How and where India’s government will spend its money during the coming year

India needs to revive growth in manufacturing, finance minister said.
India needs to revive growth in manufacturing, finance minister said.
Image: Reuters/Amit Dave
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India’s finance minister Arun Jaitley had a daunting task ahead of him in the newly elected UPA government’s first budget announcement. As expenditure outpace revenues, the government faces a severe cash crunch making any sort of tinkering in the country’s books extremely difficult.

“We should leave no stone unturned…in creating a new India,” said Jaitley. “We cannot leave a legacy of debt for our future generations,” he added.

He announced a slew of measures in the budget presented Thursday saying that the country needs to revive growth in the manufacturing and infrastructure sector. Jaitley proposed improving the tax to GDP ratio and increasing the non-tax revenues among the prescriptions to bring India’s economy back on track. He aims to reduce fiscal deficit by 3.6% by 2015-16 and to 3% in 2016-17.

Here are some the key takeaways from Jaitley’s maiden budget speech:

Small industries: “SME [small and medium enterprises] form the backbone of our economy,” said Jaitley. He allocated Rs10,000 crore ($1.67 billion) for providing credit to start-ups. He also proposed to set up a committee to look into ways that could revive the MSME sector, which are mostly run by people from India’s backward groups, according to Jaitley. The definition of MSME will also be reviewed.

Special Economic Zones: The finance minister said he plans to revise the guidelines of the special economic zones to revive investor interest and intends better utilization of land. These zones were set up to spur industrial activity and are exempt from taxation.

Foreign direct investment: Foreign direct investment has been a hot potato issue for quite some time now. BJP has maintained that it will allow FDI only in the sectors that it thinks will create more employment. The finance minister proposed to increase the FDI limit from the current cap of 26% to 49% in defence and insurance sectors subject to the approval of India’s Foreign Investment Promotion Board.

Housing: The finance minister earmarked Rs4,000 crore ($670 million) to National Housing Bank to make funds available for a cheaper credit for people from underprivileged background in urban areas. He also allocated Rs8,000 crore ($1.33 billion) for housing in rural areas.

Retrospective tax: Jaitley said there will be no retrospective tax bringing relief to many international companies operating in India. However, he said the existing cases such as those of Vodafone will be reviewed by a high-level committee before any action is taken. He also said this committee will scrutinize all cases of retrospective taxes after 2012.

Public sector companies: Jaitley said the government will retain control of public sector banks and will infuse over Rs200,000 crore ($33.49 billion) of equity into them to improve the financial stability. He also said that public sector companies such as ONGC etc. will invest Rs2.47 lakh crore into new projects. This is likely to improve the capital investment scenario in the country.

Agriculture: Agriculture contributes around a sixth to India’s GDP and employs nearly half of its workforce. Still, Indian farmers don’t have access to modern irrigation techniques and are largely dependent on rains. He has set aside Rs1,000 crore ($167 million) for the Pradhan Mantri Krishi Sichai Yojana, the government’s irrigation scheme.  Additionally, he budgeted Rs100 crore ($16 million) to an agriculture-tech infrastructure fund.

Manufacturing: Jaitley said he will make an investment allowance of 15% to any manufacturing company investing Rs25 crore ($4.18 million) to set up new plant and machinery. This benefit will be available up to end of March 2017. Last year, a similar announcement was made for companies looking to invest Rs100 crore ($16 million). That program will run in parallel and through the end of March 2015.

Roads: Jaitley allocated Rs37, 800 crore ($6.32 billion) to National Highway Authority of India which includes Rs3,000 crore ($502 million) for building roads in the northeastern part of India—a region that has received little of the benefits from India’s growth.

Defence: A total of Rs229,000 crore ($38.35 billion) has been set aside for defence sector. India’s military hardware is outdated and the country’s is the world’s largest importer of weapons, a dubious honour for a nation with starving citizens.

Power: Bulk of the power in India is produced using coal. And India doesn’t have sufficient coal deposits. Jaitley proposed Rs100 crore ($16 million) to promote cleaner and efficient thermal power. He allocated another Rs500 crores ($83.74 million) to set up solar power projects in Tamil Nadu, Rajasthan and Jammu and Kashmir. In order to improve power supply in rural areas, Jaitley allocated Rs500 crore ($83.74 million) to strengthen distribution systems.

Infrastructure: In order to reduce the pressure on banking system to fund infrastructure projects, Jaitley announced a modified Real Estate Investment Trusts (REITS) which would have additional incentives to attract investment in the sector. He allocated Rs7,060 crore ($1.18 billion) to build 100 smart cities across India. A total of Rs14,389 crore ($2.4 billion) were allocated to improve roads in rural areas and Rs8,000 crores ($1.33 billion) for rural housing scheme. Jaitley said all cities with populations of 20 lakh will have metros soon.

Capital markets: To protect financial sector from global shocks, Jaitley said it is necessary to strengthen the legislative framework of financial sector. He said government is soon going to put together a new monetary policy framework in consultation with the RBI. Government is also set to deepen currency derivatives markets by removing restrictions imposed on it so far.

Banking: Jaitley announced the launch of Financial Inclusion Mission on 15 August with an objective to provide banking services to all households in India. The government will also open two bank accounts for each household. Differentiated banks and payment banks will be set up to provide credit to small businesses and low income households.