The forthcoming Budget is a real opportunity for the UPA government to regain momentum and show the country that it is firmly in charge. One of the concerns of global investors is the sense of drift and helplessness in Delhi as well as the total stalling of reforms. Investors are convinced that if policy makers continue to fail to assert themselves, it is only a matter of time before both corporate and consumer confidence will be impacted, with telling consequences on growth.
As for what investors want to see, the first priority has to be fiscal consolidation. Without the government regaining control of the fiscal, most investors do not see how inflation can be brought under control. If the Reserve Bank of India (RBI) is to continue battling inflation single-handedly, it is bound to eventually tip over the economy with sustained interest rate hikes. Fiscal policy has to play its part. Interest rates have to moderate to enable the supply-side constraints to ease through higher private sector investment. Investors are worried that India is entering a sustained period of high rates and sticky inflation. Without fiscal correction, rates will not moderate.
The March 2011 deficit numbers will be met, thanks to a high nominal GDP base and the spectrum windfall. Can we get to the outlined 4.8 per cent fiscal deficit target for 2012? Arguably, even more important than the 4.8 per cent number is the net borrowing target for the central government. This absolute number should come in below Rs 3.6 lakh crore to ensure there is enough space for private sector funding requirements, and interest rates and liquidity are not stretched, nor are we beholden to foreign capital flows.
Most investors are not convinced of the government’s ability to hit the 4.8 per cent target for 2012, given the absence of one-time windfalls like the 3G spectrum auctions in 2012. Beyond a disinvestment target of Rs 50,000 crore, the government will have to come up with some other windfall to hit the 4.8 per cent fiscal deficit target. Two obvious candidates are a one-time overseas black money amnesty scheme, and the beginnings of a process to more systematically monetise government assets, starting with the auction of coal blocks, idle land and FM licences. Another source of windfall gain can be 2G telecom licence fees and penalties. One will look for announcements on all these fronts.
From 2013, ideally both the direct taxes code (DTC) and the goods and services tax (GST) will be in operation, and hence the central government will have less need for one-off gains, while the auctioning of government assets like coal should become a continuing process. The finance minister needs to bring the spending trajectory down to 10-12 per cent growth, while not starving capital expenditure.
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Let’s hope the finance minister does not tinker much with duty rates, avoiding the temptation to hike selectively and focuses instead on removing all area- and classification-based exemptions (in preparation for DTC), and getting rid of the Central Sales Tax and harmonising duty rates (in preparation for GST).
A status report on the preparedness of IT systems, forms, procedures and classifications for the phasing in of GST by April 1, 2012 will give the market great comfort on the seriousness of the government to get this reform completed. Politics aside, investors need to know where we are on getting this critical reform done. A time-bound commitment to pass DTC is also important.
Investors will also want to see far greater commitment and action for moving towards a cash-based subsidy transfer system. States like Bihar have already moved on this front and markets want to see a visible commitment to improving the delivery and targeting of public services/subsidies. Investors want the finance minister to outline in far greater detail how he will use the pilots initiated by the Nilekani taskforce on cash transfers to move ahead on this critical reform. How will the government use the unique identity roll-out to better target subsidies? Can better delivery of subsidies ensure we can cap our financial commitments at current levels? Everyone is convinced that the public distribution system is beyond repair. Unless we can control subsidies, there is no way the mix of government expenditure can ever improve.
In agriculture, investors will expect movement on the whole distribution chain. States have to be incentivised to scrap the Agricultural Produce Marketing Committee (APMC) Act, scrap mandi tax and take horticulture and vegetables out of these outdated regulations. Movement on a nutrient-based subsidy scheme for urea, which will help cap fertiliser subsidies as well as improve the fertiliser mix in the soil, is long overdue. All the concerns around agriculture, food prices and the broken supply chain can also be used as cover to bring in foreign direct investment into multi-brand retail.
Investors will want to see measures to help boost infrastructure. Measures to activate the corporate bond market are critical, as are steps to improve the viability of state electricity boards and allow genuine open access (a critical constraint in private power project viability). Pension and insurance reform to create larger pools of long-term debt capital will also be eagerly awaited. Some announcement of a timeline in pushing through a land acquisition Bill using some of the models now in place in Haryana and Punjab ( a combination of lump-sum and annuity payments) would also show how serious the government is about addressing project delays.
Investors have no expectation of more structural reforms like labour law relaxation or fuel subsidy reform; these are perceived as being too hard in today’s environment. Another area of low expectation is around state funding of elections, on which, I am sure, a lot of noise will be made, but vested interests are far too entrenched. Any movement on the above issues will be a huge positive.
Let us hope we are not treated to another business as usual, tinkering-around-the-edges type of Budget. This document has to capture the imagination of the people.
The author is fund manager and chief executive officer of Amansa Capital