The Union Budget has taken a much-needed leap forward with the revival of investment assuming priority. The finance minister has used the budget to create the desired enablers to revive investment climate and spur actual investment. The policy focus is on easing supply constraints, incentivizing sunrise sectors with tax adjustments and a thrust on greenfield projects, while augmenting soft infrastructure – skill enhancement and job creation.
Drawing inspiration from the budget announcements, I will outline five key themes which the government must pursue with vigor to actualize revival in investments and facilitate growth recovery that is V-shaped and durable.
1. Address basics: Mining & electricity
The sharp slowdown in mining and electricity has undoubtedly been a major factor in the overall industrial slowdown over the past two years.
Structural impediments such as mining restrictions and the lack of fuel linkages were compounded by an increase in the ICOR (incremental capital output ratio) for both these sectors, indicating inefficient deployment of available capital. In this backdrop, the comprehensive measures promised in the budget to enhance domestic coal production along with rationalization of coal linkages will help to ease supply constraints and reduce the cost of power.
Further, extension of investment-linked deduction for transportation of iron ore along with a ten-year tax holiday for power companies that begin operations before March 17, will boost investment in these critical sectors.
Given the strong forward and backward linkages, I believe that a revival in growth hereon will only be as strong as the recovery in these two sectors.
2. Synchronizing sectoral recovery
The sector specific giveaways in the Union Budget like the changes in customs duties aims to correct the inverted duty structure which would impart an impetus to domestic manufacturers to also increase capacity.
The cut in duty for chemicals and petrochemicals, minerals, and electronics (TV tubes, LCD and LED panels) on the one hand, and a hike in duty on specific telecom products, flat-rolled products on the other, would reinforce the strength of extensive pre-budget consultations that discussed the challenges facing domestic industry.
It must be underlined that most of these sectors possess high growth, high employment multipliers and as such a synchronized revival in these key sectors would empower growth recovery.
3. MSME: The Missing Middle
In spite of their immense contribution and the crucial role they play in industry, micro small and medium enterprises (MSMEs) have been the Missing Middle in the economy.
I applaud the vision of the finance minister to encourage innovation and allocate Rs10,000 crore for establishing a venture capital fund for MSMEs.
The nationwide 'District level Incubation and Accelerator Programme' to provide an efficient entry-exit framework for MSMEs is another step in the right direction. The Rs200 crore corpus fund to open technology access and build marketing expertise along with sector wise digitization will pave the way for MSMEs to compete on a global level.
4. Building soft infrastructure
The finance minister has appropriately placed simultaneous emphasis on the promotion of skill development to improve employability and job creation. Towards this, the proposed national multi-skill programme, "Skill India", brings together training, employability and entrepreneurship under one roof.
In my opinion, for the true reform of the labour market the central government needs to follow in the footsteps of Rajasthan to amend archaic labour laws. This would ensure the necessary impetus for the job market, by creating enabling conditions for employing the mass pool of labour that is now engaged in the informal sector. Improvement in labour laws would also go a long way towards raising the tax base as more firms enter the formal sector, exploiting the advantages of scale.
5. Taxation: Clarity & predictability
While the finance minister has not made retrospective changes to tax policy, he has clearly caveated that the provisions would be used only in highly selective circumstances and this would be a big relief to investors. "Tax litigation and stability of tax policy as being a critical input to re-sow confidence among foreign investors towards India's continued appeal as an investment destination." This commitment of the finance minister to strategize forward looking changes as a vision, to be communicated to all stakeholders and actualized in the medium to long term, will soothe investor concerns. The strong FII inflows, estimated at $12 billion since the beginning of May, will only strengthen as the government facilitates a turnaround in the economy.
Clearly, the finance minister has utilized the budget as a platform to press the reset button to enable an overhaul of current provisions that are unfairly stifling investments and thereby growth. While this will undoubtedly revive the brown field investments that have been caught in limbo over the past few years, I am certain that this long awaited reboot of the economic system will simultaneously create an enabling environment to trigger a positive feedback that will whet the appetite of the private sector investment.
(The writer is founder, managing director and CEO of Yes Bank, the country's fourth largest private sector bank.)