While this year's Budget has been good on the overall direction that it gives to the economy, the finance minister seems to have shirked from some tough measures on the infrastructure front.
Specifically for a developing country like ours, to move into the path for higher and sustainable growth, certain key propellers are required.
Basically, on the structural side of development, apart from a strong human capital, we require a high level of domestic savings rate, pretty decent foreign direct investment (not only foreign institutional investors) inflows and consequently a faster development on the infrastructure front.
And this Budget, we believe, has failed on all of these accounts. Let us understand them briefly.
1. Domestic savings: If we are to emulate the Chinese example of rapid growth of the years, a high level of domestic saving rate is a must. Compared to China's near 50%, India's saving rate as a percentage of GDP stays well below the 30% mark (though some economist say that high level of subsidies and low taxes have resulted in higher savings rate in China).
And while the current government has indicated that the central government's fiscal deficit for FY05 (4.5%) will be below last year's levels of 4.9%, readers need to understand that this has been made possible through an accounting adjustment whereby some of the central government's borrowings have been categorised as those belonging to the state governments.
If one were to consider the combined deficit of the central and the state governments, there has not been any improvement in the situation.
And the spending programs that the finance minister has announced in the budget makes no clear mention as to where would the revenue come from to fund the proposed investments. Such high deficit levels will then do nothing to boost the national savings rate.
2. Foreign direct investment: With a low national savings rate, what the Indian economy requires is a strong inflow on the FDI front, where we have consistently been laggard in the past.
For instance, compared to China's $61 billion of FDI inflows, India received a mere $3.5 billion in 2004. While there are arguments about the different methods of categorization of foreign inflows by India and China, even if were to take a common method, there seem to be a wide difference.
While, off late, there have been some minor initiatives on the FDI front whereby the government has eased the limits for certain sectors like telecom, aviation and insurance, the scale of inflows is still lacking.
And we believe that this is more on account of the structural problems like a corrupt administration and slow judicial process that has limited the flow of foreign capital into the country.
3. Infrastructure development: This area has received the least consideration in this year's budget. While India requires around 10% of GDP (around $56 billion) spent every year towards infrastructure development, the budget has committed a mere $5.1 billion, towards infrastructure development in areas like telecom, roads, power, housing and urban renewal.
Out of this, around $2.3 billion is likely to be financed through an SPV that will be backed by the foreign exchange reserves.
In a recent interaction with us, Ajit Dayal, Chairman of Quantum Advisors, mentioned, ". . . we are going to be spending 10% of our GDP on infrastructure and instead of that we have got Rs 100 billion in this SPV (special purpose vehicle) to build something on infrastructure, details yet to be worked out! Well, what is this SPV supposed to do? We don't know."
"To put Rs 100 billion in perspective, it is about $2 billion or roughly about 0.3% of India's GDP. This is the country, which needs to spend $50 billion or something like 9% of GDP just on building these roadways. We will spend $150 bn, which is another 25% of our GDP on building power plants, forget about the airports bills, ports bills and everything else. Just these two items are more than 1/3rd of our GDP and yet, instead of 30% of GDP, fine, you can't spend this in one year, but if you want to be bold, then you got to put 10% of GDP on the table," he added.
To conclude, while the Budget has been fairly okay on the tax front and the overall direction that it has given, it has offered little hope that Indian infrastructure spending will break out of the low 5%-7% share of GDP that has prevailed over the past few years.
If we really wish to break the jinx of a low Hindu rate of growth and sustain at higher levels, infrastructure needs to be given the prominence that it deserves. That's all!
This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.