A Budget with multiple focus areas
28 February 2015
This is a budget that can boost both infrastructure and manufacturing, which in turn, will create employment and augment India's competitiveness vis-à-vis its peers. By Hemant Kanoria, CMD, Srei Infrastructure Finance Limited
The finance minister has taken a very pragmatic approach and crafted a budget in a manner which can provide a boost to both infrastructure and manufacturing. This, in turn, will create employment and also augment India's competitiveness vis-à-vis its peers. These adhere to the prime minister's 'Make in India' vision.
The most encouraging step has been to relax his fiscal discipline targets slightly in order to channelise more funds for infrastructure creation. This is a very pragmatic approach as without a robust infrastructure sector the quest for a double-digit economic growth will only remain a pipe dream.
The finance minister realises that at this juncture India is in a 'sweet spot' due to a number of domestic and international factors and thus it is crucial to improve the ease of doing business in India in order to take advantage of the situation. To this end, a number of steps have been taken. The FM has committed to bring down basic corporate tax rate from 30 per cent to 25 per cent over the next four years.
Although he has not clarified the year-wise rates, this in itself augurs well for India to compete with other emerging economies where the corporate tax is low. The deferment of the GAAR by another two years will soothe foreign investors. The finance minsiter has also done well to tweak existing establishment rules to prompt foreign fund operators to relocate to India.
In particular, the proposal to cut down red-tapism by creating an expert committee which is to draft a legislation where need for multiple prior permissions will be replaced by a pre-existing regulatory mechanism is a huge plus for all businesses – the earlier this can be rolled out, the better. He has also proposed setting up of a task force to develop a sector-neutral financial redressal agency that will address grievance against all financial service providers.
The proposal to put in place a new comprehensive Bankruptcy Code by FY16 that will meet global standards deserves special mention. Allowing NBFCs access to ARCs under the SARFAESI Act is a big plus for players like us. All this while, NBFCs lacked a level playing field vis-à-vis banks.
The emphasis on public sector units to step up investments in infrastructure ha been very well received. An additional Rs70,000 crore has been earmarked for infrastructure.
Apart from increased outlays for the rail and road sectors, the Budget provides for mobilising resources for rail, road and irrigation sectors through tax-free bonds. Five new Ultra Mega Power Projects on plug-and-play mode have been announced. Public sector ports have also been encouraged to corporatise and get themselves registered as companies to attract investments and leverage the huge idle land resources that they have.
The finance minister also proposes to review the PPP format in order to strengthen it so that the private sector can become more active in infrastructure creation.
The mention of how the sovereign must bear part of the PPP project risks, reflects his seriousness on making PPP a success for India's infrastructure sector. In addition, he has announced the setting up a National Investment & Infrastructure Fund with an annual outlay of Rs20,000 crore from the centre, which augurs well for the financing of infrastructure given the fact that banks now have limited headroom to increase their exposure in infrastructure. We had been advocating the need for such a fund and I am particularly happy that the finance minister has acted on it.
The budget has a strong rural focus as well. The finance minister has looked into the needs of the rural sector which supports almost two-thirds of India's population and has stepped up investments in rural infrastructure like roads, housing, power supply, hygiene, water supply, cold storages - steps that augur well for the holistic development of rural India.
Increased allocations for agro-schemes, focus on enhancing effectiveness of schemes like MGNREGA, proposal to build a Unified National Agricultural Market and enhanced outlay for agricultural credit can transform the rural fabric if implementation is well thought through.
Encouraging foreign investment in Alternative Investment Funds (AIFs) and doing away with distinction between different forms of foreign investment is a positive move. Tax pass-through for Category I & II AIFs, rationalisation of capital gains regime for sponsors exiting at the time of listing of REITs and InvITs and pass through for rental income of REITs from their own assets are steps, which will hopefully bring in private investment into these funds.
In order to step up the country's infrastructure creation and to boost the manufacturing sector, these funds are very important, and therefore the changes in the tax structures of these funds, deserves to be appluded.
The Minister continues his emphasis on skill development as this can help the nation reap its 'demographic dividend'. The Budget has also announced steps towards encouraging entrepreneurship at both urban and rural levels which will lead to generation of more jobs and making our youth more self-reliant.
The abolition of the Wealth Tax is another positive step, so are the proposals on gold monetization scheme and sovereign gold bond. The service tax consolidated with the education cess now stands at 14 per cent (up from 12.36 per cent), which can neutralise the reduction on corporate taxes to some extent.
The finance minister has created disincentives for black money. I believe the tax-GDP ratio is going to rise as it will become very difficult to keep transactions unaccounted.
One area which seems to have escaped the finance minister's attention is the issue of MAT on Special Economic Zones. Some announcements on reforms pertaining to power distribution would have been welcome. Another area that would have helped infrastructure is the revival of leasing, which has become an empirically proven tool for infrastructure creation all over the world.
Leasing is confused by tax authorities both as a sale as well as a service and thus taxed multiple times, virtually eroding its effectiveness. For a country like ours where the majority of the infrastructure players are smaller contractors, leasing can be an extremely cost-effective tool in India's progress in infrastructure building.