Media Center

March 4, 2015

Budget 2015: No Big Bang, but budget theory works

By Henry H McVey and Sanjay Nayar

Finance minister Arun Jaitley delivered some welcome messages in support of long-term growth, and he addressed some of the bigger issues facing businesses in India.

What we found particularly refreshing was a renewed focus on funding infrastructure investment — even at the expense of fiscal consolidation. This initiative is important because, to drive up productivity and drive down inflation, more and better investment, infrastructure in particular, is required. Additional infrastructure investment is also required to fulfill Prime Minister Narendra Modi's desire to foster a stable business landscape. The 2015-2016 budget certainly does this by focusing on boosting infrastructure spend by Rs 70,000 crore ($11.36 billion). This commitment to infrastructure spending is immensely helpful to reviving private investment, which fell to 8.5% of GDP in 2013, according to Bloomberg. These are reportedly the lowest in government data since 2005. We believe that real investment into real Indian businesses will attract foreign money.

FDI inflows had slowed in recent years not necessarily because liquidity was limited - quite the contrary considering investors' appetite for yield — but because the challenges facing businesses have eroded confidence. We see the government's pledge for a 20,000-crore infrastructure fund to provide equity for projects as a tangible commitment to both India's assets and the country's potential. If India is backing itself, foreign investors will take note.

Another initiative to stimulate growth would be to allow private equity, real estate and hedge fund professionals to invest in alternate investment funds. While the market still needs to carefully assess the full implications of this from a mechanics standpoint, it highlights the government's focus on encouraging foreign investment.

Beyond increased infrastructure investment, tax stability has been a priority for India. Importantly, the PM's earlier rhetoric to introduce a more predictable tax regime to further boost investor confidence and enhance FDI inflows has now been followed up with a plan to reduce corporate tax to 25% over four years. The commitment to introducing GST from April next year should simplify taxation and has the potential to make manufacturing more competitive. Reducing custom duties on 22 items and introduce a tax regime that is globally competitive on rates are also tangible actions to support businesses. These efforts to reduce tax uncertainty will only compel international investors towards Indian opportunities.

(Henry H McVey is head, Global Macro & Asset Allocation, Sanjay Nayar, CEO, KKR India)