Fine-Tuning The Beast

Fine-Tuning The Beast

How is it looking a few days after the budget presentations? There is a lot of the fine print to sort through and many clarifications to seek but most people think it was a good set.

The Opposition is miffed because it has little besides the Rs. 200 crore allocation to the statue of Sardar Patel to complain about. But yes, not every provision can possibly be met with unmitigated joy by all concerned.  Many commentators are blaming the first Jaitley Budget for not dumping the welfare-priming ways of the UPA. But surely that criticism can be overlooked for being a double-edged sword, with the Congress and the Left just waiting to call this Government ‘anti-poor’.

The Modi Government has shrewdly deprived the Opposition of the opportunity, and besides there are several forthcoming Assembly polls to consider. Maharashtra is going to be challenging, despite the Congress/NCP misrule, with Gopinath Munde gone; but Amit Shah as BJP President now, is likely to pull other rabbits out of his organisational magician’s hat.

Besides the pro-poor stance in the budget is real and sincere. Modi comes from a poor family himself, and there is a genuine commitment. Universal housing by 2022 and indoor toilets for all are just two easily identifiable aspects of this. That the Jaitley budget addresses the concerns of very many other, if not all sections of the populace, is not meant to take anything away.

And then some of what has happened is fortuitous. The first national industrial production output (IIP) numbers in 19 months show a healthy uptick at 4.7% for May 2014, up from minus 2.5%  in May 2013.

This needs to ramp up further to nearer 10% month after month, along with GDP figures to match. This would put the roar back into manufacturing, and consequently, the job market. This particularly, since the highest the IIP numbers so far were in October 2012 when they reached 8.4%.  But for now, it is good to know that confidence is returning to manufacturing, however hesitantly. This May figure has come on the back of a revival in mining and automobile manufacture. It is also a percentage achieved on a low base, but still, the first two months of this fiscal, namely April and May show a growth of 4% in IIP as opposed to a minus figure of 0.5% for the corresponding period last year. GDP likewise is projected to grow to 8% by 2017, up from just under 6% this fiscal.

The Construction sector too, capable of being a major money-spinner, is feeling good, with the introduction of REITs and lower FDI thresholds for both land-banks and initial qualifying investment. This is expected to bring in about $10 billion from abroad to start with.

The allocations in the budget towards affordable housing, the seeking of innovative help in this area from Singapore, where the Government houses 82% of the miniscule 5.7 million population, is encouraging. Singapore has placed its residents in its own version of low-rent ‘Council Housing’, or long-lease (99 years) ownership, for those who can afford to buy.

The allocation of over Rs. 37,000 crores for getting the road-building started again is also welcome.

But one budget proposal in the financial sector that seems retrograde is the doubling of Capital Gains Tax on Debt Mutual Funds from 10% to 20%, and the extension of qualification of sale or transfer as a ‘long-term’ gain, from the existing 12 months to 36 months, just as in the case of  the   much bigger-ticket property sector.

The bureaucrat who proposed this probably forgot about indexing for inflation, allowed to all capital gains computing, which will reduce the notional 20% to a minus in 36 months, and make the whole thing yield negligible amounts in tax. Also, the restrictive lock-in will drive away corporate and FII investors with large funds. And quixotically, it does not apply to investments in Debt instruments individually. This ill-advised proposal will retard the growth of Debt Mutual Funds at a time when the Government needs to attract more investments into the Debt Market via all available and new avenues. And it is applicable, the Finance Ministry clarified, from April 1, 2014 making it retrospective! Hopefully, this feature will be dropped during the review of budget proposals.

Elsewhere, people are busy doing the maths. The increase of the FDI limit in Insurance is expected to bring in about $20 billion.

But the really big ticket money, in hundreds of billions or more, will come in via FDI in Defence. The lack of majority ownership by the FIPB route, will probably have most serious high technology investors come knocking for Cabinet approval on a case-to-case basis at 100%.

Defence production has enormous potential in both money and jobs, when one considers that tiny Israel supplies 10% of the world’s defence equipment, and China, once the world’s biggest arms importer, just like India today with its $300 billion arms import bill, is now the fifth biggest exporter.

We need to be careful however to stop the status quoists in their lobbyist tracks, if this great opportunity is to succeed. It is interesting after all, to note reports that certain foreign-funded NGOs don’t even want us to be food-sufficient.

(871 words)

July 13^th, 2014

Gautam Mukherjee