The worst criticism of the Budget making rounds is that it lacks vision or a big idea. Frankly, that is good for India. The government remains focused on execution to repair the economy from past issues and steering the economy amid challenging global economic conditions.
But, I would argue there is a big idea. Sticking to 3.5 per cent fiscal deficit target is a signal that fiscal prudence is a matter of faith, and not of convenience. Rather than being tempted to dilute fiscal rectitude and by sticking to a stated plan, we are following what the Germans did during the great financial crisis by avoiding an expansive fiscal and monetary policy. The results are well documented. Fiscal conservatism sharpens our focus on cutting waste and improving productivity of our spending.
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As a growth driver, the finance minister continues to push infrastructure spending in areas with proven delivery track records. The central outlay on roads and railways is set to grow 31 per cent next year - both these sectors are run by extremely goal-oriented ministers. Coupled with the aim for 100 per cent rural electrification by May 2018, the Budget takes job creation to the heart of distress - rural India. Under the current minister, the targets set for upgrading highways, though aggressive, seem achievable. The thrust on railway efficiency is a helpful driver for corporate India that reels under an average logistics cost of more than 10 per cent of sales versus the five per cent global comparable average. If we look at China, slowdowns have been countered by increasing infrastructure spends. But it is important to not just be China. Here in India, we are taking jobs to the heartland through rural development and security, creating confidence in the future of the rural consumer. With a statistical improbability of a third year of drought this year, rural consumption will once again be an important growth driver.
The last leg of growth is private capex. The government continues to court foreign direct investment (FDI) and buoyancy around MNC (multinational company) investments remains. Progress on ease of doing business is a big draw and Make in India is now a successful global brand. Local corporates will come to the table, too. Infrastructure spending and demand boosters will help increase capacity utilisation and help repair corporate balance sheets. However, this is the year of dusting off investment plans to go towards implementation. Private sector capex typically takes 12-18 months to kick in from government spending.
The immediate retort would be if bank funding is available? While the current recapitalisation looks small, the finance minister is committed as the ongoing cleansing continues. As the proposal to remove dividend distribution tax (DDT) in REITs (Real Estate Investment Trusts) gets approved, it will open credible avenues to monetize real estate assets of large state-owned banks and boost capital. Further, 100 per cent FDI in asset reconstruction companies and the pass through of income tax opens a way of dealing with stressed assets. Those who move with alacrity will thrive.
Yes this is a Budget that works because it is brilliantly prosaic!
The writer is head of corporate banking for India and member, global corporate banking operating committee, Citi
