Will India’s budget boost economic growth?

India’s 2015-16 budget was widely expected to set out a roadmap for reviving investments, creating jobs and accelerating growth. It has delivered on all counts and Finance Minister Arun Jaitley is to be commended for a prudent and visionary approach to guiding the macroeconomy.

The finance minister outlined his medium-term priorities through a 13-point agenda for 2022, when India will celebrate 75 years of independence. With these clear goals in mind, the budget focused on infrastructure investment, putting money into consumers’ hands, and providing social security to all citizens of the country.

Investment has been accelerated by pushing back the fiscal deficit target of 3% of GDP to 2017-18. The target for 2015-16, which stands at 3.9%, is reasonable given the need to build up public investment in the infrastructure sector. Central public sector enterprises are also expected to contribute to the investment pipeline. The finance minister has additionally delineated a “plug-and-play” model for ultra-mega power plants where all government clearances would be approved before the bidding process. A national investment and infrastructure fund would further revive investment. Hopefully the fiscal space will be used to create additional capital assets, which would also boost demand for related goods and services.

Industry responded positively to the finance minister’s intention to lower corporate tax rates from 30% to 25% over four years. This would make Indian enterprises more competitive in the global marketplace and impart certainty and stability to the direct tax regime by minimizing exemptions and avoiding litigation. The elimination of the wealth tax and its replacement by a surcharge of 2% on incomes over Rs 1 crore would rationalize the tax structure.

Regarding indirect taxes, the finance minister has reiterated his commitment to introducing the goods and services tax (GST), which would greatly add efficiency and productivity to the economy. The Confederation of Indian Industries (CII) has estimated that GST could add at least 1 percentage point to the GDP pace; with its institution, double-digit growth could be a real possibility. The budget also addresses inverted duty structures and anomalies by streamlining customs duty and exemption of special additional duty. This would encourage domestic manufacturing and help create jobs.

A key CII recommendation was to rationalize the capital gains regime for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Sponsors will now be allowed to exit these and rental revenues would be accorded pass-through status. The general anti-avoidance rule (GAAR) has been postponed by two years, which is a much-awaited step. The uncertainty regarding domestic alternate investment funds too has been clarified and this could encourage the establishment of new funds.

The finance minister has taken care to give money back to consumers to revive flagging demand. The calculation shows that as much as Rs 4.4 lakhs could be eligible for deductions on account of health insurance, interest on property and enhancement of transport allowance, among others. In addition, consumers are also being encouraged to find alternatives to gold investment through three gold monetization schemes, bringing more money into the market. As a result, the subsidy regime would be made more efficient through direct benefits transfer. The idea is to greatly build up universal social security for all by leveraging insurance and pension instruments.

The strong pipeline of investments, attention to securing the future of citizens and tax changes would together place the Indian economy on a firm path to double-digit GDP growth rates in the coming years.

Author: Chandrajit Banerjee, Director General, Confederation of Indian Industry

Image: A woman labourer walks past a residential estate under construction in Kolkata January 25, 2011. REUTERS/Rupak De Chowdhuri