Budget 2019 marks a paradigm shift

It quells all doubts about the private sector being the dominant agent for wealth creation in the economy

Finance Minister Nirmala Sitharaman’s first Budget will in times to come be seen as marking a paradigm shift in both the pace and nature of economic activity. Her Budget speech included a strong pro-private investment stance and an unequivocal admission of the critical role to be played by private enterprise in the country’s march towards a $5 trillion economy. The Budget itself contains a number of measures for spurring private investment, with the government playing a supportive role and displaying a willingness to share risks in order to make private investment more attractive and feasible. 

Before detailing some of these measures, I should point to two pre-conditions for the success of a private sector-led growth strategy, implicit in the Budget. First, it is critical that the bureaucracy whole heartedly accepts this approach and pro-actively implements the initiatives included in the Budget. For example, it must ensure the higher targets for dis-investment are actually achieved; public-private partnership in the Railways is actualised; and MSMEs have better access to formal credit and are able to avail the 2 per cent interest rate subvention announced in the Budget etc. This calls for further improvement in governance and widely establishing an incentive structure based on output-outcome-based performance evaluation, for which a strong start has been made in the Budget. Budget documents include for the first time, a full-fledged output-outcome performance evaluation framework for all government schemes where allocations are above Rs 500 crore, covering more than 90 per cent of the total public expenditure. 

The second pre-condition is to successfully build a trust-based relationship between the government and all other stakeholders who have a role in accelerating economic activity in the country. Such trust existed during the period leading up to— and immediately after— independence. It broke down during the 1970s and ’80s in the face of strong government-led promotion of public sector enterprise and the rampant licence inspector raj that converted the interaction between the government and business from a collaborative one to a patron-client relationship. This has to change. A trust-based relationship is an essential condition for India to expand its share in global markets and, indeed, even for the success of the Make in India initiative. 

The Budget explicitly recognises that private investment-led growth requires the government to share some of the risks associated with long-gestation infrastructure projects. This can be achieved by encouraging private investors for taking over brownfield public sector assets such as airports, highways and even some gas pipelines and telecom sector infrastructure. This will help attract private investment in infrastructure, which requires additional investment of Rs 20 trillion (nearly $300 billion) each year for the next five years to overcome the infrastructure deficit that currently hobbles the country’s global competitiveness. 

illustration: Binay Sinha

The Budget also announced that private investment will be invited in the sectors hitherto considered as exclusively public sector monopoly such as the railways and defence production. The Budget estimates that the railways requires nearly Rs 50 trillion over the next 10 years, to upgrade its infrastructure and modernise its rolling stock. Such infrastructure upgrades alone will allow the Indian Railways to recover its share in freight and passenger movement, which it has consistently lost over the past decades. The Budget clearly postulates that such massive investment can be achieved only by encouraging public-private partnership in modernising track infrastructure; manufacturing railway rolling stock and indeed in the running of freight and passenger train services. Increasing the share of domestically produced strategic equipment will similarly also require an increased role of the private sector.

Further, as part of its push to private enterprise, the Budget announced that all firms with a turnover of less than Rs 400 crore (compared to Rs 250 crore so far) will henceforth pay a corporate tax of only 25 per cent. This measure will apply to 99.3 per cent of all corporate entities in the country, leaving only 0.7 per cent that will still pay the higher tax rate of 34 per cent. Similarly, MSMEs, which are registered under the Goods and Services Tax, have been given a 2 per cent interest rate subvention for all fresh and incremental loans. Shares issued by start-ups to both Category I and Category II Alternative Investment Funds have also been put beyond the scope of income tax scrutiny. The issues relating to angel tax have  been addressed as well. 

The government’s objective of expanding the scope of private enterprise is visible in the higher target of Rs 1.05 trillion for disinvestment in fiscal 2019-20. At the same time, the government has announced its preparedness to reduce its equity stake below 51 per cent for successfully completing the strategic disinvestment of particular central public sector undertakings (CPSUs). The Budget reiterated the government’s commitment for not only the strategic privatisation of Air India but also other CPSUs, which may benefit from strategic take-over by the private sector. 

Even for the NRIs, the Budget has announced an easing of the KYC norms and permitted them to invest in India through the foreign portfolio investment route, thereby reducing compliance requirements. Foreign direct investment (FDI) inflows are sought to be further liberalised in sectors such as single-brand retail, civil aviation, media and insurance, while 100 per cent FDI for insurance intermediaries was explicitly allowed.

The Budget thus provides the clearest statement of the government’s intention of accelerating economic growth, based principally on private investment and enterprise. There cannot be any lingering doubt on the government’s recognition of private enterprise as the dominant agent for value and wealth creation in the economy. The government will, of course, continue to play its role in improving both the social and physical infrastructure and take steps for ensuring sustainability and inclusion. This is in line with experience from across the world that the success of a private sector-led accelerated growth strategy is contingent on ensuring greater inclusion of those at the bottom of the pyramid and innovatively addressing any trade-off between growth and environment protection. 

The writer is vice chairman NITI Aayog. 

Views are personal