Sunday, February 27, 2011

My expectations from the budget today.....

The Indian budget will be presented today. I am confident Pranab Mukherjee will live up to his credentials of being a savvy FM. My own expectations from the budget are simple. Rather than focus on the specifics, I would like to define the broad areas:

1)      Infrastructure: Surely, this is the one bottleneck that India has to overcome if it wants to achieve its rightful place in the world. Specific focus is needed on:
a.       Power: Almost all states in India suffer from massive power cuts. Today, India produces just about 1.5 lac MW of power.....China produces about 9 lac MWs. If we have to grow at 10% per annum for the next 20 years, we will also have to scale up power production to somewhere around 9 lac MW. As I argued in an earlier post, the way to do this is to set up more nuclear power plants. Pranab Mukherjee must make sure that that happens. Through fiscal incentives and through other means.
b.      Roads and ports: I’m not talking about urban roads which are anyways in a bad shape. I am talking about inter-state roads which directly lead to poor logistics, a bottleneck for industrial growth. Also, with India’s trade likely to double to $ 1 trillion in the next 4-5 years (exports $400 billion; imports $600 billion), its critical we upgrade our existing ports and set up quite a few modern ones quickly.
c.       Irrigation: I am including this under infrastructure and not agriculture; I feel that it will get more attention if considered as infrastructure. Somehow our agriculture policies tend to be muddled most of the times.
d.      Internet: This is a strange one to include under infrastructure, but the world today is connected more via the internet than by airlines and ships. Remember, we got our first success internationally because of the telecom boom (BPOs etc).....the next one will surely depend on the internet boom. The government must set goals for overall internet penetration....and more specifically broadband connectivity.
e.       Education: While we are getting good results with basic education (literacy levels), there is a serious worry with respect to the quality of education. It’s not enough to produce the highest number of engineers and scientists; I think its more important to produce the highest number of well-trained factory workers and service industry workers. Today, most university pass-outs are not ready for the world ahead.

2)      Investments: While we are blessed to have a high saving rate (35% of GDP), we need even more to stimulate the GDP. Remember if the returns on the investment are 10%, the 35% savings rate would lead to just 3.5% increase in GDP. We need more in the form of FDI. Any steps the government can take to increase FDI from $25 billion at present to $100 billion a year should be welcomed. Remember, if FDI hits $100 billion, its nearly 6-7% of GDP and that would take investment rate up to nearly 42% or so (35% savings + 7% FDI). FDI policies with respect to insurance and retail specifically need to be liberalized. Frankly, there is no reason left now to have FDI limits in these sectors. I would look for incentives to increase investments in infrastructure, agriculture and also in R&D – a critical focus area if we have to make industry globally competitive in the future.

3)      Inflation management: Everyone knows this, but the government needs to cut back on fiscal deficit. Fiscal deficit, in simple terms, is the gap between the government’s earnings (taxes etc) and expenditure (salary costs, interest on loans taken, defense largely). To cover the gap, the government borrows even more (thus raising market interest rates and making less credit available for the private sector to use) and in some cases simply “prints” money (by issuing bonds which the banks have to subscribe to). A certain level of fisc deficit is a healthy requirement as it helps to pump prime up the economy.

To cut the fisc deficit, the government must focus on the following:
a.       Cut government expenditure: Cut head-count before the 7th Pay commission gives a further pay hike. No new recruitments for the next 20 years. Further, the government must aim to reduce its role over the next 20 years by removing licenses and approvals required in more areas; This will have a beneficial impact on reducing corruption as well.
b.      Disinvestment: Over the next 20 years, the government must get out of business. It must stay focused on providing the right environment and infrastructure for private enterprise to prosper. It must start by setting a Rs 1 lac crore disinvestment target for FY12.
c.       Raise tax collections: Even today, the total quantum of Direct Taxes (corporate taxes and Income taxes mainly) is just about 6% of GDP. Out of this 6%, Income tax must be about 2% or so. There are only about 35 million tax payers in the country. Any efforts taken in increasing the tax coverage without increasing tax rates should be welcomed. In fact, there may be a case for a small reduction in the tax rates if it helps increase tax compliance. The Direct Tax code will aid in this objective. Further, there is an urgent need to reform the indirect taxes as well and to do that, the new GST regime must be brought in quickly.
d.   Lastly, focus on increasing agricultural productivity. We need to embrace Genetically Modified crops; we need more investments in irrigation; setting up a cold chain; modernizing the distribution system; improving roads; making more credit available to farmers and of course increasing power supply.
4)      Protecting the poor: It’s rather strange that I would recommend more socialist schemes, but honestly, because we, the rich, do not share our wealth easily, it’s important that the government devises easier ways to achieve social equity. The Food Security Act is a terrific step because it will make sure that no one stays hungry.....even if food prices rise further. Likewise, the NREGA must be expanded to cover all districts in the country and for more number of months in a year. And lastly, there is need to first improve and then expand the Public Distribution system.....maybe with valuable contributions from the Unique Identification Code project that Nandan Nilekani is championing. Maybe, there is a case of direct transfer of funds rather than selling goods to the PDS, but this is a matter of detail really.

The real truth is that the job of the Finance Minister is easier than it was 20 years back. We are an economy on the move. As GDP grows, it becomes increasingly easier to manage the issues raised in this post. Fisc deficit will contract simply because the GDP will grow at 18-19% in nominal terms (real growth of 9% plus inflation of 9-10%). It’s like a family becoming richer year by year......and more able to manage its various requirments. It’s the same with the country!

No comments:

Post a Comment