Tuesday, July 22, 2014

A directional analysis of the maiden budget

The Modi government's first Railway and Union Budget  are a reflection of prioritizing promises made in the manifesto personally ratified by PM Modi during election campaign. Just like it was Arun Jaitley's maiden budget so is my analysis. The intent of writing this blog post is not to highlight the maze of numbers going into budget or aspects connected to bond and investor market, but to analyze the direction in which the Govt is headed. Of the 2 budgets passed the Railways was more path breaking than the Union Budget. The Finance Minister(FM) Jaitley had very little time and little financial resources to expand or initiate big reforms.
The maiden budget preparation time has been too short (around 45 days) and so to expect to do something from scratch in such a short time and that too with a new government in place is a lot to expect from. This was also compounded by the fact that the country is in an extremely messy and tough financial condition.

However, many well known economists have said Jaitley's budget was disappointing and called repackaged UPA's budget. It is true that Chidambaram said -"Modi talked about Congress Mukt Bharat, but he could not even do Congress Mukth Budget". It is true that lack of time and lack of money made the budget less revolutionary. However, no one denies that money has been allotted in the right sectors with right priorities. 

According to this article the NDA government added 59.9 million jobs between 1999-2004 mainly because of high expenditure on infrastructure of ports, highways and airports while UPA added only about 14 million jobs during the whole decade (2004-2014). While UPA increased subsidies in the form of farm loan waivers, oil and LPG, fertilizers etc it was expected that Modi's government would seriously think of reducing it. On the contrary it increased even more. It has to be observed that from 1999-2009 there were huge tax revenues for the government which both governments used to pay for subsidies (Source). To be fair it was NDA which started reforms giving huge tax revenues which UPA continued until 2009. During UPA II tax revenues saw a sharp fall, but the government went ahead with increasing subsidies without analyzing how to raise money for the purpose. The first budget of Modi's government was expected to increase growth despite the expected increase of fiscal deficit, but it appears that the government wants to balance both. Hence, the government retained many of the populist schemes of UPA, but has initiated the process of being pro-business.

So, here's the quick analysis of the sectors where Budget concentrated on and the direction in which these would go in the overall growth of the economy.

Regarding the power sector: Close to 80% of energy needs are still met by thermal plants and they already have reached a point where there is not much coal left. There is no proper coal distribution supply and linkage in the country today and neither is a Coal Regulator. Obviously, solar energy and other renewable energy must be tapped. Jaitley has alloted Rs.1000 crore to develop Ultra Mega Solar Power Plants in Rajasthan, Gujarat, TamilNadu and Ladakh which receive huge amount of radiation every year. I still remember the India Today Conclave Speech of last year when Modi highlighted a fact that in the intense hot regions of Rajasthan there is immense potential to tap solar energy and despite his written proposal to the then PM Singh no action was taken. Keeping this in view he has definitely asked Jaitley to allot money in such areas. Imagine if power from renewable energy reaches 30% from the existing 13% we would have added a lot of electricity to the grid. It is interesting to note while UPA's Jawaharlal Solar Mission Project's aim is to install 20GW by 2020 we are no where near that target until mega projects are actually taken off and, hopefully, this allocation will yield results. Customs Duty has been reduced for any equipment bought for this purpose. In the power sector Jaitley has also given a 10 year tax holiday on any firms that are willing to generate and start transmission by Mar 2017. This is a huge incentive that will propel companies to start getting into electricity generation and will aid in the direction of 24*7 electricity target. This Jyoti Gram Yojana that was called in Gujarat is now called Deen Dayal Upadhyaya Gram Jyoti Yojana. Further, an additional 500 Crore has been allotted to separate the distribution lines so that rural areas get high priority.

Regarding Highways: The government has promised to reduce the number of clearances and early resolution of disputes. Clearly, the government of the day knows that Public Private Partnership route (PPP) has not yielded much results and yet they have promised to reduce the disputes. It is amazing that 189 of 332 National Highway Authority of India (NHAI) projects in 20 states are struck due to disputes over environmental and legal clearances. This has scaled down our pace of roads despite huge improvement in national highway connectivity. It is beyond doubt that airports and national highways have been transformed in India, but highways require huge investment. The total length of expressways is minuscule compared to that of China. The big vision of UPA to have 44 expressways by 2022 has not taken off with just only 4-5 in progress. The problem is not lack of private builders but that of arbitrations that never end. We will have to wait and see if the government ensures the newly enacted Land Acquisition Act is amended to expedite these clearances.

Regarding Insurance: By increasing the FDI cap in increase to 49% (with full Indian Management through Foreign Investment Promotion Board. This  means any foreign company can set up its shop with 49% partnership and 51% Indian counterpart with Indian Management control). Jaitley has only increased the competition amongst insurance companies. There will be an increased capital inflow with companies willing to set up insurance markets on a massive scale now. This is a good sign.

Regarding Defence: Increased FDI to 49%. This is an area where Modi government failed to seize the opportunity despite the fact that the government wants defence manufacturing to be developed in India. For that more than 50% FDI with mandatory technology transfer must take place. This is a clear failure. However, it is not the end of the road.

Regarding Broadband in India's villages: This "Digital India" programme to provide broadband connectivity with the help of Indian hardware and software companies is a good step forward. This will spur the growth of home grown companies to contribute back to the society.

Regarding Ganga Rejuvenation:  There is no concrete plan yet to revive and rejuvenate Ganga river and around Rs.2000 crore has been set aside. Not sure where this money will go and if there will truly be a revival. For the past 15 years all the money spent on this has yielded nothing but zero result. This is the toughest gamble PM Modi has taken on behalf of his constituency. 

100 crore club projects: Continuing the trend of UPA's 100 crore projects, Jaitley announced close to 27-  100 crore club projects and they are listed here. Only time will tell if the money allotted to each of these programs is utilized with utmost sincerity.

Regarding Agriculture: The Government has decided to start a new mission to promote irrigation, a 24 hour news channel only for farmers, restructuring Food Corporation of India (a poll promise Modi made), loans to landless farmers, and reducing transportation and distribution losses and increasing efficiency of Public Distribution System (PDS). The announcement that wheat and rice will be provided at reasonable prices to weaker sections may not work on the ground unless PDS is improved. Nothing is new about improving PDS, but the fact is that a lot of money has already been spent on this and yet no changes are visible on the ground. There is no evidence that restructuring FCI would change things. Unless Agricultural Produce Marketing Act (APMC Act) is amended that allows farmers to sell to anyone they want to inflation cannot come under control and hoarding will not cease to exist. I, personally, am waiting when this act will be amended.

Regarding Goods and Services Tax (GST): This GST has been hanging around and struck in discussions despite its introduction and numerous discussions with all states since 2009. Jaitley disappointed on this since he only stated he wants to expedite it. The passage of GST and implementation across the country alone can increase GDP up to 2%.

Regards Railways: Railway Minister Sadananda Gowda's budget was a path breaking one. This was because for the first time a large sum of money has been alloted for building new tracks, improving freight transport, safety and cleanliness of stations. Modi's brain was clearly behind several of these announcements. To overhaul 10 major stations, concentrate on railway food safety and railway safety are welcome things to hear. FDI in railways is totally unheard of the Railway budgets till now. FDI is required and private participation is required to increase the track length, cleanliness of stations and freight corridor development. The Budget talked about outsourcing cleaning to private players in 10 major stations.

Most importantly, the bullet train from Mumbai to Ahmedabad requires huge investment which India can't even afford at the moment. My personal thought is that the PM Modi might seek Japan's help like in the case of Delhi Metro. When Delhi Metro was first envisaged everyone thought India can never get such a transportation system. Such negative thoughts have been proved wrong with massive metro constructions and openings in almost all major metro and several non-metro cities. Let us hope something serious on the ground happens within the next 3 years. Railway budget also concentrated a lot on increasing efficiency of online ticket booking from 2000 to 7200 tickets per minute, allowing platform tickets to be purchased online and to go paperless in 6 years. Some of the other friendly initiatives including ready-to-eat foods of reputed brands to be made available in trains, food courts of various cuisines to be set up in several stations, feedback of food quality through IVRS, battery operated vehicles for disabled people and many more. The starting of semi-high speed trains between several short distance cities in the next 1 year is a huge welcome although 160-200 km is still slow when compared to China and Japan.

It is just so shameful that of the 99 new lines announced only 1 has been completed correctly in the past 60 years and in the past 30 years, 676 projects were sanctioned and only 317 completed. Our sluggish growth has made our Railways 100 years behind current time. Hopefully this will change.

Regarding Smart Cities Creation: Rs.7000 crore has been allotted to develop smart cities which will be brand new and would avail the best of facilities an ordinary man would accept. This proposal is surely going to take forever since it is an investment that will not easily match the returns. Don't be surprised if this will not take off in the next 5 years.

Regarding start ups and young entrepreneurs: For the first time in a decade a special Rs.10,000 crore for early start ups has been allotted. 100 Crore for start ups involving rural youth, 200 Crore for SC/ST youths. This has clearly created one of the highest financial pools for start ups anywhere in the world. However, it remains to be seen how the local banks would provide these for the start ups and if there are simplifications in availing the same.

The first Budget disappointed regarding tax rules that were undone by UPA Government despite Supreme Court order of not taxing Vodafone for acquiring assets within India and abroad. Jaitley only promised to look at them under the guidance of Central Board of Direct Taxes. Such taxation rules will discourage investment and seriously must be amended.

At the end of the day this government cannot be judged by this Budget since this is a beginning and the country's finances are in such a mess that big initiatives can't be easily taken. The Government appears to be fairly serious about amending Land Acquisition, Labor Laws and APMC Acts. Unless these 3 laws are amended and passed there is no hope for growth to pick up steam and neither will manufacturing pick up easily. It is therefore paramount to see these legislations pass through.

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