a balanced road to reform for india -- apco analysis of india's 2015 budget

7/21/2019 A Balanced Road to Reform for India -- APCO Analysis of India's 2015 Budget

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BALANCED ROAD TO REFORM FOR INDIA

Indian Budget: Did it meet expectations?

The Modi government’s landslide victory last May raised expectations among many for ‘big bang’

liberalizing reform. The interim budget in July last year came too early to spell out a clear road map

and focused only on incremental reforms. Over the last year, expectations built that this year’s budget

would echo the big-bang reforms of 1991 or 2000. Adding to mounting expectations has been the

strong performance of the BSE SENSEX (Bombay Stock Exchange Sensitive Index), which emerged as

the second best performing stock market in 2014. Government critics, on the other hand, feared that

the government would lurch to the right and pursue growth at the expense of human development.

Amid such expectations and fears, ‘Team NDA’, from the governing National

Democratic Alliance (dominated by Modi’s BJP), has chosen a middle path of

reforms which strikes a balance between center-state relations, business-

friendly policies and strengthening the social security environment for India’s

citizens. While the budget lends overwhelming support to Modi’s flagship

initiatives, it was Finance Minister Arun Jaitley, who shaped its form. The

lawyer-turned politician has often been heralded as someone who is respectedacross party lines and has built a reputation as being the go-to man for Modi. Along with Jaitley, the

Harvard educated Minister of State for Finance Jayant Sinha and former IMF economist Dr. Arvind

Subramaniam, chief economic advisor (CEA) have emerged as rising stars in Modi’s finance portfolio.

India grows when the states grow

No budget has transferred this magnitude of financial resources to

the states as much as this budget has done. Mr. N.T. Rama Rao, the

former chief minister of the state of Andhra Pradesh, had often

been quoted saying ‘the Center (Federal Government) is a myth’. As

a former chief minister himself, Modi has seen how the policydecisions taken at the federal level are at times detrimental to the

interest of the states. The NDA government moved to abolish the

Nehruvian-era Planning Commission and replaced it with an organization called NITI (National

Institute for Transforming India) Aayog, which gives all state chief ministers a say in policy-making.

Interestingly, the top states that have benefitted from this initiative include Bihar and West Bengal

both of which are non-NDA ruled states, which are heading for elections in the coming years.

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Distribution of Government Revenue



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Improving the ease of doing business in India

While the interim budget last year committed to provide stable and predictable tax regime which was

received well by investors, there were strong expectations from the business community over cutting

red-tape, simplifying tax laws and promoting a gradual shift toward a unified, national Goods and

Services Tax (GST) with the potential to make India a true single market.

True to expectations, the budget has aimed to create a business friendly environment. India has

proposed to reduce its corporate tax rate, which is amongst the highest in the world, from 30% to 25%

in next 4 years. This is comparable to ASEAN countries’ average corporate tax, which is at 21.9%. The

deferment by two years of the General Anti-Avoidance Rule (GAAR) brought about by the Congress

Finance Minister Mr. Pranab Mukherjee should come as a huge relief for foreign investors. The budget

also paints a vision towards a pre-existing regulatory mechanism instead of a system of priorpermissions.

Narrowing the deficit: Investors across the world often worry about India’s commitment to fiscal

discipline. When Jaitley promised to stick to a 4.1% fiscal deficit target during last year’s budget, it

raised many eyebrows. Luckily, the crash in crude oil prices has ensured that this target is met for the

current year. The medium-term objective of 3% fiscal deficit seems to be in-line with the estimates of

the CEA.

Growth and development

This budget also allayed fears of critics who believed that this

government would focus only on growth and not on social

development. Though more could be done to improve social development parameters such as child

malnutrition and primary education, this budget has built thin outlines for a social security system for

Indian citizens. It also calls for the creation of a senior citizen welfare fund and incentivizes citizens to

opt for health insurance.

Modi has often criticized social welfare schemes such as the Congress Party’s flagship Mahatma

Gandhi National Rural Employment Guarantee Act (MGNREGA) as being “a living example of Congress’

failures”. But the budget has actually promised to strengthen such schemes, highlighting the fact thatpolitical consensus and democratic compromise continue to shape decision-making. This likely

suggests that changes to such schemes will be incremental in the years ahead.

‘Need to cut subsidy leakages,

not subsidies themselves’-Mr. Arun Jaitley



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Focus on key sectors

INFRASTRUCTURE

Key Announcements

• Proposal to increase investments in infrastructure sector by USD 11,667 million in 2015-16

over the year 2014-15, with a focus on railways and roads

• Annual flow of USD 3,334 million have been earmarked in the budget to set up NationalInvestment & Infrastructure Fund (NIIF) and USD 4,167 million have been allocated to Rural

Infrastructure Development Fund

• The government proposed to set up 5 ultra-mega power projects, each producing 4000MW

• PPP model for infrastructure development to be revitalized and the government will bear

majority of the risk

Insight

• The government’s focus to provide boost to infrastructure sector through significant

investments augurs well with ‘Make in India’ campaign. NDA government has a high-track

record of delivering promises in this sector.

INFORMATION TECHNOLOGY AND TELECOM

Key Announcements

• Removal of the Special Additional Duty (SAD) on IT products providing the much needed relief

to domestic manufacturers of personal computers and tablets

• Proposal to reduce royalty and related taxes from 25% to 10% for technology start-ups

• National Optical Fibre Network (NOFN) Programme of 750,000km, networking 250,000

villages, to be sped up by allowing willing states to undertake its execution on reimbursementof cost

• USD 166 million 'Self-Employment and Talent Utilisation' programme to be administered by

the NITI Aayog.

Insight

• These policies promote the ‘Make in India’ campaign to boost domestic manufacturing

especially in mobiles. For the first time, there seems to be a strong focus on start-ups and

entrepreneurship.



.

FINANCIAL SECTOR

Key Announcements

• Task force to establish a sector-neutral Financial Redressal Agency

• Merge ‘Forwards Markets Commission’ with Securities and Exchange Board of India (SEBI).

• Permanent Establishment norms to be modified so that mere presence of offshore fund

managers in the country does not lead to “adverse tax consequences.”

• JAM Trinity-Jan Dhan, Aadhar and Mobile-to implement direct transfer of benefits• Postal network spread across the country to be used for increasing access to formal financial

system

Insight

• Government’s intention to boost digitization of payments and a drive towards a ‘cashless

society’ is significantly bolstered. Sector-neutral Financial Redressal Agency will help in

standardized regulation across sector.

WELFARE SCHEMES

Key Announcements

• Six core toilets across the country under the Swachh Bharat Abhiyan

• MUDRA bank will refinance micro finance organisations to encourage first generation

entrepreneurs

• Housing for all by 2020

• New scheme for physical aids and assisted living devices for people aged over 80

• The government to use USD 1500 million unclaimed funds for Senior Citizens Fund.

• USD 833 million additional allocations for MGNREGA

Insight

• The government has made a conscious attempt to balance development and growth and has

strengthened social security schemes and the ‘Clean India Movement’.

OTHER KEY AREAS

• Defence budget allocation saw an increase of 11% over last year to USD 41 billion with a focus

on ‘Make in India’

• Although few educational institutes for health education have been announced, the budget

does less for the ‘healthcare sector’. This is understandable, given the healthcare is a state

subject and the states have been significantly empowered with funds. The National Health

Mission will be one of the 24 schemes that are expected to see a large decrease in ‘grants-in-

aide’ from the centre.

• Visa on arrival to be extended to 150 countries



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Challenges ahead

Unlike its predecessors, this government believes that the key policy decisions need not wait for that

‘one day’ in the year. If this budget is seen through that lens, it has largely done what it had intended

to do. It focuses on cooperative federalism, kick starting manufacturing, building infrastructure and

simplifying taxation. Most importantly, it sets a roadmap that is balanced and pragmatic.

If the budget has set the tone, ‘Team NDA’ now needs to deliver on its promises. It faces a difficult year

ahead. Ordinances in land and insurance face significant opposition in the Rajya Sabha, the upper

house: nearly all of the Modi’s flagship projects such as ‘Make in India’, ‘Smart-cities’ and the

strengthening of the defence sector require the land ordinance to pass through the parliamentary

process. After a defeat in the Delhi elections in February and a shared victory in Jammu and Kashmir,

the BJP now faces an election in Bihar in 2015. For the BJP, winning the state will be crucial as it can

then add 15-20 seats in the upper house in 2016.

Modi will also need to strengthen ‘Team NDA’ by empowering them with autonomy and freedom in

decision-making. Though we are seeing rising stars like Mr.Suresh Prabhu, minister for railways and

Mr. Piyush Goyal, minister for power, there is a need to develop ministers if the BJP is looking ahead

for the next nine years. More importantly, as ‘Team NDA’ takes shape there needs to be a stronger

anti-corruption environment given reports of corruption and espionage over the last month. The

budget announcement is over, but in many ways the challenges have just begun.

APCO WorldwideAPCO has provided counsel to clients in India since 2006. Since that time, we have partnered with a number of

prestigious Indian and multinational entities, non-profit organizations, government bodies and financial

institutions to assist in their efforts to build strong strategic communication campaigns, design and implement

effective India business strategies, and understand and work within the country’s complex public and

regulatory affairs environment.

For more information about APCO Worldwide in India, please contact:

MumbaiSukanti Ghosh

Managing Director

[email protected]

+91-9833038520

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