Jaitley pushes the growth button

The Budget has allocated almost $90 billion for building new infrastructure. This will help restart the stalled private investment cycle and spur demand but the absence of serious efforts to resolve the non-performing assets (NPA) problem in the banking sector will hurt. Indian finance minister Arun Jaitley, who reiterated his earlier statement that private investment remains sluggish despite incentives, has done his bit to revive the entrepreneurial instincts of private entrepreneurs, both domestic and foreign, by announcing a massive $90-billion infrastructure building programme - covering roads, highways, railways, inland waterways, ports, rural infrastructure, broadband, toilets and more - that promises to boost corporate top and bottom lines, create jobs and fuel a consumption and demand revival. He has also addressed the demand side by lowering income tax rates in the lowest slab from 10 per cent to 5 per cent. This will put an additional $3 billion in the hands of consumers. Even a modest velocity of three - appropriate for India - will lead to a $9-billion rise in consumer demand and contribute significantly to a revival in demand. And he has taken a big step towards Prime Minister Narendra Modi's goal of turning India into a (mostly) digital economy by announcing the imminent launch of Aadhar Pay, a merchant version of the payment system based on India's Universal Identify Card that is being given to every citizen. Since every Indian, even the poorest of the poor who may not have debit or credit cards and/or mobile wallets, will have this, it will provide a massive boost to digital transactions across the economic value chain. The target: 25 billion Aadhar Pay transactions in 2017-18. Meanwhile, the banking system will make available an additional one million point-of-sale (PoS) machines by the end of the next month and a further 2 million Aadhar-based PoS devices by September this year. Towards a higher growth trajectory Private investment, which has been anaemic over the last five years, and consumption expenditure, the main driver of demand in the Indian economy needs to grow for India to expand at 8 per cent-plus - the threshold identified by most experts for the country to be able to generate jobs for the millions of young people who join the workforce every year. Arun Jaitley's Budget, presented on February 1 provides a strong push to both, though economists have been quick to add caveats to the final result. But we'll come to that later. Boost to consumer demand First, let's look at consumer demand. Official figures show that Private Final Consumption Expenditure, proxy for money spent by Indians on consumption goods and services, for 2016-17 is likely to grow at 6.54 per cent, compared to 7.14 per cent in 2015-16, indicating that Indians have been niggardly about opening their purse strings. The massive Rs 3.96 lakh crore (about $57 billion) allocated for investment on roads, highways, railways and inland waterways in Budget 2017-18 will almost certainly lead to a large uptick in consumer demand. Highway to high growth Jaitley has increased the allocation for roads and highways to Rs 64,900 crore ($9.8 billion) from Rs 52,447 crore ($8 billion). Economists are hopeful that like Atal Bihari Vajpayee's mega highway building programme, this increased allocation, too, will set off increased spending and lead to an all-round revival and higher growth for the economy. Vajpayee's highway programme was launched in 2001. This showed immediate results - the number of workers in the construction sector jumped 50 per cent from 17 million in 1999-2000 to more than 26 million five years later. This set off a virtuous cycle of consumption-led growth all round - because a boom in the construction sector directly feeds demand in about 250 feeder and downstream industries such as steel, cement, construction equipment, commercial vehicles, electric equipment, etc. And this, in turn, creates more jobs and leads to greater demand for a host of other non-industrial, consumption items. Rural roads as growth drivers One little known fact about rural India is that more than 50 per cent of jobs in the heartland come from non-farm activities - industry, small traders, services and non-agricultural wage labourers, etc. Thus, village roads are a key enabler of rural commerce. In addition, like in urban and more accessible areas, building rural roads also helps generate large primary employment. Jaitley has increased the allocation for the Pradhan Mantri Grameen Sadak Yojana to Rs 27,000 crore (including a 40 per cent contribution from the states) from just a third of that sum when he took office two-and-a-half years ago. This will help raise the purchasing power of the rural population, increase demand for consumer goods and drive the investment cycle into a relatively faster growth trajectory. The Ministry of Finance has agreed to maintain its share of allocation for rural roads for the next three years, so, the expected growth in rural job creation and rise in consumption demand are expected to be sustained over the foreseeable future. More roads=more jobs The higher allocation for rural roads will automatically translate into greater lengths of metalled roads in rural India. Under the Modi government, the pace of rural road construction has jumped more than 35 per cent from 73 km per day in the last three years of the UPA regime to 100 km per day. The Budget envisages raising this to 130 km per day, the highest in recent years but still about 10 per cent short of its peak expansion rate of 145 km per day in 2009-10. The higher rate of rural road construction will generate higher employment and, therefore, greater prosperity across rural India and drive demand for industrial goods, which, in turn, will help rev up the investment cycle. Employment generator A look at empirical data will reveal an interesting nugget of information. In the five years beginning 2007, total infrastructure investments in India jumped to $475 billion or about $95 billion per year. Job generation in this sector also doubled to more than 50 million. The problem this time: In 2016-17, gross fixed capital formation (GFCF), which measures total investment in the economy, actually slipped into negative territory - at -2.2 per cent - according to CSO. Will history repeat itself Despite this, economists are cautiously optimistic. Their optimism is qualified because private investment, a critical driver of growth has remained stubbornly sluggish as is evident from the negative GFCF figure, but Jaitley is obviously betting on his massive allocation to infrastructure - Rs 48,000 crore ($7.2 billion) more than the previous year - to turn things around. Reviving stalled investments Here, there are some positive tidings for the economy. The Project Monitoring Group, which is mandated to clear the roadblocks clogging up several lakh crores of public and private investments, cleared projects worth more than Rs 1 lakh crore (around $14.5bn) last year, as a result of which, the investment rate has picked up in the current financial year. This process of unlocking stalled investments will effectively mean more than the allocated $57 billion investments coming on stream. And this will, to some extent, compensate for the stagnant private investment rate. Chugging along Budget 2017-18 was unique not only because it was presented on the first day of February instead of the last, but also because it was the first to have subsumed the Railway Budget, which has always preceded the Union Budget by two days. But being presented as part of the consolidated accounts of the Government of India hasn't hurt the Railways. Jaitley allocated Rs 1.31 lakh crore (around $15bn) to the Indian Railways, an increase of 12 per cent over the current year. This includes laying an additional 3,500 km of railway tracks, up 25 per cent over the figure of 2,800 km in 2016-17. Then, it has identified 25 stations, including iconic ones like New Delhi and Kolkata, for redevelopment with private sector participation. This is an off-Budget item. At the time of going to press, there are reports that a South Korean company has bid to redevelop the station at a cost of Rs 10,000 crore (around $1.5bn). Every station, obviously, will not attract the same level of investment, but if the Delhi bid is any indication, it is probable that private and foreign investors will spend big bucks on projects that promise decent returns. And this will help keep the wheels of private investment spinning. Then, there is also the project to power 2,000 stations across the country with solar energy. This will not only help reduce India's carbon footprint and help it meet its climate change goals, it will also help meet the Prime Minister's goal of generating 100,000 MW of power from solar energy in the next five years. Growth via Digital India Of all the Narendra Modi government's flagship schemes, Digital India is, arguably, the one that receives the least media attention. But unobtrusively, away from the public eye, more than 150,000 km of optic fibre network has been laid across India. This Budget has allocated Rs 10,000 crore ($1.5 billion) to expand this network to 150,000 gram panchayats. This, too, will help reopen the investment cycle and lead not only to increased demand for internet-related equipment such as routers but also generate demand for other consumption items, driven by improving Net penetration in rural areas.

Housing for all Another scheme that promises to unleash massive investments and generate hundreds of thousands of jobs is the renewed focus on Housing for all. To meet its target of providing a roof over every Indian head by 2019, the scheme will have to ensure the construction of 3.5 million houses every year, almost double the figure of 1.82 million units constructed in 2015-16. Giving this sector infrastructure project will make it easier for realtors to launch and complete projects. And like big infrastructure projects such as highways and railways, rising demand for housing will also feed demand across the same 250-odd industries that feed the former and reinforce the virtual cycle of greater demand leading to greater jobs leading to greater overall prosperity leading to higher growth. Outlay on toilets Jaitley has allocated Rs 16,248 crore ($2.5 billion) for building toilets in 2017-18. This is 30 per cent more than the revised estimate for 2016-17 of Rs 12,800 crore, which itself was double the previous year's figure of Rs 6,524 crore. Like large infrastructure and housing, this initiative, too, will demand in a host of feeder industries such as cement, steel, sanitaryware. Being a much smaller ticket item than house, it can generate jobs at a much faster rate and quickly ramp up spending power among rural construction workers. Push to rural infrastructure Rural India accounts for 46 per cent of India's GDP, and a significant portion of the demand for cement, steel, two-wheelers, textiles, footwear, televisions and electrical gadgets. Buoyed by a good monsoon after two consecutive years of drought, the farm sector growth jumped to 4 per cent in 2016-17 from 1.1 per cent the previous year. This is already being reflected in the relatively higher demand for two wheelers, steel and a host of items consumed in the hinterland. To sustain this momentum and also to reduce India's dependence on the rain gods, Jaitley has proposed to spend $28 billion in 2017-18 on building rural infrastructure. As discussed above in the context of roads, highways and housing, this will lead to significant orders for the Indian corporate sector as well as local contractors and generate huge direct employment in rural India. The spin-off, in terms of increased demand for material and equipment required for this rural infrastructure push will, in turn, create jobs in urban and other non-rural areas and lead to a jump in consumption demand - a key ingredient for sustainable and high GDP expansion. The direct giveaway The Finance Minister has also reduced the I-T rate in the lowest tax slab from 10 per cent to 5 per cent. This will reduce the tax outgo of assesses in that tax slab and increase cash in hand for all others by Rs 12,500 (around $187) per annum. Since elasticity of demand is highest in lower income groups, this giveaway will cumulatively generate a demand of about Rs 60,000 crore ($9 billion), given velocity of three. This will translate into higher demand for cars, TV, two-wheelers and other items consumed by the middle classes. Bank recap a damp squib, to prove a drag on growth Early in this article, we had highlighted some caveats flagged by economists and promised to return to them later. Stressed balance sheets from past expansion plans gone wrong and the inability of banks to lend as a result of holding the resultant unpaid loans are two sides of the same coin - and a significant contributor to the sluggish private investment cycle. Analysts had been hoping that the finance minister would announce some sort of an at least partial bailout of banks to shore up their ability to resume lending to spur growth once again. However, his allocation of a measely Rs 10,000 crore ($1.5 billion) towards bank recapitalisation is wholly inadequate given the gravity of the crisis. Jaitley had his reasons. He had to find funds to push infrastructure investments, he had to maintain fiscal discipline, failing which international ratings agencies could have downgraded India to junk category, and he had to compensate the common Indian for the hardship they had endured as a result of the demonetisation shock. 8% growth still some way off The choice he made is understandable, but crucially, it leaves the Indian economy running on one cylinder less. Most economists and analysts are unanimous that Jaitley's Budget will stoke a recovery in the economy and raise GDP growth to beyond 7.5 per cent - the government's own Economic Survey puts it in the 6.75-7.5 per cent band. But the magic figure of 8 per cent-plus will have to wait for a time when all the pieces of India's economic jigsaw - including healthy banks and a good monsoon - are once again in place.