View: Budget begins the race to a $5-trillion economy
Remarkably, the government did not lose the ball on fiscal prudence.
The FY20 budget was the first step in operationalising the Prime Minister’s vision to take India to a $5 trillion economy by 2025. Against the backdrop of the massive mandate, the budget is patently growth oriented and balances the needs for meeting expectations of almost every set of stakeholders.
Remarkably, the government did not lose the ball on fiscal prudence, a feat which will surely be rewarded by investors. The Budget has three notable features.
First, multiple strategies are proposed to revive growth, the predominant one being infrastructure spending, with spends of Rs 100 lakh crore envisaged over five years. Affordable housing is another, with expansion of the scope of tax benefits on investments in affordable housing which will help both construction and in increasing disposable incomes of beneficiary households. The phased reduction in corporate tax rates continues, with an increase in the cap on companies eligible for the lower 25% rate. Improved compliance is expected to partially offset the resultant lost revenues.
Second, in addition to monetising existing assets through Invits, REITs, TOTs, CPSE ETFs, etc, and continuing disinvestment, a couple of path breaking proposals to raise additional resources have been proposed: One, the effective dilution of the 51% floor in government holdings in CPSEs by including the stake of government-controlled institutions. Two, considering India’s low sovereign debt to GDP ratio, part of its borrowing would be in external markets in foreign currencies. With appropriate risk mitigation, this will reduce pressure on domestic markets. In addition, multiple measures have been announced to enhance the flow of foreign currency funds into India. With a large amount of global debt at very low yields, foreign investors are likely to find the existing, cash generating assets quite attractive.
Third, availability of credit and finance is an important component for reviving investment. Recapitalisation of public sector banks (PSBs) is an important step in boosting bank credit flows. The partial credit guarantee to PSBs for buying high rated pooled assets on NBFCs will enable liquidity for sound intermediaries. Allowing all NBFCs to participate on TReDS will reduce working capital costs for MSMEs. In addition, keeping the borrowing programme in check will enable a gradual drop of sovereign interest rates.
The expected slowdown in the global economy will present its own challenges, but also keep crude and commodities prices moderate, which will help to keep inflation in control and open up room for further monetary policy easing. The fiscal stimulus embedded in the Budget proposals will help in crafting a coordinated response in reviving investment and growth. Execution, as always, will be key to achieving the $5 trillion goal. The budget proposes multiple initiatives to improve Ease of Doing Business environment. This will also have a direct impact not just on investor confidence, but also towards improvements in process and system efficiency.
(The author is CEO, Axis Bank)