Where vision meets veracity

GURU RAMAKRISHNAN

March 3, 2015

The HinduCULTURE OF DEPENDENCY: “A welfare state built on free handouts for all, without holding their citizens accountable, is seldom a path to prosperity.” Picture shows people waiting for kerosene at a government ration shop near Erode in Tamil Nadu. Photo: M. Govarthan

The bold decision to level the playing field for Indian corporations in the 2015 Budget demonstrates the government’s strategic vision and inherent confidence

The budget announced by the Narendra Modi-led government may well clinch the top spot for India as the “Emerging Market” destination of choice in the eyes of global investors. This budget has lots of “vision” but more important, it is balanced with “veracity”.

In a country used to hand-outs and freebies, it’s always a balancing act for an incoming administration to walk the fine line between “screaming leftists” that want everything given for free and the “extreme conservatives” that want the total elimination of subsidies. This budget threads this proverbial needle.

Finance Minister Arun Jaitley’s Budget aims at expanding the productive capacity of the economy — a vital undertaking, if India wishes to attain its goal of non-inflationary and all-inclusive growth. A smart way to build this growth is by constantly focussing on the factors that improve potential GDP. Giving consumers and businesses the essential tools such as critical road networks, uninterrupted electricity, sensible transportation and storage logistics which connect the country will be crucial to accelerating progress. The 2015 Budget clearly delivers on this count. An incremental $12bn in targeted infrastructure spending proposed in this Budget is just what the doctor ordered.

Laudable decisions

Indian corporations constantly compete with the rest of the world for market share and mind share. Having a corporate tax rate in India which is higher than the tax rates for businesses in the rest of the world is tying one hand behind the back of Indian companies and asking them to go to battle. Ergo, the decision to cut the corporate tax rates from 30 per cent to 25 per cent, which is more reflective of the global rate, should be applauded.

More important, corporations in India operate on the elastic and backward bending portion of the famous “Laffer” curve, which represents the relationship between rates of taxation and the hypothetical resulting levels of government revenue. At the backward bending point on the curve, a reduction in corporate tax rates (given the pick up in overall economic activity) will actually help improve tax collections for the government from the corporate segment. So this bold decision to level the playing field for the corporations by the government demonstrates strategic vision and inherent confidence.

Equally important in this Budget is the government’s decision to build up the power capacity in India with five ultra mega power plants, each of which will have 5000 MW of capacity. This build-up is being done against the back drop of discouraging coal-based energy generation through a doubling of the coal tax. Stepping up “clean” energy projects and dissuading coal consumption will help India clean up its international image of being one of the largest polluters of the world.

Against the global backdrop of terrorism and territorial ambitions that many nations now seem to have, spending money on shoring up the internal and border defenses is vital for India. Sharing its borders with tough neighbours, this increase in defence spending is indispensable for its national security. Their decision to direct $15 bn of the military budget towards modernisation of equipment is the biggest service the country can do for the brave men and women who protect its borders.

The long-term success of any nation depends intricately on the depth of its capital markets and the regulatory framework surrounding them. India has a well entrenched equity culture. However, its debt markets are ruefully inadequate. This Budget takes concrete steps to deepen the bond markets, establish a debt management agency and consolidate the regulatory regime for commodities under the Securities and Exchange Board of India. This is truly a thoughtful step in the country's evolution of capital-markets. The ways in which the savings pool of a nation are channeled to the right investment areas eventually dictate the quality of life that is enjoyed by the savers and retirees in that country. A robust and well functioning bond market is a crucial ingredient.

Need for fiscal restraint

The evidence from the rest of the world at this point is very clear. Societies that have veered significantly left, engaged in massive handouts and indulged in excessive spending by racking up budget deficits have almost walked off the precipice-Europe and Latin America included. So it’s time India showed fiscal restraint. This Budget which targets the fiscal deficit as percentage of GDP to 3.9 per cent is a great first step.

“ Whilst the transition for India from a subsidy culture may be painful, Modi’s budget takes another important step to wean the state-dependent citizens off it by keeping the rupee value of the subsidies flat. ”

A welfare state built on free handouts for all, without holding their citizens accountable is seldom a path to prosperity. A government's fiscal strength at the end of the day is only as strong as its tax base. So having non-state dependent citizens who are productive and stand on their own feet is the only sustainable solution. States in India which espouse the free handout model for its citizens will most certainly fail in the next 10 years. So, criticising the Modi government for not granting more freebies in this Budget is an irresponsible position for the opposition parties to take.

It’s better for the government to get its citizens to learn how to fish rather than handing out a fish each day for them to consume. Whilst this transition for India may be painful, the Budget takes another important step to wean the state-dependent citizens off the subsidy culture by keeping the rupee value of the subsidies flat. By doing this, subsidies as percentage of GDP go down because of the forward looking growth rates of GDP. This is why this Budget demonstrates veracity which is most needed in India.

This turn back to the centre is an essential step for India to take in its long walk towards true economic prosperity. This long road may have just gotten shorter, thanks to the Budget.

(Guru Ramakrishnan is the Chief Executive Officer of Meru Capital Group.)