Sunday, July 27, 2014

Modi should use future budgets to build, build, build

An Indian labour works at a construction site in Mumbai, India,
July 18, 2014. Infrastructure was a key sector addressed in the first
budget of Financial Minster Arun Jaitleythe and the Modi government.
(Photo: AAP)
East Asia Forum - July 26, 2014
Author: Geethanjali Nataraj, Observer Research Foundation

Expectations of the Modi government’s first budget were high. But, in the face of difficult fiscal circumstances and volatility in oil and food prices, the new government and Finance Minister Arun Jaitley had limited options. Seen in this light, this year’s budget is balanced and gives a sense of direction to the economy. In fact, it has laid the base for a whole set of reform measures that will be put into the place around the next budget.

One of the key sectors addressed in the budget is the infrastructure sector. However, only time will tell whether the measures announced will be sufficient. The inadequacy of quality infrastructure at internationally competitive prices has long been recognised as a handicap to the development of India’s economy. In this context, it was imperative for the budget to pursue infrastructure reforms with more rigour. Some of the key measures related to infrastructure in the budget are as follows.

The government has given equal emphasis to all physical infrastructure, including roads, rails, ports and aviation infrastructure.

Carrying on the legacy of the Vajpayee government, the new government has allotted US$6 billion for national highway development and US$2.4 billion for the development of roads to unconnected villages. The budget has also placed an emphasis on developing urban metros using public-private partnerships (PPPs) in different parts of the country. The government has allocated US$16 million for metro schemes in Ahmedabad and Lucknow. Attempts will also be made to have a metro system in all cities with a population over two million. Further, US$827 million has been allocated to the National Bank for Agriculture and Rural Development for the development of rural infrastructure.

Aviation infrastructure in India has seen a great deal of investment over the last decade owing to increased demand in both passenger and freight traffic. Several airports have been revamped and expanded via PPPs in the last few years. The budget has provided for the further development of airports, again using PPPs, in all tier 2 (with a population of 3 million) and tier 3 cities (with a population of 1.5 million). There will also be US$1.16 billion allocated to the PPP-led development of 100 smart cities and new airports. Similarly, attention has been given to ports with US$1.87 billion put towards the setting up of 16 new ports.

An important step that the Modi government has taken is allowing banks to issue long-term bonds without subjecting them to cash reserve ratio and statutory liquidity ratio for financing infrastructure.

Investors in export industries choose between destinations, and infrastructure is a key consideration. India’s poor infrastructure threatens to hold back the flow of export-oriented FDI. Consequently, the government has raised the limit on foreign direct investment in sectors such as insurance (with a new limit of 49 per cent) and defence manufacturing (also up to 49 per cent, from 29 per cent). It has also promised to take steps towards reviving special economic zones.

Manufacturing should be a priority.

So, it is welcome that the government will provide an investment allowance at 15 per cent for three years to manufacturing companies that invest more than US$4 million in plants or machinery. The Kakinada port will also be developed with a special focus on manufacturing.

The government has announced other notable measures, including the establishment of special economic zones for women in 100 districts.

All these measures are expected to give a boost to trade and manufacturing and thereby growth in the economy. In infrastructure, at least, the Modi government’s first budget is a step in the right direction.


Geethanjali Nataraj is a senior fellow at the Observer Research Foundation in New Delhi.

See More at:
http://www.eastasiaforum.org/2014/07/26/modi-should-use-future-budgets-to-build-build-build/

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