Budget will fuel growth with stability

The Union Budget 2020-21 seems to have given considerable thought to address the key challenge of ensuring economic growth with macroeconomic stability. The Finance Minister has succeeded to a great extent in addressing some of the core issues that are being faced by the industry, taxpayers and investors. Even after the Budget, if required, the government is expected to continue with follow-up action to put India back to its high-growth trajectory.

To its credit, the government in the past has been prudent and honest in sticking to fiscal consolidation, even as it valued sustained growth, foreign investment and higher credit rating. When the economic growth came down below 5 per cent, it was ready to loosen the purse strings to fuel consumption — still well within the limit permitted under the FRBM Act — by allowing the fiscal deficit to clock 3.8 per cent for FY20 (versus the targeted 3.3 per cent).

It now promises to return to a more manageable deficit level of 3.5 per cent for FY21, which should please stakeholders across the board.

Towards sustainable consumption: Through higher agriculture and rural allocation, as well as by leaving more in the hands of the middle class through tax cuts, the Finance Minister has effectively moved to revive the consumption demand that can inspire a virtuous cycle of recovery first and growth later.

Since consumption is also a sum of favourable prices, higher disposable income and consumer confidence, projects announced to improve rural employment and higher agriculture income come as a logical corollary. In fact, tax rate cuts for the middle class will have a greater impact once the Indian banks start passing on the interest rate cut benefits to them.

Local employment thrust: Besides infrastructure, education and healthcare, ‘Make in India’, exports and MSME sectors are prominently mentioned in the Budget, since these areas can contribute significantly to job generation and a level-playing field to indigenous manufacturing and MSME sectors. For example, every district in India will be incentivised to become an export hub. The move to rationalise unwarranted duty exemptions for various sectors, along with raising duties on imported goods, would encourage local manufacturers and prevent dumping by other countries.

Innovative resource mobilisation: As seen in some of the resource proposals, the government wants the private sector to harness the market forces, especially for health, education and infrastructure. For example, the asset monetisation in road projects, a viability gap funding in the PPP mode for hospitals and agri-food processing sector, and liberalised ECBs and FDI for education can be effectively explored for resource mobilisation and lessen the fiscal troubles for the government.

Announcements such as a seamless national cold supply chain for perishables, Kisan Rail, railway station re-development projects and the operation of 150 passenger trains through the PPP mode are both visionary and practical.

Improving investor sentiment : The abolition of the DDT should inspire foreign investors and multi-nationals. By allowing greater freedom for sovereign wealth funds of foreign governments to invest in Indian infrastructure projects and by hiking the investment limit of FPIs from 9 per cent to 15 per cent in corporate bonds, the government is pushing for foreign investments to drive long-term resource mobilisation in infrastructure and in the corporate bond market.

LIC IPO: There is a renewed optimism about higher revenue collection, especially through a more strategic and well-conceived disinvestment plan. Though the government could only achieve a part of the targeted ₹1.05 lakh crore so far in the current fiscal, mega announcements like the LIC IPO should lift the market enthusiasm in the coming quarters.

Given the structural drivers available for the insurance industry, LIC will be the best bet to play insurance in India. It would also improve India’s presence in the MSCI Emerging Markets Index, thereby improving the quality of inbound foreign investments. Investors often consider such moves as reform statements with long-term implications for the broader market multiple.

A substantial ₹90,000 crore would come from sale of government stake in public sector banks (such as IDBI) and financial institutions (LIC), adding to the ₹1.20 lakh crore estimated to be mopped up from CPSE stake sales (like BPCL and Container Corporation) in 2020-21. While the government has laid out an ambitious target of ₹2.1 lakh crore through disinvestment, it has also spelt out its vision to achieve this target, which is encouraging. The biggest signal from the Budget is the government’s willingness to step out of the fiscal constraints in favour of growth and stability. This is the need of the hour and the government has responded to that admirably.

The writer is Chairman and CEO of Edelweiss Group

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