THE PRUDENT PATH TO GROWTH
With the hype and hoopla that has come to surround the Union Budget in India out of the way, the more substantive business of rebuilding industry, investor and consumer confidence has resumed. While it may not have whetted the hungry stock market investor’s appetite for the pomp that usually accompanies dramatic moves to stimulate market sentiment, the new government wins on account of its consistency with stated goals. By clearly outlining a growth path, it has reassured ratings agencies, international investors, domestic business and individual tax-payers that it will play the balancing act that long term growth and stronger fiscal health demands.
Our sectoral experts have enumerated the developments and announcements that most closely impact individual sectors. Overall, the move towards rebuilding the economy and setting it on a path of sustainable growth are bigger positives that underscore the continued move towards inclusive development. At the same time, realistic revenue goals while also retaining a focus on supporting the agricultural and manufacturing sector have been made possible by levying a gradually rising burden on the service sector to reflect its proportionate share of GDP, focusing on divestment proceeds and a reduced fuel subsidy bill on account of sliding crude prices.
That said, the economy will have to wait for a slower recovery given the budget’s focus on infrastructure investment rather than a one-sided preference for stimulating demand through tax cuts. This shows a more mature stance and a leaning towards longer term reform rather than short term populism. In the following pages, each of these announcements are listed and their sectoral linkages outlined. In addition to the sector specific announcements whose implications for government revenues and industry are self-evident, our assessment is that the following developments are also far-reaching with a bearing on the future:
Devolution of decision making to states: The tenfold increase in disbursement to states equates to nearly 1% of GDP that will result in the government spending nearly half of its fiscal stimulus through the states. This is a dramatic shift that could change the way an electorate interacts with its government. Provided state governments focus on key investments like power distribution, affordable housing, health and sanitation and infrastructure, instead of freebies doled to appease vote banks, this can transform the way consumers perceive tangible change and progress. This in turn can help tax payers feel more confident about the future and consequently, spending.
Funnelling of savings into investments rather than consumption: By creating tax free bonds to attract private investment into infrastructure, incentivising investments in health and life insurance and pensions and creating initiatives to monetise the Indian penchant for storing value in metal gold, the budget has initiated a move towards productive savings. The creation of a social security net that includes both insurance for those most in need of it and a pension scheme to cater to the longer term needs of India’s burgeoning elderly population, can help envision a very different future for India’s citizens.
Incentivizing non-cash transactions: Though thin on details, the Finance Minister’s explicit focus and proposal to introduce several, yet-to-be detailed measures to incentivizing credit and debit card transactions is a slow-burn revolution in the making. Combined with the impetus to payment banks, the creation of bank accounts for 125 million unbanked households, a surging telecom infrastructure and a continued focus on bringing more money into the formal economy through clamps on black money, this may mark the beginning of a very different consumer economy. With consumers empowered to carry and transact more easily, this bodes well for the way in which consumers across the income spectrum purchase goods and services.
Admittedly, some of the moves to stimulate the economy sustainably over the long term need greater detailing and a hard-nosed focus on execution to realise their benefits fully. Nonetheless, the Union Budget manages the tight rope walk with aplomb in a well-intentioned roadmap to economic growth, albeit with a slightly longer time-frame than businesses would have hoped. If patience is a virtue, now will be the time for Indian industry to test themselves on it.
For industry specific details download the full report (top right).