Finance Minister Arun Jaitley has a tightrope walk ahead in presenting the Budget on Monday. Massive expenditure is needed to fund the Seventh Pay Commission’s recommendations and railway and road expansion plans. This may stretch the Budget deficit beyond the promised 3.5 per cent.
However, such repeated shifting of goalposts can create further trust issues with foreign investors, whom the Government has been inviting to fuel sectors including banking, education and Defence. Avoiding subsidy leakage through the Direct Benefit Transfer route, reducing non-plan expenses by cutting fuel subsidy, divesting in PSUs and bringing back wealth tax (which taxed the balance sheet rather than income) are being proposed to plug the gaps.
Here are some suggested reforms in four key sectors that provide minimal stress on the fiscal deficit.
Renewable energy
Even as coal demand is coming down, theft and loss during transmission continue to inflate energy cost obstructively for power-intensive industries. Rooftop solar is an option, but it can generate energy only during the daytime. Batteries can easily cost half the cost of the system. To produce economical batteries with longer life, we need more R&D (and this is true for many other sectors as well).
Given a readymade market and growing entrepreneurship, a gentle nudge should be sufficient. For large-scale solar power generators, tax-free bonds and transferable tax credits should attract both classes of investors — independent power producers (IPPs) and tax investors. Last, rather than choking project economics through the domestic content requirement (DCR), manufacturers should be given tax exemptions.
Banking
The major issues need more regulatory discipline than budget allocation. The lack of liability along with flawed accounting practices (NPA provisions allowed to be carried forward to four years) and the myopic vision of bank management has reached a stage where the too-big-to-fail question is being posed. Banks with high net NPAs should be allowed to go down (the Bankruptcy Code could bring more clarity on this).
ARCs are to be better incentivised. Currently, they can operate with 5 per cent investment and withdraw 1-2 per cent management fee, which gives little incentive to resolve assets. To the Government’s credit, major defaulting industries such as aviation, telecom, textiles, among others, are all doing better now due to global or national developments.
Real estate
Passing the Real Estate Bill, removing dividend distribution tax (DDT) from real estate investment trusts (REITs), and bringing in single-window clearance are some cost-effective and simpler ways to stimulate the sector. By some estimates, the marketplace for REITs could be worth $15 billion in the next three years.
At the same time, the Real Estate Bill could enhance customer confidence by putting in place an escrow for cash receipts. Other measures could be: allowing capital gains exemption for special purpose vehicles (SPVs) and allowing tax benefits on interest at the onset of loan repayment, rather than post-possession.
Healthcare
We fall below the world average in almost all health indicators. Universal health coverage can be improved by adopting technology (telemedicine), and incentivising insurance by encouraging corporate group insurance, and allowing home healthcare under insurance.
We need to adopt preventive care and increase outpatient care at primary health centres (PHCs) through better staffing. Approving the Drug and Cosmetics Act and incubating R&D, especially for pharamaceuticals, are other important areas.