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Honourable Finance Minister Arun Jaitley set the tone for the upcoming budget by adding that "mindless populism" in policymaking needed to be checked. His comments will add to expectations that this Govt. could unveil tough fiscal consolidation measures to revive the sagging economy in his first annual budget on July 10.
Expectations are that the government will use the Union Budget to create an environment, which is conducive for growth. The idea will be to drive GDP growth to over 6% in FY16, and further accelerate it to 7-8% in ensuing years. Higher growth will help create new job opportunities. The following steps could be in offing to propel growth:
Support for the manufacturing sector: The new NDA government is likely to initiate meaningful steps to infuse life into the manufacturing sector: both organised and small scale industries. Steps are expected to trigger growth in many sectors, which include auto and auto ancillaries, consumer durables, electronics, etc. For instance, there can be various changes to correct anomalies in the import duty structure.
Thrust on project implementation: There are Rs 20trn worth of projects facing execution issues. The government is looking to accelerate execution by removing obstacles, which can kick-start economic growth. While most steps are not in the scope of the Budget, we believe the Budget speech will lay special emphasis on this issue.
Thrust on FDI – A Wild card: Foreign direct investment in defence is an area where a lot of action is expected. While Indian Inc is opposed to 100% FDI in defence, there is hope that 74% would be allowed, with conditions on ‘technology transfer'. There are expectations that the government will encourage Indian private defence equipment manufacturers, which will boost manufacturing growth.
Tax reliefs for the ‘aam admi’: The Centre is likely to provide relief by way of tax exemptions to the common man, thereby creating a positive demand environment in the economy. This may include increasing the tax exemption limit, raising the tax benefit on medical and housing loans, etc. Higher disposable income in the hands of common man will boost demand for consumer discretionary items.
Policy initiatives that will boost the government’s credibility
Containing the fiscal deficit: Paring down the fiscal deficit in a sustained manner and maintaining it at a level conducive to India's economic environment is a necessity to bring down inflation and interest rates. The government will maintain the 4.1% level as targeted in the Interim Budget.
Inflation: The reasons leading to food inflation - supply constraints, archaic laws, hoarding, and speculation - are well known. Steps taken to arrest these issues will be a welcome move by the govt.
Structural reforms in LPG and kerosene: Subsidies led to a drain of 2.2% of India’s GDP in FY14. Total outlay on food, fertiliser, and fuel subsidies is expected to touch INR2.5trn (over USD40bn). Reforms in oil sector have been the most aggressive steps taken by the previous government, and progress on the same is widely accepted. Lowering the LPG cylinder cap to nine from 12, and resumption of Direct Benefit Transfer will be viewed positively by the market. Complete diesel deregulation and DBT for LPG alone can result in FY16e under-recoveries falling to INR650bn.
Clear road map for the Goods and Services Tax: Implementation of GST will significantly improve economic growth. The NDA has been a votary of GST, and there are expectations that the government will lay down a concrete road map for its implementation.
Banking sector reforms: Total stressed assets in the banking sector will touch 14% of loans by Mar-15. Now, the focus has shifted to what the Centre can do to fix the large non-performing loans and restructured book of state-owned banks. In this environment, creation of a separate sovereign entity - National Asset Management Company, which can acquire bad assets from banks, will be seen as path-breaking.
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