When the Finance Minister rises to present the Union Budget on February 1, his countrymen will have huge expectations. Everyone, right from the tea stall owner in Chindwara in Madhya Pradesh to the white-collared executive in a swanky glass office in Hyderabad, is hoping that he will bandage the wounds from November 8, 2016.
While the individual taxpayer is expecting relief through lower tax rates, the industry is pushing for reforms that will set the tone for investments in our fledgling infrastructure, especially in Tier 2 and Tier 3 cities.
Breaking of tradition
This year, the Railway Budget is breaking away from its 92-year-old format and will form a part of the Union Budget. It will be interesting to watch if the change will work to reverse the perennial misfortune the Indian Railways faces.
While passengers have borne the brunt of higher fares and dynamic ticket pricing, there is still a lot left to be desired, as far as the facilities and security are concerned. The Sam Pitroda report on modernisation of Indian Railways has estimated an investment of ₹40,000 crore for equipping it with the required safety measures. In addition, there is an urgent need to increase line capacity and electrify tracks way beyond the 1,600 km announced in last year’s budget.
Cashless economy
With the economy moving towards a cashless payment system, equipping railway stations with POS machines has become the need of the hour. Improved facilities both, at stations and inside trains, will demand a plan for outsourcing catering, deploying bio-toilets, and enabling wi-fi in trains and stations, to name a few.
The Government should come up with a plan of partnering with the private sector for faster deployment of such investments and bring in efficiencies in the working of India’s biggest non-corporate employer.
Infrastructure industry
The current minimum alternate tax (MAT) regime does not go in favour of the government’s stated objective of boosting investment in infrastructure, as companies in the sector are required to pay MAT on their book profits. To invite greater investments in such projects, the government should look at extending tax holidays to companies involved in building and maintaining infrastructure.
Such a move will invite greater interest in the industry and be a boost to the Government’s Make in India campaign. Section 80 CCF of the IT Act, which allowed a maximum deduction of ₹20,000 for investments made in long term infrastructure bonds, was discontinued with effect from AY2013-14. Re-launching the same will provide an impetus to investments in the sector.
Equity markets
While 2016 began with expectations of positive returns from equity markets, it proved to be a very unpredictable animal! The broader equity market indices remained flat, and bank credit growth for the month of December hit a 19-year low at 5.1 per cent. Over 73 per cent companies posted a mere 3 per cent y-o-y growth in their net profits.
The economy and capital markets are tightly coupled, and these numbers indicate the economy’s weak health. This further illustrates how corporates are struggling to estimate the pervasive impact of demonetisation and are therefore cautious of their expansion plans.
Favourable investment environment
It is imperative that the government facilitates a favourable investment environment. In the backdrop of demonetisation, real assets have become riskier, and lower fixed income rates have made debt market unfavourable. To add to this, the Government has indicated that it will penalise the equity markets through an aggressive hike in short and long-term capital gain tax and stop foreign investments through p-notes. Such disruptive measures can be implemented when there is a bull run and when economic conditions are strong. Clearly, it should be avoided at this point in time.
The government needs to give a clear agenda for the next two years through the budget — is it growth? Is it curbing black money and corruption? Or is it the development of rural India?
All the initiatives taken over the past three years are brilliant on a standalone basis. However, rigorous efforts need to be made to bring cohesion and fuel the Indian growth story.
(Preeti Bhanot is currently pursuing MBA in Strategy and Leadership at Indian School of Business. Shruti Pillai is pursuing MBA in Finance and Marketing at ISB)