India budget marred by funding gaps

THE first Budget of the new BJP government presented by finance minister Arun Jaitley distinguishes itself from the previous one in the boost it gives to financing the construction industry and its attempt to get infrastructure projects such as roads and power going.

It also has proposals it believes will boost employment, but is weak on support to agriculture. It also does not explain how it will finance its proposed projects.

While the finance minister promised to keep the fiscal deficit down at 4.1 per cent for 2014-15, he is targeting to lower it to 3.6 per cent next year and to 3 per cent the year after. With the fiscal deficit under control, the government can hope to suppress inflation, and, with that, lower interest rates and boost growth.

The budgeted expenditure is around 17.8 trillion rupees (S$367.4 billion), with net tax receipts of 9.8 trillion rupees, leaving a deficit of 8.1 trillion rupees, or 4.1 per cent of gross domestic product, made up by borrowings.

This is thought to be something of a problem, as it strives to meet the target that his predecessor, P Chidambaram, set in the interim budget in February.

Those figures are thought to be imaginative accounting, since his assumptions about revenue growth are seriously flawed: they show an unrealistic growth in revenue of 19 per cent in an economy where projected net growth (including inflation) is 13 per cent.

Mr Jaitley has neither explained how he will generate the additional revenue or how expenses would be cut. One option not mentioned is by large-scale privatisation of the public sector.

His ideas on how infrastructure would be funded are more practical. For the first time in India, he has proposed allowing Real Estate Investment Trusts (Reits). These would allow Indians to invest small in property without actually buying it, and create a paper property market that would enable many foreign investors in property to divest without making big losses.

Other infrastructure projects in power or ports would be financed by long-term loans from banks, which would themselves be permitted to raise long-term funds for lending to such projects with minimum regulatory conditions.

What Mr Jaitley did not mention in his Budget speech - but is part of government policy - is that power and coal projects that are stuck because of environment and land laws would be able to move forward because these would be bypassed.

Highways and roads are going to be well funded with some 380 billion rupees for the year to build 8,500 km of roads. Since these are mostly built on a public-private partnership (PPP), not all of this would come from the government.

What is really new in the Budget are the plans to create employment. The government plans to set up a fund with a corpus of 100 billion rupees for providing equity through venture capital funds, quasi equity, soft loans and other risk capital, specially to encourage start-ups by the educated young.

Besides this, other innovations are setting up backward and forward linkages between manufacturing and service delivery, a technology network to help first-time entrepreneurs, and a legal framework to enable small and medium-sized enterprises to make an easy exit in case they fail.

There is also a wish to revive manufacturing, though there is little in the Budget to indicate how this is to be done. One idea that was floated was to have a concessional tax rate for investments of over 250 million rupees; others include encouraging the production of LCD and LED TVs below a certain size by reducing duties, and protecting solar power manufacturers that have been hit by dumping by China.

The banking sector is also in a mess because of bad loans. Following Basel III norms, some 2.4 trillion rupees will have to be infused into these banks, most of which are public-sector ones. If the government is unwilling or unable to do this from its Budget, a simpler way is to raise the capital by increasing private holding in the banks.

A similar problem exists regarding public-sector units which require a capital investment of 2.5 trillion rupees in the current year. There is no way the government is going to be able to finance this and will resort to privatisation or greater sale of company shares. This is the only way that the government would be able to meet its deficit target.