Budget 2014 has no major policy turnarounds. Instead, it lays the foundation for big reforms in the months ahead
The Union Budget is certainly not too glossy and glamorous but it is balanced and gives a sense of direction to the economy. It lays the base for a whole set of reform measures that will come into place around the next Budget.
One of the key sectors given a much-needed boost is the infrastructure. The inadequacy of quality infrastructure at internationally competitive prices handicaps the development of the economy. It was imperative to pursue infrastructure reforms with rigour. Six key infrastructure and core industries (electricity, crude oil, the petroleum refinery products, coal, steel and cement) have a weight of 26.7 per cent in the Index of Industrial Production.
Also, the Government has given equal emphasis to all physical infrastructure segments — roads, rails, ports and aviation. It has allotted Rs37,000 crore for national highway development and Rs14,389 crore for the development of roads. It has announced 15,000km of pipeline to be developed through public-private partnership to complete the gas grid, Rs500 crore for solar projects, the setting up of ultra-modern solar projects in Rajasthan, Tamil Nadu and leh and also allocated Rs100 crore for preparatory work of a new scheme on thermal power technology.
Aviation infrastructure in India has grown by leaps and bounds in the last decade owing to the increased demand in both passenger and freight traffic. Several airports have been revamped and expanded in the PPP mode in the last few years. In continuation of that, the Budget has envisaged development of airports through the PPP mode in all Tier-2 and Tier-3 cities. Also special economic zones will be developed in Kandla and Jawaharlal Nehru port at Navi Mumbai. A comprehensive policy to promote Indian ship building is also in the works.
A key element of the Budget is the novel step taken by the Government to increase infrastructure spending. The Budget has allowed banks to issue long term bonds without subjecting them to cash reserve ratio and statutory liquidity ratio for financing infrastructure.
Even in the context of foreign direct investment, India is a major loser due to underdeveloped infrastructure. As the NK Singh Committee rightly points out, India is handicapped in attracting export-oriented FDI due to lack of quality infrastructure prices. However, the Government has raised the FDI limit in select sectors such as insurance and defence manufacturing and promised several measures to boost India’s external sector.
Giving a fillip to the manufacturing sector is another need of the hour. The Government will provide investment allowance at 15 per cent for three years to a manufacturing company which invests more than Rs25 crore in plant and machinery. It has also announced FDI in manufacturing to come in via automatic route, apart from increasing FDI in insurance and defence manufacturing to 49 per cent. All these measures are expected to give a boost to trade and manufacturing and thereby fuel growth in the economy.
The focus of the Budget is to revive investment and investment sentiments. Higher levels of investment have to be supported by a sufficient expansion in domestic savings to bridge the investment savings gap, which is also the current account deficit, which has increased since the global financial crisis.
The gross domestic savings ratio has reached 31 per cent of the GDP in 2013, from 37 per cent of the GDP in 2007. The change of composition of household savings, leaning heavily towards physical savings from financial savings, has made matters worse. High inflation has eroded the ability of households to save, and much savings went into unproductive investments such as gold and real estate, in an attempt to preserve the value of assets.
In this context, the Finance Minister’s decisions to increase the tax exemptions limit, hike the taxable income limit and allow tax exemption on housing loans are encouraging and will incentivise financial savings.
Given the current economic situation, the Government has rightfully focussed on infrastructure and manufacturing, with a view to bringing back the economy on a high growth trajectory. There were no big reforms and no major policy turnarounds. It was a Budget of small and tentative steps to help steady the ship and lay the foundation for big reforms.