vital as it is, is already over 150
years old, much neglected, and uses outdated technology more than 50 years
behind the times. The tracks and signalling equipment are worn out; from
overload, poor maintenance,
obsolescence, lack of replacement and pose a safety hazard too.
Through it all the Indian Railways is a
gargantuan employer, with over a million people on its rolls. The challenge
will be to actually add to this number, as creation of additional jobs is a
national priority, but vastly increase the scope of works, the skill-sets, the
commitment to profitability and efficiency.
But as such, it has grown less than 20% in length since 1951,
wrote Samar Halarnkar in The Hindustan
Times, while passenger traffic has ballooned by 400%. Freight loads have
grown 600%, and yet more freight has spilled over onto National Highways and
the swanky Golden Quadrilateral. Road haulage is much more expensive, but what
do you do when you can’t book a rake?
The Railway Budget, now that the daily haemorrhaging has
been stemmed to an extent, is widely expected to concentrate on massive
modernisation, and improving the dismal safety record, inclusive of the
Railways’ ability to protect itself from Maoist attacks. But, in a shift of
strategy, it will be made to generate additional resources on its own and
commit to run itself profitably. Keeping prices unrealistically low, and depending
on increasing Central Government hand-outs is unviable. Much can indeed be done
to raise resources by unbundling some of its extensive real-estate. The quaint
bygone era station network, now filthy, inadequate and dilapidated, also needs comprehensive
upgrading, incorporating smart commercial exploitation to raise additional
resources.
Prime Minister Modi has grand legacy plans for a ‘Diamond
Quadrilateral’, which will link the country with a series of modern high-speed
trains. This will naturally be expensive, and will have to be largely foreign-funded,
possibly by railway technology aces China and/or Japan, and with Railway Bonds
and the like domestically.
In terms of the ‘Super-Budget’ itself, one of the most
pressing needs is to be seen to be providing money for business and industry,
and many other starved-for-funds productive sectors. Everything needs to start
expanding, growing and modernising again. The previous regime’s tight monetary
policies, high interest rates, negative growth of industry, plummeting GDP, and
hardly any money to lend with the banks, is a complete tale of woe.
Now, with continued high inflation, a poor monsoon and
turmoil in Iraq to boot, the RBI, may, by itself, lack the elbow-room to
promote growth. And so, it is vitally important to turn to the supply-side of
the economy, and crucially, other sources of funds.
To a great extent, the FIIs, who have spontaneously pumped
in $ 25 billion into the Indian stock market have eased the situation,
strengthened the rupee, added to hard currency reserves, and vastly improved
market sentiment. But much more needs to be done to attract more FII and FDI
monies by way of liberal reform and market-friendly procedures.
The self-help part of this, which will have a salutary
knock-on effect, is very important. One idea is to allow a proportion, about
30%, of Indian pension funds to invest in the equity markets. This will let
them seek returns higher than 8%, quite inadequate in such inflationary times. It,
along with hopefully continued large FII inflows, will provide funds for
companies to raise money for development and growth. Plans are already on in
over a 100 companies to seek over Rs. 1.5 lakh crores through 2014-15 from the
stock market. The Government is also readying many PSUs for outright sale, and
others for diluting 25% of their equity in favour of the general public.
The advent of pension funds in the stock market will also
provide a stable flow of domestic monies which won’t be volatile as FII money
can sometimes be. In what is being called as a multi-year Indian bull market just
begun, this should do well for the returns of pension funds. The market-regulator
SEBI also thinks this is a good thing. CII- Ernst Young estimates the Indian
pension sector corpus will top $ 1 trillion by 2025. Even at present, pension
funds add up to Rs. 6.50 lakh crore, but
none of it is coming into the bourses.
Another source of
very cheap funds right now could be from low interest economies abroad, awash
in liquidity. Such External Commercial Borrowings (ECB) are likely to be
encouraged by the Government given the fairly strong hard currency reserves
position.
This budget will surely give tax concessions to industry.
The continued excise concessions to the automobile industry till December is indicative.
But many other incentives, liberalisations, reforms and concessions for
industrial development are expected.
Of course, infrastructure in general, inclusive of the needs
of industry, urban and rural India, will be strongly boosted. It is
acknowledged as a classic driver of growth in GDP, and indeed, jobs. To finance
some of it, new tax-free infrastructure bonds may be introduced, while the
Government will need to stand guarantee for foreign lenders. The infrastructure
sector, on its needs base, could easily suck in over a $ 1 trillion and boost
the economy dramatically. Outside the budget, our outdated Labour Laws too are likely
to be tweaked to encourage foreign investment.
Foreign investors, such as Japan, have been requesting tax
concessions for manufacture and this will most likely be granted to remove an
irritating road block. In addition, the Government has already indicated it
will get rid of retrospective corporate taxation. To compensate itself however,
it may withdraw some exemptions at the same time. The world, including the US
and Europe, is waiting for Modi to demonstrate his reformist zeal, and this
first budget will undoubtedly do so. The stagnation and status- quoist policies
will be jettisoned, and this Government will not carry forward many of the UPAs
policies.
India is targeting FDI investment from Japan and China in
particular. The Chinese Government is well disposed commercially, even as it
has persistent territorial issues on the borders. As yet it has only invested a
meagre $ 900 million in India, with most of it going to Gujarat. But this can
ramp up exponentially as China does have billions to invest. Japan, already
committed to develop the Delhi-Mumbai Industrial Corridor amongst other
initiatives, needs its problems addressed. The budget will send out positive
signals to both.
On the consumer side, there is a strong possibility of the
income tax slabs being tweaked, in effect putting more spending money into the
hands of people. Revenues lost to direct taxation, it is reckoned, will come
back to the Government via indirect taxation of goods and services.
There is also the usual clamour to reduce or do away with
all sorts of other imposts, including the transaction tax on the bourses, the
service tax on a great many activities, the surcharges, and so on, but it is
unlikely that the Government will oblige because of its poor financial
situation. However, processes, including financial disbursement procedures, are
likely to be simplified, and laws such as the over intrusive new Company Law,
will be modified.
Various sectors will be opened up to 100% FDI and others
will have their limits enhanced. In Defence procurement, a large number of
items, 60%, albeit not the critical path items, have been already taken off the
list for mandatory Government licensing for manufacture in India. India is
today the largest arms purchaser in the world, with an urgent shopping list
that tops $ 300 billion. But for critical items that cannot wait, the Defence
Budget will have to be enhanced. But as the domestic manufacturing of
state-of-the-art weaponry takes off, it will contribute significantly to our
financial health and create a new export stream as well.
The rural areas, another major constituency, will receive
massive infrastructural attention, to create, what Modi has called rurban
facilities, inclusive of a 100 new cities. The budget is likely to dwell on
allocations and stratagems to bring about this transformation to benefit over
600 million people.
A number of other items, such as the contentious gas prices,
expensive electricity due to dependence on imported coal, inefficient
generation and inadequate transmission systems, insufficient water and so on,
will most likely be addressed in terms of both infrastructure development and
better governance. Chennai, for example, long suffering water problems has
probably taken care of it now with desalination plants under execution. The
Modi Government is also very keen on solar power.
Projects stuck due to
‘land and forest clearances’ and ‘bureaucratic delays’ are in process to be sanctioned
briskly. These too, though outside the purview of the budget, will contribute
towards getting the economy going again.
Most of all, this Super-Budget will exude
confidence in the future and give the nation enough solid assurance that
the country is on the move and it can look forward to better times.
(1,800 words)
June 29th,
2014
Gautam Mukherjee
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