Opinion: Most Important Budget in Years for Manufacturing

(Kumar Kandaswami is Senior Director, Deloitte in India)

The Modi government's first Budget, presented in July 2014, was seen as a procedural matter and not much was expected as the government had barely been in office for a month. The forthcoming Budget, however, will be amongst the most important in the last several years.

Through the course of last year, the government has reached out to other countries; its focus on trade and commerce has been applauded. The fact that the government is making commitments to powerful trading partners means there is seriousness about getting things done.

The fact that the Prime Minister made 'Make in India' a flagship program of the government meant leadership attention. The reforms that were sought to be pushed through demonstrated the strength of the government to make difficult decisions.

But questions are being asked, over the last two or three months, about the need to do more as manufacturing is not visibly growing. There are a few important things that have to be done in the Budget.

In the light of the high inflation in the recent past, the ability to consume went down, taking with it domestic savings. Therefore, the consumer will take time to come to the party even though the inflation problem seems to have been addressed; consumer-led demand will be inadequate to push the manufacturing sector's share in the GDP to 25 per cent.

What is needed to push strong manufacturing growth is investment. Investment in infrastructure as well as private sector investment have dropped considerably in the last few years. Areas that need urgent attention are viable PPP structures in infrastructure, getting the mining sector going and enabling investment in new sectors like port and railways.

There is fair amount of capital that has gone into the power sector and a fair bit of it is as yet unproductive. The sector seems to be prone to business model and policy risks. This is not the recipe for investment to flow. If this sector does not get fixed quickly, the manufacturing industry, in general, will not achieve the competitiveness it requires to attract further investment.

While fuel was a big problem and it is being addressed, one would think there are others that need to be solved. A large part of India's manufacturing comes from a handful of states. Even within these states, the concentration of GSDP around a few cities, particularly the capital city, is high. This results in factor conditions and costs not being attractive.

Manufacturing can be pushed by better connectivity and making logistics less of a headache.

In spite of a large potential demand, there aren't takers for road projects as one would desire, according to press reports. Many of the recent projects are not being given out on PPP structures but are government-funded. This would restrict the extent of road building that can take place in the country - the government has finite amount of capital to invest. Therefore, getting the PPP structure right is of utmost importance. Not just for the road sector, but also other capital intensive ones.

Mining has to deal with both executive and judicial dimensions. Without getting into what caused the current situation, getting the sector going would be important to be able to feed the manufacturing sector. Admittedly, there is action being taken - e-auctions in coal, for example. Does this take care of difficulties in the larger definition of mining? Mind you, all of this without making compromises on the long term environmental interests - just so that nobody thinks of addressing mining issues means polluting or causing an adverse social impact.

Private investment in railways and ports is being spoken about. Where will the investments go? It cannot be in just food and beverage. It has to be far more substantial. Do these departments have the legal structure in the core areas of their operations where investment is required, to be able receive private capital - let alone FDI?

All of these sectors not only facilitate the manufacturing sector, they directly generate demand. In the short term, the value of such demand can be invaluable. If you consider the timing, when the world commodity prices are soft, this is best opportunity to build out infrastructure. Furthermore, the strengthening of the supply infrastructure can largely address fears about excessive inflation in the future.

All of these, with potentially cost-effective, easier land acquisition and supply chain efficiencies arising out of the GST implementation, could be beneficial for manufacturing.

That the projects are implemented in the states and effectiveness of policies will finally depend on how good the states level processes are is a cliché.

This, by no means, is an exhaustive list of things to do. But one the author keeps coming across in conversations with business leaders and academics. One recognizes these are some of the more difficult things to do - they would have already been fixed, had they not been. And, that is precisely why the forthcoming budget will be watched with interest!

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