The decline in investment growth from 16% to 6% will not work for an
economy that has the potential to grow at 9% per annum.
The need of the hour was to revive investment growth to at least 10% per annum. Under the RBI’s vicious monetary repression (high interest rates and liquidity crunch) investments from a high growth of 16% had declined to under 6% which won’t work for an economy that has potential to grow at 9% per annum. As a share of GDP, it has fallen steeply by over 5% points.
The budget missed out on the opportunity to give an investment tax credit to industries. Instead, it has come out with a huge increase in indirect taxes -20% (excise and service taxes from10% to 12%), which is not opportune since this would be a premature exit from the stimulus.
The most heartening measure is the commitment to direct cash transfers. Direct endowment subsidies are necessary in a number of sectors - oil, fertiliser, food and electricity. Unfortunately, only fertiliser and food are planned to be covered. The devil here lies in the details. It is important to have the right design since otherwise even endowment subsidies can be made to fail in India. The off-budget borrowings would increase, given the increase in the limits for tax-free bonds to be raised by many organisations.
While the support to infrastructure, power, agriculture equipment, and clean energies is necessary, the choice of instruments - import duty and excise concessions- mess up the tax regime and increase the scope for discretion, misrepresentation and litigation by bringing about complexity in the tax system. Despite the slew of measures to raise agricultural output and improve food processing, food output would not rise sufficiently to meet the demands created by increasing outlay on NREGS and the linking of NREGS wage rates to inflation since, this indexation would suddenly bring on increased food demand from a hitherto hungry 15-20% of India population. That would necessitate a universal rationing solution.
Much in the coming year would depend on the RBI. If it chooses to improve liquidity and reduce rates, growth may well revive and the budget will achieve its targets. If not, the coming year may well see a lower growth. FDI would depend upon growth more than signals while these like opening of multi-brand retail are important.
— Prof Sebastian Morris Indian Institute of Management, Ahmedabad
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