Lighting a fuse

The positive impact of the Union Budget 2015-16, which contains many path-breaking features, will be felt over the years

By Mohan Sule
Ever since the deregulation of the London financial markets by Margaret Thatcher in October 1987, every reform is expected to produce a Big Bang. Following the opening up India’s economy by the P V Narasimha Rao-Manmohan Singh duo in 1991, every budget since then is viewed as a make-or-break occurrence. The urge for lofty deliverables stems from the fact that the country is always in a crisis mode. The causes may vary, ranging from lack of rainfall, runaway public expenditure, galloping inflation to the after-effects of global catastrophes. Consequently, the collective will of the nation imposes on those at the helm mythical powers to bring order to the chaos, not one day at a time but at the stroke of a pen, unmindful that magnificent edifices that can withstand time are built brick by brick. There has to be a reason to undertake destruction to raise a new architecture. Britain was losing its preeminence as a global hub for doing business due to the outcry system for executing trades and fixed brokerage. India was on the verge of default and had to pawn its gold for foreign exchange to meet its import requirement. In present times, the corruption and the populist policies of the UPA government had turned off investors, plunging the currency to a new low. Hence, the hopes of a quick turnaround by those who had lost more than two years of their lives fighting price rise and stagnation had reached unrealistic proportions by the time Narendra Modi ascended to power. The report card so far: the Wholesale Price Index near zero, bidding for natural resources, infra projects on the fast-track, and initiatives such as Make in India, Digital India and Swatch Bharat launched to make India an attractive destination.

If the first budget of the new government in July 2014 was crammed with good intentions like cleaning the Ganga, setting up smart cities, running bullet trains and making India a magnet for religious tourism, this budget’s four cornerstones are financial inclusion, creation of jobs, building up of infrastructure to improve the quality of life, and tax transparency. The approach is to treat the root cause of inequality rather than the symptoms by offering curatives such as subsidies and guaranteed wages for digging holes leading to nowhere. The rural employment scheme has not been abandoned. In fact, the allocation to it has been increased, probably necessitated not only due to wider coverage of road and irrigation projects but also to make up for the deficient rainfall last year, which had led to slump in sales of consumer durables. As such, the pumping of more liquidity in rural areas could act as quantitative easing for FMCG, automobile, cement and steel makers and telecom services providers. An indirect fiscal stimulus will be cash transfers in lieu of subsidies and providing health, medical and pension benefits for a nominal premium. The idea of universal insurance coverage is path breaking like the Jan Dhan Yojna, the universal banking system. Similarly, the intention to bring in a bankruptcy code is a historic development. It will aid in creative destruction and evolution of new opportunities, so vital for a dynamic economy.


Clearly influenced by the role of venture capitalists in nurturing and sustaining Silicon Valley ideas, the Mudra Bank is a concept whose time had come. Despite the inroads by microfinance agencies, unorganized businesses have very few bankable avenues to rely on. The pampering of the poor and the marginalized is not at the expense of big companies. Another game changer is the offer of five 4,000-MW ultra mega power plants, with all clearances in place, to bidders. Other infra projects, usually victims of the crossfire between the industry and environmental ministries, too, can benefit from this novel concept. The scrapping of wealth tax and replacing it with surcharge on the income tax of the super rich will result in better compliance. An important step towards stability of the tax regime is the cut in corporate tax by 5% over four years in return of elimination of tax exemptions and doing away with retrospective taxation. The 2% increase in service tax along with higher freight for coal, cement and steel, will be inflationary in the short term but is a transition to the era of goods and service tax, which is 14%, from April 2016. Besides, GST will replace all other existing Central and state levies. If a realistic roadmap is drawn to nip benami transactions, it will indeed be one more visionary feature of the budget. The stock market, comfortable with cold numbers, appeared confused at a vision statement instead. It need not. The fallout from the budget will gradually gather momentum to create a transformational change in the way we are governed.

Opportunity in setbacks

The AAP win and the spy scandal in the capital should be used as springboards to illustrate the power of competition

By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.

On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.

On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.