Why Budget 2015 could transform the Indian economy

Let us forget tweaking and tinkering, let us start thinking transformative. Yes, Budget Day is all about the 3Ts this time. More often than not, after the hype and hoopla attached to the Budget, one comes away disappointed and with a bad after-taste to boot. This Budget needs to be decisive. It requires a cogent articulation of the BJP's economic vision, with a gauge to measure the government's reform momentum.

The general sense however, is that it is unlikely to be a game changer. While fiscal consolidation will remain its bedrock, in many ways this is perhaps the most defining Budget in India's recent economic journey.

Equally, the Budget is on a Saturday which could take the sting out of it, since the markets will be shut and no special session is being allowed. And, there could be hell to pay on Monday if it is unpalatable. But that is besides the point, for India awaits clarity on what the BJP plans to do with the economy over the next five to 10 years. The time is here and now, for crude and other commodity prices are on a downward trajectory and this moment needs to be seized. The opportunity cost is humongous.

Innovation

Which brings me to the question of what is transformative? Arun Shourie's strategic sale programme of sick and ailing PSUs, easing capital controls of the kind done first by Jaswant Singh at Pravasi Bharatiya Divas or Gen. BC Khanduri's driven roads and highway programme were all part of Atal Bihari Vajpayee's quiver of reforms. Yes, all this was outside the Budget, but it was cutting edge. Think of how all these things have impacted the economy in myriad ways.

If India wants to metamorphose itself, then this is a defining moment in our history. Think of some of the companies and the kind of value they have delivered to all the stakeholders because of Shourie's divestment programme. Take Hindustan Zinc as a case study. In April 2002, Sterlite Opportunities and Ventures Limited (SOVL) bought 26 per cent consequent to disinvestment. Thereafter, it made a mandatory open offer to acquire an additional 20 per cent.

In August 2003, SOVL acquired additional shares exercising the call option to the extent of 18.92 per cent of the paid up capital taking its stake to 64.92 per cent. For the quarter ended September, 2014-15, Hindustan Zinc logged a total income of Rs 4,445 crore, a net profit of Rs 2,183 crore and the company's market capitalisation as of Friday was Rs 74, 365 crore. And mind you, it is a zero debt company. If you want more proof to bolster my argument, its quarterly total income for December 31, 2001 was Rs 353 crore while its net profit for the same period was a paltry Rs 3.6 crore. Exponential? Professional management, better efficiencies and techniques have turned HZL into a mining behemoth of zinc, lead, silver and cadmium. HZL currently operates the world's third largest open-pit mine, and the world's largest zinc mine in Rampura Agucha, Rajasthan.

Here is another case study to substantiate my narrative. Agreed that some of these companies may have been sold cheap in retrospect but all valuations and sale were conducted in a transparent manner following the enterprise valuation methodology. When the department of disinvestment was battling Suzuki Motor Corporation (SMC) over how much they should fork out as control premium for change of ownership of Maruti Udyog Ltd, dialogue was deadlocked because the government was committed to a price and wouldn't budge. Given the nature of the heated confabulations, the DoD packed off the Suzuki team to Agra to see the Taj Mahal. On their return, the negotiations saw fruition with the Japanese willing to cough up Rs 1,000 crore as control premium. Today, Maruti Suzuki where SMC owns 56.21 per cent has posted a quarterly total income of Rs 14,250 crore in December 31, 2014-15 with a net profit of Rs 802 crore.

Expenditure

Now, if we were to compare this to Maruti's annual results say for March 31, 2010, its total income for the full year was Rs 29,317 crore while its annual net profit was Rs 2,497 crore. Though all of this is in the past, it is clear that India's right wing parties overall have been good for business and the economy. At this inflexion point, no shortcomings will be tolerated. Let's mention a number of things that require immediate rollouts:

1. Even as one expects a capital deficit government to rationalise spending and increase capital outlay, overall public capex is not driven through budget allocations alone. Within the overall public capex of approximately 8 per cent of GDP ($2 trillion), central government spending through the Budget is only 21 per cent of the total. A large part of public capex is driven by spending by state owned enterprises, which is outside the domain of the Budget. Morgan Stanley's Chetan Ahya and his strategists recommend that the government should encourage state owned enterprises to lift their capital spending. This is crucial because India needs to also find the means to fund the capital expenditure for the Railways and the National Highway Development Programme (NHDP).

2. Spending and consumption are vital to drive India's static economy. Rural wage growth decelerated to 2.5 per cent year on year in November 2014 from a peak of 20 per cent in 2012. Kick-starting the rural economy to arrest the mass migration is vital.

3. Government has removed the discretionary powers of labour inspectors, but the Factories Act and Labour Laws Act which has been cleared by the Cabinet is expected to be taken up in the Budget session. The President has given his assent to the changes made by the Rajasthan Government with respect to amendments to labour laws, increasing the threshold of firm size to 300 workers from 100, allowing for the retrenchment of employees without prior government approval.

4. Revival of infrastructure investment - near the high of 8.4 per cent of GDP in FY 2011 from current 6 per cent of GDP - particularly in coal, electricity, roads and highways.

5. Government has started to develop roads under Engineering, Procurement & Construction (EPC) model instead of PPP to deal with lack of funds from private sector.

Many believe this Budget could be the gravitationally defining one for the economy after the early 1990s, when India unfettered its command economy. As hope floats, the chances of being disappointed abound.