The Indian economy is still under stress. Budget 2015 can be the stress buster. In the last nine months, the aura of Prime Minister Narendra Modi has improved industry and foreign investors sentiments and propelled the stock markets to new heights. Fortune too has supported him with global crude oil prices declining by over 50 per cent and touching a historic five-year low. But the economy has not gathered as much steam as was expected.
Team Sunday Standard has highlighting nine stressed sectors that should be addressed by Finance Minister Arun Jaitley, in his forthcoming budget. These sectors have the potential to crank up manufacturing, create jobs that in turn spur demand and become the much-needed spring board for the economy to bounce back.
Weighed down by the constraints of fiscal deficit, the government needs to take those ‘special steps’ to boost public spending on infrastructure and initiate measures to rationalise subsidies. The government should also pay heed to the suggestions of the Expenditure Finance Commission that suggests rationalizing subsidies and public expenditure. It should aim to reduce its subsidy bill for oil and fertilisers that drains the exchequer of lakhs of crores of rupees.
With a slimmer oil import bill, coupled with higher gross budgetary support, the finance minister will have the elbow room to allocate more resources for infrastructure assets and schemes to reduce poverty.
Cheap capital and a conducive tax environment, both for investors and the masses, will help the economy get back on growth trajectory. To provide a much-needed fillip to Prime Minister Modi’s ambitious ‘Make In India’ programme, Budget 2015 needs to primarily focus on infrastructure, power, auto and healthcare.
Take a look.
Since the deregulation of insurance in 2000, the sector has grown rapidly but India remains under-insured. Penetration level has dropped to 3.9 per cent as of March 2013 from 5.20 per cent in 2009, and 4.8 per cent in 2006. Every budget has promised a higher FDI limit but has not delivered. In the 2015 Union budget, parliamentary approval of FDI could provide a boost. Foreign investors could bring in as much as Rs 25,000 crore into local ventures, according to estimates. “Passing the FDI bill will remove uncertainty in an under-insured country, and open up sources to a sector that needs large investment,” says G Murlidhar, managing director at Kotak Life Insurance, adding, “Inviting foreign capital will be very welcome and useful.’’ As the government pushes ahead with Jan Dhan Yojana and plans insurance cover for more people, insurers will need much more capital to educate policyholders and sell products. As the country seeks to increase savings, insurance could provide a steady source of long-term saving that is critical for building infrastructure.
Stock markets are seen as a barometer of where the economy is headed. Benchmark Sensex gained about 30 per cent in 2014 on the optimism that the Modi government would bring faster approvals, legislative changes and growth. The budget of July 2014 promised to enact Indian Financial Code, and to have a single demat and KYC, to liberalise ADR/GDR, introduce a liberal Bharat Depository Receipt, make corporate bonds market vibrant and liquid, and propose convergence of Indian accounting standard with International Financial Reporting Standards. According to Sundeep Sikka, president and CEO of Reliance Capital Asset Management, the budget 2015 must focus on robust improvement of infrastructure, manufacturing and employment, leading to stronger consumption. That will be a positive budget and lay the foundation for growth for the next 3-4 years. Crude oil prices that halved last year and disinvestment will help the government keep fiscal deficit in check. He expects a 15 per cent gain in capital markets. The Sensex is currently hovering around 29,000 points.
Banks are a microcosm of the economy. The responsibility of public sector banks (PSBs) gets more onerous as they fund sectors key for the economy even though they may not be very profitable. The SBI group had gross NPAs of Rs 62,778 crore, while the rest of PSBs had another Rs 102,227 crore and private sector banks had Rs 21,070 crore. With large exposure to infrastructure and basic industries, most PSBs are grappling with bad and doubtful loans following slow economic growth and inertia in government approvals over the past few years. The July 2014 Budget proposed six new debt recovery tribunals to deal with NPAs, and steps to revive other stressed assets. It proposed flexible structuring of infrastructure loans, exemption from CRR, SLR and priority sector for raising long-term funds for infrastructure and higher public shareholding in PSBs among other things. VR Iyer, chairperson of Bank of India, says in the 2015 budget, the government will need to make fresh capital infusion, ease tax rates and structures, permit banks non-traditional routes for raising capital, and help projects in trouble.
According to a World Bank report, India’s power remains inadequate with nearly 300 million households still living without electricity. The sector had to be bailed out twice, with Rs 350 million in 2001 and Rs 1.9 trillion in 2011. Annual losses for the sector could reach $27 billion by 2017 as the sector’s total debt was over $77 billion in 2011. “We are hoping that the NDA administration goes ‘Big and Bold’ to boost the renewable energy and power sector and is not avert to funding one-off ‘novel’ projects,” says Raj Prabhu, CEO Mercom Capital Group. Industry experts feel that unless financial situation of the discoms are fixed, there will be little interest in investment into the sectors requirements which runs in several trillion. Previous budget allocations include the Deen Dayal Upadhyaya Gram Jyoti Yojana at Rs 500 crore; Clean Thermal Power preparatory work at Rs 100 crore; New & Renewable Energy at Rs 500 crore and Solar powered agricultural pump sets at Rs 400 crore, and Development of 1 MW Solar Parks at Rs 100 crore. Low interest funding for these projects and a payment guarantee mechanism to back PPAs signed by discoms will have instant impact.
The biggest impediment in the automobile sector is the high interest rates. These go from 11 to 12 per cent in the public sector banks to 15 per cent in private banks. “Increasing GDP growth to 7 per cent by checking the fiscal deficit and other factors will automatically ensure growth of the automobile sector,” says Abdul Majeed, auto expert at PwC, and adds that simply cutting excise duty will not bring back ‘customer confidence’. The ‘real boost’ expected by the industry is a clear road map for GST. High cost of new cars has pushed sales of used cars which is now expected to hit over 15 per cent growth this year. Majeed says other factors like bringing down import duty and incentives to replace ageing CV fleets will not only help the industry but also address environmental concerns. Jaitley has earmarked Rs 50,000 crore for transport as well as addressing other infrastructure projects in urban areas. In the interim budget (February 2014), the UPA government had allocated Rs 14,873 crore for JNNURM scheme which involved the purchase of upto 10,000 buses.
With a requirement of over $1 trillion for the 12th plan period (2012-17), changes will have to be quick and effective at all levels to boost the infrastructure sector. “Many projects have been stuck for some time now and until this is cleared, new projects cannot come up. The money of lenders is stuck too and they are apprehensive about lending any further,” says Vishwas Udgirkar, infrastructure expert at Deloitte, adding that unless a boost is given to the financial sector, things cannot change much in infrastructure. The government must come up with hybrid PPP projects. Initial funding is proposed to come from the government as the traditional PPP scheme has not fared well, according to Udgirkar. Stating that India faces domestic challenges in this sector, the finance ministry’s mid-year review said, “The most important among them relates to the experience of the last few years that led to over-exuberant investment, especially in infrastructure and in the form of public private partnerships (PPPs). The review states that nearly 60 per cent of stalled projects worth Rs 18 lakh crore (13 per cent of GDP) are in infrastructure.
India’s services sector needs a push on the investment front with industry players expecting the government to announce measures to attract foreign investments. FDI inflows to the top five sectors, including construction, declined sharply by 37.6 per cent to $6.4 billion in 2014 compared to an overall growth in FDI inflows at 6.1 per cent. Similarly, India’s share in world services exports, which increased from 0.6 per cent in 1990 to 1.1 per cent in 2000 and further to 3.3 per cent in 2013, has been increasing faster than its share in world merchandise exports, according to the Economic Survey 2014-15. While exports of software services, accounting for 46 per cent of India’s total services exports, decelerated to 5.4 per cent in 2013-14 from 5.9 per cent in 2012-13, travel, accounting for a nearly 12 per cent share, witnessed negative growth of 0.4 per cent. “We need monetary incentives so that companies can invest in research and development and can develop outstanding software products. Allowing FDI in ecommerce will spur the sector,” says BVR Mohan Reddy, VP, Nasscom.
Currently, a weighted tax deduction of 200 per cent is permitted on in-house R&D expenditure like clinical trials. But there are no tax benefits for those engaged in contract R&D or undertaking R&D for group companies. The previous budget had nothing significant for the pharma sector. “We have the requisite manpower and can build necessary infrastructure to undertake research and innovation and the government should incentivise R&D activities to attract and encourage drug discovery programmes,” says GV Prasad, co-chairman & CEO, Dr Reddy’s Laboratories Ltd. Industry analysts feel that measures like this can help the government and the industry capture at least 15-20 per cent of the world’s R&D pipeline by 2020 to emerge as one of the top five countries doing drug discovery. The industry is also seeking tax incentives on instruments and equipment imported for analytical and R&D use. Lastly, companies want removal of MAT in SEZs, revision of service tax on drug testing and regulatory clarity on drug price control for essential medicines, which eroded margins last year.
The sector needs infrastructure status to bridge the gap between demand and supply and achieve a desired bed density of 2 per 1,000 population by 2025. The sector is expected to attract $86 billion investment, a bulk of which is likely from the private sector or through FDI. Currently, more than 74 per cent of the healthcare infrastructure investment is by the private sector. Industry also wants tax holiday benefit to hospitals set up in urban areas. The interim budget in July 2014 had given ample thrust to the sector with key announcements like setting up of four more AIIIMs, 15 model rural health research centres, a proposal to add 12 government medical colleges, two National Institutes of Ageing at AIIMS, New Delhi, and Madras Medical College, Chennai, a national level research and a referral institute for higher dental studies and e-visas that could aid medical tourism. “Increase in GDP allocation on healthcare will help the government achieve its vision of universal healthcare and reduce out-of-pocket spending for common man,” says Dr Shashidhar Kamineni, Founder, Kamineni Hospitals.