There is a buzz around the upcoming Budget. Most expect it to be path-breaking, with some even saying it will be as important and revolutionary as the 1991 version. With growing unease that the economy is showing limited signs of a bounce-back, combined with evidence of the legislative difficulties the Centre is facing in pushing through reform and the gaps between talk and action on the ground, the Budget needs to reassure investors.
However when I ask fellow investors as to what they want to see in the Budget I get no real, concrete answers. What are the two or three reforms they want to see for them to give the Budget a thumbs up, and consider it to be revolutionary? No real answer. It will be difficult for this government to beat expectations if the expectations themselves are so hazy..
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Be that as it may, I have put down what most investors tell me are their minimum expectations, as a guide to judge what the Budget actually delivers.
On the revenue side, most investors believe that we will get greater than 20 per cent growth in gross tax revenue. A combination of the mid-year hike in taxes on fuels and autos, the normalisation of tax refunds, expected new duties on crude oil and electronics, as well as a hike in service tax will combine to deliver this.
However despite this very robust growth, net tax revenues to the Centre will hardly grow by four-five per cent, as the 14th Finance Commission recommendations on devolution of taxes kick in. There is, thus, very limited scope for any significant tax cuts. We may see a hike in tax slabs for individuals, some increase in 80C limits, tinkering with minimum alternative tax for special economic zones and so on - but don't expect cuts in tax rates. If they happen, it will be a positive surprise. Hopefully, we will get full tax clarity on the real estate investment trust, or REIT, structure, as this can unlock $4-5 billion for the real estate sector almost immediately and support further investment here.
Steps to broaden the tax base are desperately needed; it is a shame that only about 35 million Indians pay tax compared with almost 300 million Chinese. Our fiscal problems are ultimately rooted more in revenue weakness than excess spending.
The real bet the government will have to make to boost its revenues will be in asset sales. Expect a target of Rs 70,000 crore at least. A combination of divestment, sale of Bharat Aluminium/Hindustan Zinc and hopefully biting the bullet on the Specified Undertaking of the Unit Trust of India (SUUTI) stakes. Anything less will be a disappointment. Positive surprises here could be innovative methods to monetise more government assets like land. A willingness to sell the SUUTI stakes to strategic investors and maximise their value as opposed to selling these shares in the market would be another positive.
There is a clear expectation on the goods and services tax, or GST - though exactly what the government can do here beyond making statements of importance and time-line is unclear. Maybe give some comfort on the state of readiness of the rules and information technology infrastructure for implementation will help. Investors also want to see some resolution of this whole retrospective tax issue and postponement of the General Anti-Avoidance Rules, or GAAR. There is a trust deficit here, and until we resolve this, investors will always assume the worst. There is an expectation of reversing the inverted duty structure for many finished products, as well as a wholesale pruning of exemptions and standardisation of rates. There may also be tax breaks for new capital spending and infrastructure.
On expenditure, there is a clear expectation of a reduction in subsidies. Partly due to oil prices, and partly as the direct benefits transfer (DBT) methodology is used for food, kerosene and other social transfers. The government will be expected to lay out clear timelines for this move to DBT.
We should expect some reduction in the central Plan assistance to states to compensate for the higher tax devolution - but not an exact offset; the states will still gain substantially in aggregate. If the Centre is willing to further prune central schemes, and concentrate its support to a handful, that will be a positive.
The subsidy and central Plan assistance savings will be expected to fund an increase in non-defence capital expenditure from one per cent to at least 1.5 per cent of gross domestic product (GDP) - a $10-billion hike that will go into highways, railways and affordable housing.
Investors also want to see a credible allocation for the public sector banks - at least Rs 30,000-35,000 crore. Most are not going to be able to fund themselves from the market; the government has to step up if the public sector banks are to be able to lend.
If some way can be found to unlock the Rs 2 lakh crore in public sector undertaking (PSU) surpluses and channel this money into public infrastructure in a systematic manner, that will be seen as positive.
While everyone would like to see a 3.6 per cent fiscal deficit number, if this goes to 3.8 per cent that would hardly be a huge negative, especially as this is a transition year for the Finance Commission recommendations. More importantly, the sanctity of the numbers should be ensured. The Budget should have assumptions on both revenue and expenditure that are believable.
On the structural reform side, one expectation is for the government to accept a formal inflation-targeting framework and move to set up a monetary policy committee, working seamlessly with the Reserve Bank of India on both.
Providing more capital for the PSU banks is only a short-term solution, there is need for fundamental reform of their governance and restructuring of their operations. Some move to accept the P J Nayak committee recommendations has to be made. The status quo cannot continue here.
On infrastructure, we have to find a way to revive some form of public-private partnerships (PPPs). The government ultimately has neither the money nor capacity to handle all our infrastructure needs; this is why the PPP concept gained traction initially. The government can hike public expenditure for a year or two, but we need the private sector back into infrastructure. The government is not the solution.
While we talk of improving the ease of doing business in India, I don't see a holistic plan for this. A concrete plan outlined in the Budget with timelines will add more credibility, as will explicit steps to improve the competitiveness of Indian manufacturing.
It is unlikely that we will get a big-bang 1991-type Budget, which some expect. If we can get a Budget with realistic numbers, which delivers a fiscal deficit near 3.6 per cent and begins the process of expenditure switching from transfers/subsidies towards capital expenditure, we should be grateful. It should address the structural issues of adoption of cash transfers, PSU bank reform, revamping the PPP framework and improving trust between the taxpayer and the government. If it can outline a plan to ease the hassles of doing business and improve competitiveness of manufacturing, that would be an added bonus. Expecting more than this is unrealistic.
The writer is at Amansa Capital. These views are his own
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