The biggest challenge the Finance minister will face in his budget preparation will be 
on how to balance Growth vs Inflation and at the same time help in creating new jobs especially in the manufacturing sector. Currently manufacturing contributes just 16 percent to India’s GDP which needs to be at least 25% if we are to address 12 million people joining the workforce. In the face of rising oil prices, poor monsoon and CPI already nearing double digits, the challenges become even more testing. Considering that the government has taken over mid-way in the year, we will look more from directional point of view on what policy interventions are being planned in short to medium term.
We believe, clear transparent policies and their implementation is a must, if any investment cycle is to be started in any segment. Policies on FDI investment in real estate, infrastructure including power sector with well-planned initiatives to help restart stalled projects particularly in the Power, Coal, Roads, Railways will be of great help to the growth of economy.
We expect government to announce fiscal incentives for new capex where we can see encouraging participation from sovereign debt funds of countries like – Japan, China, Germany, France, Saudi Arabia. This will do well to balance the shortfall in $1 trillion investment plan which the 12th five year plan talks about for infrastructure development.
Indian economy is basically consumption driven which will mean extension of sops for demand creation. But we must also de-bottleneck the supply side otherwise this may lead to further inflation. The waiver of excise duty till December 14 is a positive step for demand creation and a matching increase in productivity from supply side will be of great help. To boost the demand cycle GOI can look at raising the tax exemption limit from present Rs 2 Lakhs to at least Rs 3 Lakhs, medical reimbursement exemption limit revision from the current Rs 15,000 and increase in upper limit of deduction under section 80C of the Income Tax Act from Rs 1 Lakh to at least Rs 3 lakhs. This will help to promote savings rate which as a % of GDP has dropped from 38 to 30 and gap between financial to physical composition of household savings which is now the widest in the last 13 years.
But at the end of the day, it all comes down to having a more effective implementation of the stated policies and projects on the ground which will decide whether we get back to heady days of 2009 – 10 with GDP growth rate of greater than 8%.
