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Friday, 11 July 2014 00:00
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A lot to stimulate economy, especially infra, with enough of a cushion to make it credible

Though markets dismissed it as a non-event, after a sharp 800-odd point movement during the day thanks to a seeming lack of big ideas and impossible tax targets, the Budget’s biggest achievement is that it looks doable. Rolling back the retrospective tax would no doubt have moved the market, as this newspaper recommended on many occasions, but it would have riled Parliament since this would have challenged its authority to pass bad laws, so an acceptable half-way house was put in place. The retro law remains in place, but no fresh applications of it are to be made in a casual manner; as for the existing R2 lakh crore-plus of tax demands based on this, they will be dealt with by the courts or various dispute resolution fora—the key here, of course, will be to ensure the government doesn’t play the heavy as it has on Vodafone’s arbitration demand, and at least allows them to be arbitrated.

As in P Chidambaram’s budget, the tax target is unlikely to be achieved, especially given the R14,745 crore of tax giveaways—to cite one instance, excise duty collections are slated to rise 15.4% as compared to last year’s 1.7%. The saving grace here is the huge cushions which, it has to be said, were available to the UPA as well—which means the government needs to be decisive for even the airbags to inflate. The R64,425 crore divestment target includes just R6,500 crore of the SUUTI shares—worth around R54,000 crore currently—and can easily be stepped up when taxes fall short. The R25,000 crore or so targeted from spectrum sales—that’s after removing the R20,000-odd crore the government will get from annual licence fees—will require defence minister Jaitley to come to the aid of finance minister Jaitley. Given that just a third of all 2100 MHz—popularly called 3G spectrum—has been used so far, unless the defence ministry vacates the rest, the target isn’t going to be met; this is the most valuable spectrum, so it needs to be auctioned.

If the criticism of the Railway budget, or other plans such as the Ganga cleaning one, is that they rely too heavily on PPP—which doesn’t have the capacity to shoulder the kind of risk it needs to—the finance minister has promised to develop more sophisticated models of contracting along with a suitable dispute redressal mechanism. This is easier said than done, but given the very large number of big infrastructure projects in trouble, is an imperative. For now, at R52,189 crore, the roads sector—NHAI and rural roads—has got double last year’s allocation to complete projects, most likely on the old EPC basis; purists will cavil since the privatisation process has got a jolt, but roads will need to be built if the economy, and jobs, are to grow. Several schemes that have worked in Gujarat, such as the separate power feeder lines, are to be experimented with—it is to be seen if they can be scaled up nationally.

The R10,000 crore funds to catalyse MSMEs is seductive, but the Budget’s really big ideas are reserved for infrastructure; given their simplicity, it is unclear why they have not been implemented earlier. Right now, banks cannot lend to infrastructure projects for more than 7-10 years even though the life of a concession is typically 20-25 years. So, in order to look viable, projects need to ink in unreasonable returns to show they can repay debt over relatively shorter periods of time—this means they are set up for failure and, given that banks have to then classify them as NPAs, makes financing that much more difficult. With this financing bottleneck eased, projects will look a lot more viable. More important, funds raised for such lending will not be subject to the usual SLR/CRR/priority-lending expropriation. Clearing tax treatment clauses for SPVs for real estate and infrastructure will allow bundling of equity and even listing, a big positive.

The longer-term reforms of the agriculture sector and the food security system remain untouched, and it has to be hoped the finance minister’s expenditure management commission comes out with a credible roadmap, though the exercise has been pushed back a year. Moving away from even a distorted incentive structure, and one that focuses only on wheat and rice—and ends up costing R80,000 crore more in terms of excess stocks with FCI—is something that needs to be phased in, not introduced dramatically. Since the Budget’s FRBM document does talk of Aadhaar-based cash transfers, it is to be hoped the NDA will realise the futility of the current food subsidy programme, and moves to cash transfers—the difference is between spending around R30,000 crore a year and upwards of R1.5 lakh crore. Not agreeing to a monthly, if small, subsidy cut on LPG and kerosene is unfortunate, and suggests that, as in the past, PSUs like ONGC will continue to be forced to share the subsidy burden.

Not agreeing to the PJ Nayak committee’s suggested bank holding company is the Budget’s Achilles heel since, without adequate capital raising ability, banks will be constrained to lower lending targets—sooner, rather than later, the FM has to embrace the idea. Not being able to set a timeline for GST suggests the Budget is too cash-strapped to agree to compensate states, and is embarrassing since this was seen as a done deal as the opposing states so far were largely BJP-ruled ones. It speaks volumes for how far India has travelled that liberalising rules for FDI in both insurance and defence manufacturing, normally top on the list of most Budget lists, have been dismissed as non-events, as has the FM sticking to the aggressive deficit target.

 

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