Expectations are riding high for the new government’s maiden budget, given the myriad problems currently facing the economy. However, one needs to recognise that the finance minister will need to play a balancing act. While sluggish growth would normally call for some stimulus measures, a bigger threat is the ballooning fiscal deficit. Disappointing revenue collection along with rising expenses on subsidies had forced the last government to cut critical capital expenditure in order to keep the deficit under control. But these are likely to have further reinforced the slowdown, particularly on the investment side. The need of the hour is therefore to implement structural reforms that will rejuvenate industrial growth without impacting the fiscal arithmetic.
The first step should be to ensure that any project up for approval is fast-tracked and put on the ground in the shortest possible period. The Centre should strongly impress upon the states to do their bit. A reduction in the threshold limit of CCI clearances from R1,000 crore to R500 crore would bring up more projects for faster clearance. Tracking projects online should be made possible. PSUs should be encouraged to invest in new capacity or increase dividend payouts to the government. The reserves of 277 PSUs in FY13 amounted to R6.8 lakh crore and this should be put to judicious use.
Financing investments is going to be a challenge as savings, particularly in financial assets, have declined. Some announcements could be made in the budget on incentivising savings. These could include hike in exemption limit of personal income tax, raising the investment limit under Section 80C and removal of TDS on interest income. In addition, higher permissible FDI in insurance, defence and e-commerce can bring in more foreign capital.
In the early years of development, several financial institutions provided project finance. These have been done away with. It is important that either existing financial institutions are given adequate leeway to fill this gap or alternatively, a development finance corporation is created to fund long-gestation investments. Other measures to promote investment, particularly in manufacturing, include reduction in the threshold limit of the investment allowance to R50 crore, relief from MAT provisions and introduction of 25% accelerated depreciation for investment in plant and machinery for 3-5 years.
It is widely felt that retrospective taxation has negatively impacted the business sentiment and needs to be avoided. The budget should amend the Income Tax Act to clarify