CII Pre-Budget Recommendations: Investment & Other Macro Reforms

Budget 2018-19 comes at a time when India’s growth fundamentals are improving. The improvement can be credited to the aggressive reform agenda undertaken by the Indian Government in the last few years, including the implementation of the Goods & Services Tax (GST), several banking reforms including committed measures to address the Non-Performing Assets (NPA) problem and several sectoral policies that boosted industry sentiments.

CII has come out with a host of Pre-Budget recommendations which was presented to the Finance Ministry. This is the first of a three series article on CII Pre-Budget Recommendations where the focus is on Investment and other macroeconomic reforms.

Indian Macroeconomy: Overview

Gross Domestic Product (GDP) growth is regaining momentum and increased from 5.7% in Q1 2017 to 6.3% in Q2 2017.

Source: Central Statistics Office

The First Advance Estimates released on 5 January 2018 by the Central Statistics Office (CSO) estimates GDP growth in 2017-18 at 6.5% as compared to 7.1% the previous year. The slowdown may be on account of GST introduction and in coming quarters, the Indian growth trajectory is likely to continue on an upward path.

Exports growth also bounced back after a tepid performance during October 2017 and grew by an impressive 31% in November 2017.

Source: Ministry of Commerce

Further cheer for the Industry came in the form of faster growth registered by the eight core sectors at 6.8% in November 2017, mainly driven by cement and steel production.

Gross Fixed Capital Formation (GFCF) also picked up and will grow by an impressive 4.5% in 2017-18 as compared to just 2.5% in the previous year as per Advance estimates. However, there is a slowdown of GFCF as a proportion of GDP at constant prices in 2017-18, which is estimated at 29% as opposed to 29.5% in 2016-17.

The slow pace of investment activity is a key concern and needs to be addressed urgently.

Further, low domestic demand and high commodity prices are also major concerns this year, as per the respondents surveyed in the latest Business Outlook Survey published by the Confederation of Indian Industry (CII).

Optimism arises as global economic markets recover and present a positive picture for India’s growth. In this scenario, the upcoming Budget on February 1st 2018 is expected to add to the growth forces.

Investment Reforms

The economy is characterized by high infrastructure deficit. CII recommends stepping up public investments for building infrastructure projects. This has to be done in conjunction with – enhancing capital expenditure as the current spending has been lower than budgeted; identifying projects that are to be completed on a priority basis; more focus on public housing projects in industrial clusters where new jobs can be created, affordable housing and agri-infrastructure (irrigation, cold storage, warehousing and rural roads); and advising banks to adopt the new Expected Loss method of rating for assessing credit risk of infra projects.

The second recommendation relates to the requirement of a clear asset recycling policy along the lines of the toll-operate-transfer programme to accompany large public expenditure.

Thirdly, the Government should pre-clear projects and award only those projects to the private sector for which the key sovereign clearances have been obtained. This is particularly important for the big infrastructure projects such as power plants, airport and roads.

Finally, the Government may consider strengthening the PPP model for investment by implementing Kelkar committee recommendations on Revisiting and Revitalizing the PPP Model of Infrastructure Development. Some of the provisions include establishing 3P India to support PPPs, setting up of independent regulators for PPP projects in various sectors, and a clear and articulated dispute resolution structure for PPP contracts, among others.

Power & Electricity Reforms

Distribution of power remains the weakest link in the power sector. Further, poor demand from Discoms has led to stranded assets adding to the NPA problem for firms in the sector. The thermal sector is also stressed due to stiff competition from renewables leading to renegotiation of Power Purchase Agreements.

The Government may consider setting up an umbrella organization, a “National Power Distribution Company” to address all the issues related to power grid connectivity.

Secondly, addressing the financial viability of the sectors is vital as the growing NPAs of the sector are affecting the macroeconomic stability of the country.

Where there is a lack of take-off by Discoms, the Government may consider picking up standard capacities and create effective markets for generators.

Finally, other concerns such as energy security, price pooling for diversification of power generation sources and the formulation of a national pricing benchmark also need to be addressed.

Public Land Reforms

Presently there is no definitive publicly available inventory of central land holdings. Further, multiple public entities such as Railways, Army, Airport authority etc. hold vast amounts of public land in prime urban spaces which often remain underutilized.

A “Land Bank Corporation” may be set up to monetize government owned land.

A reliable and consistent inventory of land which is publicly accessible and is open for scrutiny by higher level authorities would be the key to promote transparency.

It has also been suggested that annual audits of land be conducted followed by actual management of surplus land by specialized agencies

Innovation to Improve Productivity & Competitiveness

The current share of expenditure in Research and Development (R & D) is a meagre 0.7% of GDP.

To boost R & D, a National Technology strategy may be formulated for the next ten years with focussed outcomes in critical sectors such as Defence, Aerospace, Electronics, Capital Goods etc. The Government should form a committee comprising of thought leaders and Industry members, responsible for creating the strategy.

A National Innovation Fund may be created with a sizable corpus of at least Rs. 10,000 crores to provide seed funding to industry for innovation and other R & D Projects.

The Government should consider funding higher education institutes for R & D to generate the right talent for creating an effective innovation system.

Notable policies have been announced in previous budgets and industry looks forward to a progressive budget in 2018 as well, which would drive India’s growth further.

The second in this article series would focus on recommendations relating to sectoral reforms.

 

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