As Union Budget 2016-17 draws closer, expectations have started building. While there are several competing demands, in my view the singular focus should be on pursuing growth while ensuring macro stability of the economy. In this regard, efficient fiscal management is of utmost importance and will be watched as the centrepiece of the forthcoming budget.
Nominal GDP registered a growth of 10.8 per cent in 2014-15 and latest estimates peg it at 8.6 per cent for 2015-16. Real GDP, on the other hand, has been posting an uptick in growth. This clearly points to deflationary pressures being faced by the economy. In such a scenario, a case can be made for fiscal policy to pursue growth. In fact, if needed, the government should not shy away from recalibrating the fiscal deficit target in order to push public investments with a view to add productive capacity to the economy. It is not sacrosanct to keep fiscal deficit target at 3.5 per cent of GDP as long as the direction is downwards and quality of spending is maintained. It should be ensured that the spending stimulus is directed towards fruitful capital expenditure, especially in infrastructure. The previous budget provided a strong thrust to the infrastructure sector. The budgeted capital expenditure for 2015-16 was around Rs.2.4 lakh crore, which was 25.5 per cent higher over the previous fiscal’s capital outlay. We look forward to a similar thrust in public capex in the upcoming budget. Since the government has been tasked to manoeuvre in the limited space, it is equally essential that it continues to rein in unproductive expenditure such as that on subsidies. Subsidy rationalization measures initiated through Direct Benefit Transfer channels should be expanded to all subsidies.
Greater thrust on infrastructure spending will also help in reducing the cost of doing business thus enhancing the competitiveness of our manufacturing sector. Currently, average cost on logistics account for almost 20 per cent of the product cost in India which is almost 4 to 5 times that in developed countries. Besides enhancing the outlay on infrastructure, the government may consider earmarking certain sectors as ‘focus sectors’ on an annual basis under National Infrastructure Investment Fund (NIIF) that was recently launched. This will ensure that sufficient funding gets targeted to specific sectors only. To promote PPP in infrastructure, it is desirable to leverage the ‘annuity model’ wherein private investors can recover their cost in a series of semi-annual payments from the government over the concession period.
Alongside, there is a need to propel private sector investments in an environment where the domestic economy is reeling under weak demand, both urban and rural. Prolonged contraction has been noted in the demand for FMCGs, tractors and motorcycles since November 2014 while subdued growth can be traced back even further. To revive demand and propel private investments, the Finance Minister must put forth an enabling tax framework that puts greater disposable income in the hands of the consumer and encourages firms to invest. In addition, it is essential to lower the cost of finance to stimulate expansion by enterprises and to boost sales of housing, consumer durables and automotive sector. In this context, the government should expedite the review of small-savings interest framework to ensure effective transmission of policy rate cuts into lower lending rates by banks. The government can also consider providing three per cent interest rate subvention for housing loans up to Rs.10 lakh. This will further boost consumer demand for housing.
The government recently launched the Start-up India campaign announcing initiatives such as providing tax holidays, exemption on capital gains, faster exit, rebate in patent filing, etc. to strengthen entrepreneurship in the country. In addition to these, the government may also consider incentives such as paying employer’s contribution towards employment benefits such as PF and ESI for a defined period of say three to five years in case of start-ups.
The author is Secretary General, FICCI
