The Gist of Yojana: June 2015

The Gist of Yojana: June 2015

Budget 2015-16: Impact on Growth, Employment and Welfare

Budget 2015-16 of the central government sets out ambitious short and long term targets relating to growth and welfare. There is a direct link between growth, employment and people’s welfare. Growth creates employment opportunities, which lead to increased earnings and therefore to improved welfare. In this context, the budget of the central government for 2015-16, can be examined for its impact on employment through growth as well as through more direct employment-promoting policy initiatives.

For growth, the target for 2015-16 is achieving an 8 to 8.5 per cent growth. The longer term target is to achieve a double digit growth, the minimum of which would be 10 percent. On welfare, the budget wishes to achieve by 2022, that is, by the 75th anniversary of our independence, 13 specific objectives as indicated below:

1. Ensuring housing for all by completing 2 crore houses in urban areas and 4 crore in rural areas;
2. Ensuring that each house has basic facilities of 24-hour power supply, clean drinking water, a toilet, and road connectivity;
3. Making sure that each family has at least one earning member;
4. Substantially reducing poverty;
5. Electrification of all villages;
6. Connecting all habitations by all weather roads;
7. Providing medical services in each village and city;
8. Educating and skilling youth;
9. Increasing agricultural productivity;
10. Ensuring communication connectivity to all villages.
11. Skilling young population and making in India;
12. Encouraging entrepreneurship in India; and
13. Developing India’s Eastern and North Eastern regions.

In achieving both the growth and welfare objectives, the central and state governments as well as the public sector enterprises and departmental enterprises and the private sector will have to play a critical role.

According to the revised GDP numbers brought out by the Central Statistical Organisation, GDP growth in 2014-15 is estimated to be 7.4 per cent. For 20 15-16, the budget states a growth target in the range of8.0 to 8.5 per cent. This implies an increase in the growth rate of about 1 percentage point. This requires an increase in the investment rate of about 4 to 5 percentage points, given the incremental capital-output ratio of 4 to 1.
The central government plays a critical role in the growth endeavor directly by public investment and indirectly by facilitating private investment. As per the 2015-16 budget, the direct increase in public investment by the central government is going to be limited. This is because of a considerable pressure on central government revenues. The budget for 2015-16 has provided only for an increase in the capital expenditure to GDP ratio of 0.2 percentage points from l.5 per cent in the 2014-15 revised estimates to l. 7 per cent in 2015-16 budget estimates. Clearly this increase is too inadequate to meaningfully uplift the growth rate directly from the central budget. This limited additional fiscal space for investment by the central government has been forced on the Finance Minister because of the need to adhere to fiscal deficit path as committed under the Fiscal Responsibility and Budget Management Act. The Finance Minister has adhered to the fiscal deficit target of 4.1 per cent of GDP in the revised estimates for 2014-15. He has created a narrow additional fiscal space of 0.3 per cent points of GDP compared to the consolidation path envisaged earlier, which had envisaged a fiscal deficit to GDP ratio of 3.6 per cent. However, even with this adjustment, the room for additional expenditure, it has been possible to budget for an extra capital expenditure of only 0.2 percentage points of GDP.

Given the limited scope for direct additional public investment by the central government, the role of state governments becomes critical. After the recommendations of the Fourteenth Finance Commission, and in fact, beginning from the 2014-15 budget, fiscal transfers are being given to the states such that there has been an increase in the transparency of transfers and autonomy for choosing priorities for the state governments. In the 2014-15 budget, a large volume of transfers that were being given directly to local level autonomous bodies have been given to the states as state plan grants. This has increased transparency in transfers. In the 2015-16 budget, a part of this increase in plan grants is being given to the states as their share in central taxes. On these funds, states have full autonomy and no conditions can be attached as to how they spend these funds.
The remaining thrust for increasing investment can come from the departmental and public sector enterprises. The government has already planned considerable expansion of railways and services provided by the post and telegraph department. It is the right time for the other public enterprises to activate their expansion plans. If they borrow from the market to finance this investment, it will not become part of government’s fiscal deficit. The FM has increased outlays on both the roads and the gross budgetary support to the railways, by Rs.14,031 crore, and Rs.10,050 crore respectively. The CAPEX of the public sector units is expected to be Rs. 3,17,889 crore, an increase of approximately Rs. 80,844 crore over RE 2014-15. It is estimated that investment in infrastructure will go up by Rs. 70,000 crore in the year 2015-16, over the year 2014-15 from the Centre’s Funds and resources of CPSEs. Beyond this, it is the private sector that will have to playa critical role.

The private sector consists of households, private industry, and private investors, both domestic and external. The households provide savings as well as investment. Although the overall saving rate of the household sector has not fallen by any significant margin, more recently, their savings kept in the financial form as a ratio of ODP have fallen. We expect the household financial savings rate to improve now that the overall inflation rate has fallen and the real interest rate has started to increase.

The Finance Minster has also announced the intention of the government to reduce the corporate income tax from 30 per cent to 25 per cent in the next 4 years. This would help attract potential investors to increase investment. Some of the external investors have been dissuaded from investing in India because of particular tax provision called the general anti-avoidance rules (GAAR). The government has clearly indicated that the application of this provision is being postponed by two years.

The government has reaffirmed its commitment to introduce a comprehensive goods and services tax (GST) replacing existing mix of central and state indirect taxes that have proved to be distortionary. GST is expected to play a transformative role in the way the India economy functions. It will add buoyancy to the economy by developing a common Indian market and reducing the cascading effect on the cost of goods and services.
On the demand side, however, there are critical challenges. In 2014-15, all major components of demand have shown subdued growth. Private final consumption expenditure has grown by about 7 per cent. Expenditure of fixed capital formation, that is, investment expenditure grew by only 4 per cent and exports by less than 1 per cent. Again, any strong stimulus to demand is not likely to come from the side of the central budget as they have planned only for an increase in the overall expenditure of 5.8 per cent in nominal terms. If the inflation is about 4 per cent, that would give a real increase of only about 2 per cent. Clearly on the demand side also, the state governments will have to play a critical role.

There is a more direct way through which the central budget would facilitate growth in employment. This comes from the policy emphasis on skilling India. The budget recognizes that India is one of the youngest nations in the world with more than 54 per cent of the total population below 25 years of age. The budget has proposed to launch a National Skills Mission through the Skill Development and Entrepreneurship Ministry. The Mission will consolidate skill initiatives spread across several Ministries and allow us to standardize procedures and outcomes across our 31 Sector Skill Councils. The central government has also launched the Deen Dayal Upadhyay Gramin Kaushal Yojana and Rs. 1,500 crore has been set apart for this scheme.

Another employment promoting initiative of the budget is the proposal to establish a mechanism to be called SETU (Self-Employment and Talent Utilisation). It will be a Techno- Financial, Incubation and Facilitation Programme to support all aspects of start-up businesses, and other self- employment activities, particularly in technology-driven areas. The budget has set aside Rs. 1,000 crore for this purpose. These are innovative ways of increasing employment opportunities in India.

The FM also observed that the bottom-of-the-pyramid, hard-working entrepreneurs find it difficult, if not impossible, to access formal systems of credit. He has proposed to create a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs. 20,000 crore, and credit guarantee corpus of Rs. 3,000 crore. MUDRA Bank will refinance Micro-Finance Institutions through a Pradhan Mantri Mudra Yojana. In lending, priority will be given to SC/ST enterprises.

Furthermore, the FM has referred to the Pradhan Mantri Suraksha Bima Yojna that will cover the accidental death risk of Rs. 2lakh for a premium of just Rs. 12 per year. The government will also launch the Atal Pension Yojana, which will provide a defined pension, depending on the contribution, and its period. To encourage people to join this scheme, the Government will contribute 50 per cent of the beneficiaries’ premium limited to Rs. 1,000 each year, for five years, in the new accounts opened before 31st December, 2015.

The FM has also proposed to establish a National Investment and Infrastructure Fund (NIIF), and find monies to ensure an annual flow of Rs. 20,000 crore to it. This Trust will raise debt, and in turn, invest as equity, in infrastructure finance companies such as the IRFC and NHB. The infrastructure finance companies can then leverage this extra equity, manifold. He expressed his intention to permit tax free infrastructure bonds for the projects in the rail, road and irrigation sectors. Furthermore, the PPP mode of infrastructure development is to be revisited, and revitalized with the idea of rebalancing of risk. He has acknowledged that in infrastructure projects, the sovereign will have to bear a major part of the risk without absorbing it entirely.

These initiatives would add to a powerful milieu of support for increasing education and employment opportunities particularly for the poorer sections of society. The budget goes to show that even when there is a resource crunch, it is the joint effort of all stakeholders including the state governments, the public enterprises, the external investors, banking and financial institutions, and industry and above all the people at large who -with their joint effort can make the India growth story succeed.

Transforming India into a Global Manufacturing Hub

The make in India program was launched in September 2014 as part of a wider set of nation-building initiatives. Designed to transform India into a global manufacturing hub, Make in India was a timely response to a critical situation : by 2013, the much-hyped emerging markets bubble had burst, and India’s growth rate had fallen to its lowest level in a decade. The promise of the BRICS nations had faded, and India was tagged as one of the so-called ‘Fragile Five’. Global investors debated whether the world’s largest democracy was a risk or an opportunity. India’s 1.2 billion citizens questioned whether India was too big to succeed or too big to fail. India was on the brink of severe economic failure.

Make in India was launched against the backdrop of this crisis, and quickly became a rallying cry for India’s innumerable stakeholders and partners. It was a powerful, galvanising call to action to India’s citizens and business leaders, and an invitation to potential partners and investors around the world. But, Make in India is much more than an inspiring slogan. It represents a comprehensive and unprecedented overhaul of out-dated processes and policies. Most importantly, it represents a complete change of the Government’s mindset - a shift from issuing authority to business partner, in keeping with government’s tenet of ‘Minimum Government, Maximum Governance’.

Make in India needed a different kind 0 campaign: instead of the typical statistics-laden newspaper advertisements, this exercise required messaging that was informative, well-packaged and most importantly, credible. It had to (a) inspire confidence in India’s capabilities amongst potential partners abroad, the Indian business community and citizens at large; (b) provide a framework for a vast amount of technical information on 25 industry sectors; and (c) reach out to a vast local and global audience via social media and constantly keep them updated about opportunities, reforms, etc.

On September 25th 2014, Make in India was unveiled in the presence of domestic and global business leaders, policy-makers and members of the media at a high-profile event in New Delhi. The event was accompanied by a comprehensive digital strategy, resulting in a significant surge of interest on social media, TV and newspapers. The Make in India program has been built on layers of collaborative effort. DIPP initiated this process by inviting participation from Union Ministers, Secretaries to the Government of India, state governments, industry leaders, and various knowledge partners.

Next, a National Workshop on sector specific industries in December 2014 brought Secretaries to the Government of India and industry leaders together to debate and formulate an action plan for the next three years, aimed at raising the contribution of the manufacturing sector to 25% of the GDP by 2020. This plan was presented to the Prime Minister, Union Ministers, industry associations and industry leaders by the Secretaries to the Union Government and the Chief Secretary, Maharashtra on behalf of state governments.

These exercises resulted in a road map for the single largest manufacturing initiative undertaken by a nation in recent history. In a short space of time, the obsolete and obstructive frameworks of the past have been dismantled and replaced with a transparent and user- friendly system that is helping drive investment, foster innovation, develop skills, protect IP and build best-in- class manufacturing infrastructure. The most striking indicator of progress is the unprecedented opening up of key sectors - including Railways, Defence, Insurance and Medical Devices - to dramatically higher levels of Foreign Direct Investment.

A workshop titled “Make in India - Sectorial perspective & initiatives” was conducted on 29th December, 2014 under which an action plan for 1 year and 3 years has been prepared to boost investments in 25 sectors. The ministry has engaged with the World Bank group to identify areas of improvement in line with World Bank’s ‘doing business’ methodology. The Indian embassies and consulates have also been communicated to disseminate information on the potential for investment in the identified sectors. DIPP has set up a special management team to facilitate and fast track investment proposals from Japan, the team known as ‘Japan Plus’ has been operationalized w.e.f October 2014.

100 Days of Make in India

  • 90 million bank accounts have been opened, thanks to the Jan Dhan initiative.
  •  Entry and exit regulations have beens eased out, exim regulations made infinitely easier, six PSUs brought out sickness and five PSUs closed down.
  • The initial validity period of an Industrial License has been increased from 2 to 3 years, giving licensees enough time to procure land and obtain the necessary clearances. MHA has also stipulated that it will grant security clearances on industrial license applications within 12 weeks.
  • A security manual for licensed defence industry has been recently issued.

Automobiles

  • Largest tractor manufacturer; 2nd largest two wheeler manufacturer; 2nd largest bus manufacturer; 5th largest heavy truck manufacturer; 6th largest car manufacturer; 8th largest commercial vehicle manufacturer
  • India’s car market potential : 6+ Millions units annually by 2020.

Aviation

  • 9th largest civil aviation market in the world, about $12 billion in value terms
  • Potential to become the third largest aviation market in the world by 2020 and the largest by 2030.

Biotechnology

  • Amongst top 12 biotech destinations in the world; 3rd in the Asia-Pacific region.
  • Government expenditure plans: US$3.7 billion during 2012-17, more emphasis on biotech parks to facilitate product development, research & innovation.

Chemicals

  • 3rd largest in Asia & 6th largest by output in the world
  • Key growth factors : A large population + dependence on agriculture + strong export demand.

Construction

  • Approx. US$ 650 billion required for urban infrastructure over the next 20 years.
  • Technologies to promote sustainable cities & integrated townships; green building soultions
  • Foreign investment rules in India’s construction sector have been eased - built - up area requirement and minimum capital requirement reduced.

Defence Manufacturing

  • FDI update: Up to 49 percent FDI is now allowed under the government route and beyond 49 percent with the approval of cabinet committee on security wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country
  • 53 percent of the defence items for manufacturing by private sector have been de-licensed and dual use items having military as well as civilian applications deregulated

Electronic Systems

  • Expected demand to reach USD 400 Billion by 2020, aided by government schemes like the National Knowledge Network (NKN), National Optical Fibre Network (NOFN)
  • Attractive incentive package scheme providing capital subsidy up to 25 percent for 10 years

Food Processing

  • A rich agriculture resource base
  • The establishment of food parks - a unique opportunity for entrepreneurs, including foreign investors
  • Investment opportunities in: Fruits and Vegetables, Beverages, Dairy, Food additives & nutraceuticals, Meat and Poultry, Fish, seafood and fish processing; Food preservation and packaging, etc

Oil and Gas

  • New Exploration Licensing Policy and the Coal Bed Methane Policy to encourage investments across the industry value chain
  • 48 percent of the country’s sedimentary area is yet to be explored. The city gas and distribution sector offers opportunities for both incumbents and new companies

Ports

  • Increase in cargo-handling capacity - 800 MMT in 2014 from 575 MMT in 2009
  • Increasing trade activities & private participation in port infrastructure development
  • Sagarmala project planned aimed at port-led development in the coastal states.

Railways

  • 100 percent FDI under the auto route in the railway infrastructure segment
  • Priority : Port connectivity
  • Infrastructure projects : High speed train projects, railway lines to and from coal mines and ports, dedicated freight corridors

Roads and Highways

  • Extensive road network of 4.86 million kms: 2nd largest in the world
  • Private sector : Key player in the development of road infrastructure
  • The Indian government plans to develop a total of 66, 117 km of roads under different programmes

Renewable Energy

  • India stands fifth in the world in the overall renewable energy capacity installation with an installed capacity of 33, 792 MW (end 2014)
  • India plans to scale up renewable energy to 165 MW, of this solar energy will be 100 GW by 2019-20
  • Major policy incentives given by the Government, including accelerated depreciation, generation based incentives; feed in tariff and viability gap funding are expected to add massive investments in the renewable energy sector

Thermal Power

  • The government is targeting a capacity addition of 88.5 GW during 2012-17 and 86.4 GW during 2017-22
  • A growing population is likely to boost demand for energy
  • Investment opportunities: Power generation, transmission and distribution, power trading and power exchanges

Tourism

  • Foreign tourist arrivals to India has risen 7.1 percent to 7.5 million in 2014
  • Factors expected to drive growth of tourism are focussed marketing and promotion efforts, liberalization of air transport, the growth of online travel portals, growing intra-regional cooperation and more effective public private partnerships

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