Union
Budget – Challenges and Options – F 18
India
is entering a phase of lot of challenges today, arising from developments around
the world and in the Indian Economy. The New president assuming office in US
has created lot of uncertainties for our IT , Pharma sectors and investments
from US to India and India’s Exports to US.
The
UK’s likely exit from Euro zone poses challenges for corporates which are
operating in Europe.
The
increase in commodity prices and oil price is a risk. Every $ increase in oil
price, will increase the trade deficit by $ 1.4 bn and the government has to
give an additional subsidy of Rs.1500 cr for every $ increase. If the Customs
and Excise levies are kept at the present levels, this will increase the
consumer inflation.
The
demonetisation is a bold and progressive step by government but in the Short
and Medium terms, the potential growth of the Indian Economy has come down and
this year as per estimates China will regain the position of fastest growing
large Economy in the world.
The
advantages of demonetisation / digital economy are : Higher Tax collections, small Black Economy , less terror
Funding, less fake currency , Higher Value Added for reporting ( GDP ) , Prevention
Cross border Crimes , reduction of domestic crimes will come down and protection
of environment.
The
advantages of Cash transaction are It is the most common way of payment around
the globe .1)cash does not involve third-party action for its immediate
conversion into other forms value, 2)Cash requires no authorization for the
person who carries it 3) Easy
to make small payments,4)Feel Secure having cash , 5)Major form of Working capital
for small firms 6) Accepted by Any one, any time, any where 7) Most liquid form
8) alleviate
the risk of identity theft. 8) The use of cash does not involve any transaction
fees 9) can foster good spending habits 10) Cash is 'easy-to-carry' form of
payment 11) Cash payment does not require additional knowledge .
The
fact is that, cash transactions in large economies are very high in China and
Japan more than 90% and in US more than 50%. In countries around the world ,
the investment in sectors, where returns from investments are sub par, are
supported by the cash economy where ROI is not the major consideration.
For
a balanced growth of the economy both Digital and Cash transactions are
required.
The
demonetisation has already affected most of the sectors in the economy and SME’s
are the most affected in a big way. The banks received higher deposits and they
are in a comfortable position to lend . They had already reduced the interest
rates. But the new NPA’s are likely to come from SME’s.
Government
has seen a good increase in tax collection and this is likely to continue.
Demonetisation has already had an effect, similar to the one which could have
been achieved by GST.
The form
of GST which is being talked about is one different from the initial concept,
and many rates are being discussed and many exemptions are being considered. In
the revised form, it may not fulfil the intended objectives and on top of
demonetisation, it could reduce the growth rate further.
In
the light of above, Government could consider the following while preparing the budget.
- The
GDP growth objective for the year could be 8%.
- Higher
Tax collection could be focussed on those who are still not on the tax net
and focussing on the top 500 industrial / trading centres, the objective for
higher Direct and Indirect tax could be achieved.
- Since
already more have come into taxation net after the new measures by
government, the corporate and Individual tax rates could be reduced to
28%.
- Through
increased efficiency in tax administration , set a target to increase the
tax collection by 20%.
- Due
to increased level of Digital transactions, the banking model will undergo
a change. Banks will lose one of the fee based incomes. Further, new
exposure norms to large corporates will restrict the exposures to large
corporates. The banks could focus on Government employees ( whose
purchasing power has gone up due to pay commission recommendation
implementations ), Retail customers and Micro Finance Institutions ( right
now banks mostly lend to MFI’s and MFI’s in turn lend to groups. Instead
of that a provision could be made for banks directly to MFI’s through
creating a new SBU for MFI’s within Banks).
- The
capital expenditure in the Corporate Sector and Infrastructure is yet to
take off. Special incentives could be considered for kick starting the
Capital investments, investments in Mining and other infrastructure
sectors. Already lot of initiatives were taken in the Road sector. On the
similar lines, enabling mechanisms could be created.
- To
generate , more non tax revenues, as one option, The share holding in
PSU’s , PSB’s above 75% could be sold in small lots through secondary
market for the PSU’s / PSB’s which are listed and those who are not listed
and have basic conditions for listing could be listed and 25% of shared
could be sold.
- In
each PSU / PSB through demerger, create Real estate subsidiaries. In the
case of listed entities, even the other share holders will get the share.
Then through sale / sale and lease back, lease , Invit, Reit, capitalise
the value of the real estate properties.
- Create
provisions for easy issue of Municipal bonds in India.
- Consider
sale of Central government properties in prime areas with a target to mobilise
at least Rs.20,000 cr through this route.
- Target
a reduction of 25% in overall subsidies through Direct Benefit Transfer
and micro – targeting of beneficiaries. Within a period of four years, set
a target to stop all the subsidies.
- Since
Individuals and SME’s are affected in a big way, measures to support these
segments including increasing tax slabs , introducing more incentives for
investments could be considered.
- Since
the investment requirements for Infrastcuture and Industry growth are very
high, the incentives available to Foreign Investors and Indian Investors
should be continued. Any change in policy in this regard , will further
increase the uncertainity.
Railways
·
This year, the railway budget would be merged
with the General budget.
·
The
government can consider creating a special fund and the tariff structure could
be restructured in such way that, on an average for each journey, Rs.10 for
investing in the equity capital of
Railway infrastructure corporation could be earmarked. The fund could be
called Railway infrastructure development fund.
·
The
amount collected would be Rs.8150 cr a year. This can be used to invest in
additional capital of IRFC.
·
When
it is routed through the fund, the fund has multiplier effect. That is the
Corporation can borrow at least 6 times the additional capital. That is 48,900
cr.
·
The
total amount mobilized would be Rs. 57000 based on the present numbers.
·
Assuming
a growth of 5% every year, the total fund which could be mobilized for the next
10 years could be Rs.7,20,000 cr.
·
For
the next five years, Rs.250,000 cr could be mobilized through this route and
the remaining will come from other funding sources.
·
After
the demonetization, there is an increased interest by pension funds to invest
in India. Hence, IRFC can issue development bonds and SWF’s and Pension funds
from abroad will invest in these bonds.
