DOES THE INDIAN BUDGET DELIVER ?

Ajay Chhibber

ORGANISATION OF THE TALK

• Economic Context for the Budget

• Key Features of the Budget and Risks

• Potential Game Changers in the Budget

• Looking Beyond the Budget

Road Map and a Guiding Philosophy

CAN ELEPHANT’S FLY

India’s Sweet Spot :

Accelerating Growth,

Declining Inflation,

Lower Fiscal and External Deficit and

Bigger Forex Reserves

BUT HUGE CHALLENGES • Declining Competitiveness

• Low Investment

• Poor Ease of Doing Business

• Terrible Infrastructure

• Slow Job Creation

• Rising Inequalities

• Massive Gender Gaps

• Growing Environmental Problems

NEW GDP NUMBERS HAVE DELIVERED A “DOOSRA”

ITS NOT THE SHIFT TO GDP-MPTHAT MATTERED

2012-13 2013-14old new old new

Agriculture, forestry and fishing 1.4 1.2 4.7 3.7

Mining and quarrying -2.2 -0.2 -1.4 5.4

Manufacturing 1.1 6.2 -0.7 5.3

Electricity, gas, water supply & other utility services 2.3 4.0 5.9 4.8Construction 1.1 -4.3 1.6 2.5

Trade, repair, hotels and restaurants 4.5 10.3 1.0 13.3Transport, storage, communication & services related to broadcasting 6.0 8.4 6.1 7.3

Financial, real estate & business services 10.9 8.8 12.9 7.9Community, social & personal services 5.3 8.8 5.6 7.9GDP 4.5 4.9 4.7 6.6

HUGE SHIFT ACROSS SECTORS ? MANUFACTURING, MINING AND RETAIL TRADE UP; FINANCIAL SERVICES DOWN

GDP growth rates by sectorsDifference between new series and old series

in percentage points2012-13 2013-14

Agriculture, forestry and fishing -0.2 -1.0

Mining and quarrying 2.0 6.8

Manufacturing 5.1 6.0

Electricity, gas, water supply & other utility services

1.7 -1.1

Construction -5.4 0.9

Trade, repair, hotels and restaurants 5.8 12.3

Transport, storage, communication & services related to broadcasting

2.4 1.2

Financial, real estate & business services -2.1 -5.0

Community, social & personal services 3.5 2.3

GDP 0.4 1.9

INDIA EXPERIENCED RELATIVELY A HIGH INFLATION DURING 2008-13, BUT SINCE DEC 2013 IT IS DECLINING

HUGE REAL EXCHANGE RATE APPRECIATION

COMPETITIVENESS DECLINED SIGNIFICANTLY. CURRENTLY INDIA IS THE LOWEST AMONG BRICS.

INDIA’S RANKING IN THE WORLD BANK'S 'EASE OF DOING BUSINESS' INDEX HAS ALSO DECLINED.

ON FDI INFLOWS, INDIA STILL HAS A LONG WAY TO GO TO CATCH UP WITH PERFORMANCE OF OTHER EMERGING COUNTRIES.

INDIA SHARE MARKET AND FOREX RISING RAPIDLY

INDIA’S CURRENT ACCOUNT TO GDP IMPROVED : BUT DID GOLD SMUGGLING INCREASE ?

2015-16 BUDGET : SABKA SAATH, SABKA VIKAS : SABKA BUDGET

• Many New Policies and Initiatives : Execution Will Matter

• Pro Growth, Pro-Poor, Pro Corporate , Nothing for the Middle Class

• Fiscal consolidation Announced Path breached – 2015-16 deficit 3.9% vs 3.6 %

• Target of 3 % fiscal deficit shifted to 2017-18.

• If new GDP numbers accepted why push growth so hard?

BUDGET MATHS : HIGHER DEFICIT: FOR CAP EX OR DEVOLUTION

• Less Cur Exp 0.2 % of GDP

• Less Subsidies 0.35% of GDP

• Addl Disinvest 0.3% of GDP

• Total 0.85% of GDP

• Lower Deficit 0.2% of GDP

• Higher Capex 0.3% of GDP

• Fin Comm 0.35% of GDP

• Total 0.85% of GDP

14TH FINANCE COMMISSION: GAME CHANGEFOR COOPERATIVE FEDERALISM

Last 3 Years 2015-16

(share of divisible pool)

Tax Devolution 32 42

Non Plan Grants 5 7

Total from FC 37 49

Central Asst to state 27 16

Total 64 65

SOME RISKS AND WORRIES

• Quality of fiscal consolidation ?Revenue Deficit Remains High

at 2.8 % of GDP in 2015-16 and stays high

• Tax Assumptions Optimistic : No effort to widen tax base –

Awaiting GST ?

• Petroleum Subsidy projected to decline by 0.8% of GDP-

what if oil prices rise faster?

• Aggressive disinvestment- but it will work ?

OTHER MACRO MEASURES

• Public Debt Office – How Independent Will It Be

• Monetary Policy Committee – flexible inflation targeting

“oxymoron” adopted ?

• FMC and SEBI to be merged - good

• Demonetisation of gold- sovereign gold bonds – how much will it

generate ?

• Wealth tax to be abolished – replaced by 2 % higher income tax

above Rs 1 crore

• FDI and FII to be treated the same

Private Sector Banking 74% ( 49% FII/FPI cap)

Commodity and Power Exchanges 49% (26%FDI and 23% FPI/FII)

Credit Info Companies 74% (24% FPI/FII)Insurance 49% ( FDI+FPI/FII)Single brand retail 100%Multibrand 51%

Stock Exchanges 49% (26%FDI and 23% FPI/FII)Defence 49% (24% FPI/FII)

Railways (in selected areas) 100% (above 49% clearance in select area)

EXISTING FDI/FII LIMITS

PRO GROWTH AND EMPLOYMENT

• More Infrastructure spending Rs 70,000 cr ; 5 UMPPS plug and play mode

• National Investment and Infrastructure Fund Rs 20,000cr – game changer

• Ease of doing business ; much in state hands

• Lower Corp Tax from 30 to 25% by 2019 – loopholes to be removed

• GAAR delayed by two years : nothing on retrospective taxation

• REITS tax benefit

• Import Duty on inputs, raw materials and components reduced

• MUDRA Bank

• New Bankruptcy Law – potential game changer

INFRASTRUCTURE GETS BOOST, SOCIAL SPEND DECLINES : GUJARAT MODEL ?

FY 16 (Y on Y) Increase as % of GDP

Roads 59% 0.1%

Railways 33% 0.1%

Defence 10% 0.2%

Rural Development 21% 0.1%

Total 0.4%

States exhorted to pick up decline in social spend and agriculture?

STRATEGIC DISINVESTMENT (PRIVATIZATION) ISBACK : NAV RATNA’S ON THE BLOCK

• NDA Government under PM Vajpayee started strategic disinvestment

• UPA stalled- carried out desultory disinvestment

• Disinvestment target of Rs 41000 crores in 2015-16 budget.

• Strategic disinvestment is back target of Rs 28,000 crores – huge

efficiency gains

• IOC, NALCO, BHEL,NMDC,VSNL and Dredging Corporation under

consideration.

PRO POOR ?

• Funding for MGNREGA kept but Sarva Shiksha Abhiyan, National

Health Mission and ICDS reduced: States to pick up slack

• By 2022 20 m houses for urban poor, 40 m for rural poor and 60 m

toilets

• Universal Security System : Pension, Health , Accident : potential game

changer

• 20,000 villages to be electrified by 2020

• Nai Manzil Youth Scheme for self employment and talent utilization

UNIVERSAL SOCIAL SECURITY: JAN DHAN TO JAN KALYAN

• Atal Pension Yojana - 50% of premiums to be paid

• Pradhan Mantri Jyoti Bima Yojana – cover Rs 3 lakhs premium Rs

330/yr

• Pradhan Mantri Suraksha Bima Yojana- cover Rs 2 lakhs premium Rs 1

/month.

• But Cuts In Health Spending

PRO ENVIRONMENT ?

• Cess of Rs4/litre on petrol and diesel will raise Rs 30,000cr per year

for transport infrastructure.

• Cess of Rs 200/tonne on coal will raise Rs 10,000 cr per year to be

used for renewables

• By 2022 175000 MW of renewable capacity- 60,000MW on solar

• Helps Meet Global Carbon Tax Requirements ; But Is this Enough ?

ASPIRATIONAL INDIA ? SHIFTING FROM HAND-OUTS TO HAND-UP’S

• Small Bang Reforms But Role of State Shifting From Provider To Enabler

• Five Game Changers in the Budget

> Devolution to States

>New Investment and Infrastructure Fund

>Bankruptcy Law

>Universal Social Security

>Strategic Disinvestment

AGENDA FOR NEXT BUDGET ? AND BETWEEN BUDGETS?

• Land Acquisition Law – passed Lower house , upper house ?

• Stalled Infrastructure projects 7% of GDP

• Recapitalisation and reform of state banks – NPA +restructured loans 12%

• No Clear PPP model – plug and play for power ?

• No Power sector reform ; need reforms in distribution ?

• Reform of Food and Fertiliser Subsidy ( Shanta Kumar Panel )

• Middle Class Hurt : Higher Petrol Prices, higher service taxes

• Agriculture – neglected

Clarity on GST Timeline

POLITICAL ECONOMY AND CRICKET

• In Cricket start slowly in first 20 overs and accelerate in last 20 overs

• In Politics difficult reforms in first two- three years and reap electoral rewards in the last two years – need a Road Map

CAN THE ELEPHANT RUN ?

GDP-MP Growth in 2015-16 projected 8.4 %;

Faster than China;

Double digit to come ??

UNSHACKLING INDIA FOR THE 21ST CENTURY BUDGET MAKES A START

India’s Most Famous Finance Minister and Economic Advisor Chanakya (Kautilya) 3rd Century BC

“ Jahan Raj Vepari Vahan Praja Bhikhari”

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