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India’s Union Budget 2015-2016

02 March 2015

In unveiling a budget on Saturday that drew uniform cheer, Mr Arun Jaitley, finance minister, rewrote one act of India's premier piece of economic theatre – he largely met expectations. Bankers cheered the budget's commitment to institution-building and tax reform; business leaders applauded the boost to investment in manufacturing and growth; centre-left interventionists welcomed the strong attention to welfare, from medical cover for the moderately well-off to agricultural support for the majority of Indians in work who earn from the fields. Prime Minister Narendra Modi, who won a general election in May 2014 on a platform of development, growth and jobs, said the budget was "progressive, probative and practical." Mr Jayant Sinha, junior minister at the ministry of finance who quit Mckinsey and fund management for politics, said the "strong directional policies on taxation, regulation and governance [put us in place] for a 21st century economy." Mr Jaitley himself reckoned the budget would make India "fly." Even by the standards of India's hyper-ventilating media, expectations had been set high for this first full-year budget of the nine-month old Bharatiya Janata Party (BJP) government. Adjust the prism to reflect the dynamics of "a recovering economy rather than a surging one," as one observer put it, and Mr Jaitley delivered a trade-off between near-term palliatives to stoke economic activity and longer-term building blocks to reform institutions and achieve fiscal consolidation. This was, then, a credible road map to a globally competitive India. Prepare for flight

Mr Jaitley went into his budget with favourable economic winds behind him: the collapse of oil prices in the past six months has been a huge fillip for India, which imports 70 per cent of its crude requirements; inflation is low and trending down; and GDP in the last quarter jumped an extra two percentage points after a tweak in the methodology of its calculation. Assuming China's economy continues to slow, then Mr Jaitley's forecast for GDP growth of 8-8.5 per cent next year would make India the fastest-growing large economy in the world. Nevertheless, Mr Jaitley, and especially his boss, were under immense political pressure that belies their party's thumping electoral victory last year, when the BJP came home with the first single-party

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majority in the lower house in three decades. Their early-day hubris imploded last month when a clever crusader against graft inflicted a humiliating defeat on the BJP in an election to govern the capital Delhi. The victor has emerged as a thorn in Mr Modi's side, and the prospect of more such pin-pricks in state elections in Bihar and West Bengal over the next year presumably persuaded Mr Jaitley to be generous in his capital allocations to these two poor states, both of which, like Delhi, are ruled by charismatic opposition satraps. Additionally, India's PM, who has cultivated a deserved image as a CEO-type capable of getting things done, especially in business, has himself been drawing fire from a private-sector increasingly impatient with his marketing-soaked promises that are yet to deliver on the ground. Mr Deepak Parekh, chairman of India's leading home-loans lender and respected by foreign investors, captured the sentiment with blunt words ahead of the budget. Measures that matter

Mr Jaitley's measures for a near-term boost included a phased reduction in corporate taxes; steps to address so-called tax-terrorism of the retroactive kind that has single-handedly dented foreign investor confidence; commercialising the management of ports; hiring professional managers for India's distressed banks, which require massive capital injection to provision against decades-long imprudent lending, as well as the demands of Basel to boost capital cover; postponing by two years the introduction of a measure to track tax avoidance and a commitment to finally introduce next year the biggest single consolidation of taxation in independent India, replacing multiple taxes with a single general sales tax across the country; and, finally, a Rs70,000 crore (US$11.3 billion) infrastructure fund, accompanied by funding instruments such as tax-free 'infra bonds', which by encouraging a revival of public-private partnerships should ignite activity at the heart of the economy. Among the structural measures designed to rejig the economic template of India, the finance minister proposed distributing a larger share (62 per cent) of tax revenues to the states at the expense of the centre, marking a seminal realignment of federal India. He also announced the creation of an independent debt management office, which in most rich economies is pivotal in the management of inflation via monetary policy; a new bankruptcy law and dispute resolution standards to make exits quicker and easier; and doing the same for the way in by consolidating a plethora of rules for setting up a business. From single taxes to simpler rules, the direction here is to make India a less painful place to do business. Certainly, the bankers, tycoons, fund managers, professional advisers and entrepreneurs who got together to applaud a celebrated Indian artist on Sunday, were equally congratulatory of the finance minister. The big push on infrastructure, manufacturing, dispute resolution, tax predictability as well as committing to internationally competitive tax regimes are all measures that should strengthen foreign investor confidence and encourage FDI, as well as sustain the heady portfolio flows into local equity markets. On cue, the main stock market index climbed. Clearing roadblocks

Yet the thrust on manufacturing and infrastructure ultimately depends on the government gaining support in the upper house of parliament to pass laws on labour, environment, land acquisition and big-ticket foreign investment. Land, labour and environment have historically been enduring and massive impediments to India's manufacturing competitiveness.

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For instance, the revival of manufacturing, still only contributing about 14 per cent to GDP but central to the PM's ambition to create jobs for the 10 million young people joining the labour market each year, rests partly on rewriting antiquated labour laws. New laws would it make it easier to fire incompetent workers, allow bosses to pass on more perks to staff recruits, giving workers a real economic stake in a growing venture, and ease an historic dependence on casual labour. The northern state of Rajasthan, ruled by the BJP, has done much of that, fast becoming a laboratory state for Modi-type overhauls. A similar impasse afflicts the issue of land acquisition. The government wants to water down a law passed by the previous government which states that any change in use from farming to industrial activity must be sanctioned by four-fifths of local stakeholders. Environment issues - another area of triumph for activist civil society groups - is similarly a quagmire for business, notably resources companies. Sum of the parts

The budget is just one of many platforms for India to remake itself. The weekend measures should therefore be slotted into a wider context that includes India's railway budget, unveiled a day earlier with a significant rise in investment, and the PM's own attempts to reform his primary implementing agency - the bureaucracy. The latter remains a work in progress and may yet undo many of the good things in the budget that depend on fast and effective implementation. In addition, there have been other incremental changes over the past months that amount to a foundation for further progress. They include executive orders that bypass parliament to permit changes in FDI in insurance. The re-auctioning of coal mining licenses that were found by the Supreme Court to have been corruptly awarded under the previous government, is not only under way but its transparent manner has been emblematic of a larger, positive intent. Similarly, Mr Modi's personal grand-standing of his manufacturing initiative known as 'Make in India', re-enforced in the budget, and his financial inclusion thrust (100m new bank accounts in several months) are milestones that cast the net wider afield for economic enfranchisement. Mr. Modi is, however, nothing if not resolute. While the budget has credibly demonstrated his intent, he will, in the coming months, need to be demonstrably effective in showing that he can deliver tangible things on the ground, or be punished by an unforgiving electorate in local polls. For more information, please contact:

Khozem Merchant Partner, Head of India +91(0)9820060485 kmerchant@brunswickgroup.com

Azhar Khan Director, India +91(0)9167883290 akhan@brunswickgroup.com