By: India Briefing, Dezan Shira & Associates
Recently, India’s Union Budget for FY 2015-16 outlined the federal government’s economic vision for the country. Behind the front page headlines, one of the most overlooked and important aspects of the Union Budget was an increase in states share of federal government taxes.
States and union territories’ share of the federal government taxes increased to 42 percent in 2015-16, which is up from 25.7 percent ten years ago. When federal government grants and loans are included, states and union territories will receive INR 8.43 trillion in 2015-16, which is 60 percent higher than two years ago.
The take-away is clear: state budgets are becoming increasingly important. Competitive federalism has become a governing philosophy for Prime Minister Narendra Modi’s government – Modi has encouraged local governments to create innovative policies that better utilize their resources, which can then be supported by federal government. Given this direction, foreign investors should take closer look at the most recent state budgets to identify new opportunities for growth.
Much of Maharashtra’s 2015-16 state budget focused on infrastructure development. The state government identified improved irrigation and roads in rural areas as one way to help achieve a 4 percent growth rate over the next year. Irrigation is to be improved with Rs 7,272 crore (US$1.2 billion) set aside for 38 irrigation projects across 69,000 hectares of land. In addition, Rs 970 crore ($155.6 million) will be used for energizing agriculture pump sets and setting up over 7,000 solar agriculture pumps. To improve transportion in rural areas, Rs 30,000 crore ($4.8 billion) was set aside for roads, which will help industry and trade across the state.
Aside from infrastructure development, the state budget contained several other important changes for foreign investors. The state announced a five percent entry tax on steel imported from other states, which will likely increase the cost of material used for construction, manufacturing and heavy machinery. The state government increased premium rates in the Floor Space Index (FSI), which defines the permissible area for construction on any plot. This rate increase will likely lead to an increase in property prices, especially in Mumbai, which already has some of the highest rates in India.
Another important change is that the Local Body Tax (LBT) will be abolished from August 1, 2015. The LBT is imposed by local civic bodies on entry of goods into a local area for consumption, use or sale. Local businesspeople and traders welcomed the reform, which will allow more freedom for the flow of goods. However, the loss of LBT revenue will be offset by an increase in value-added tax (VAT).
The state government’s budget includes new reforms and investment schemes valued at Rs 139,139 crore ($21.87 billion), which is ten percent larger than the 2014-15 budget. State authorities expect strong tax revenue to underwrite increased spending designed to fuel economic growth. The total breakdown is Rs 96,944 crore ($15.57 billion) for developmental expenditure and Rs 39,975 ($6.42 billion) for non-developmental expenditure.
Authorities have earmarked investment for the social sector as well as national schemes like Make in India and Digital Gujarat. To support Make in India, the state government has allocated Rs 3,623 crore ($582 million) to the Industries and Mines Department. To support the Digital Gujarat, the state government has allocated Rs 323.55 crore ($52 million) to create district-level Wi-Fi facilities.
Haryana’s 2015-16 state budget contains no new taxes for any industry. In addition, the VAT on bio-fertilizers was removed and the rate of VAT on LED lights, pipe fittings and pre-fabricated steel structures was reduced from 12.15 percent to 5 percent.
In an effort to use technology to improve government efficiency, the government plans to create a state resident database to link e-governance applications and create data that will help the local government become more responsive. This effort will be supported by the National Optical Fiber Network System, which will bring 100 Mbps internet connections to about 4,000 Haryana villages by September 2015.
The Karnataka state budget strengthened several populist schemes. For example, authorities granted senior citizens 60 years and older a tax exemption from the Professional Tax. The state government provided considerable support to agriculture sector, but failed to provide industry with the same level of support. Local observers note that the budget also avoided concrete initiatives to increase electricity production and the overall power supply. However, the budget did formulate a Micro Irrigation Policy to promote the efficient use of water, and announced plans to develop the Bengaluru-Mumbai Economic Corridor over the next five years. The latter initiative will prove a boon for industry and inter-state trade.
After the bifurcation of Andhra Pradesh, many investors remain interested in the direction of the new state. The bifurcation left Andhra Pradesh with a large revenue and fiscal deficits of Rs 7,300 crore ($1.17 billion) and Rs 17,584 crore ($2.82 billion), respectively. As a consequence, the state government was unable to make as many big allocations as other states. Allocations for irrigation and social welfare, in particular, were drastically reduced in Andhra Pradesh’s budget.
The state budget did, however, allocate Rs 3,168 crore ($508.5 million) for developing a new capital, named Amaravati. Singapore-based Jurong International and Surbana International Consultants will produce a master plan for the capital. State authorities’ other major investments include Rs 4,360 crore ($700.6 million) for the energy sector and Rs 2,960 crore ($475.7 million) for the road and building sector. Businesspeople will appreciate that the state government did not introduce any new taxes; however, this will likely contribute to the state deficit.
Agriculture and Infrastructure Dominate
Agriculture and infrastructure received substantial support from most state government budgets. The importance of agriculture, in particular, shows that state governments want to make sure they retain political support from rural areas, while the money spent on infrastructure shows the importance authorities place on improving business conditions.
This demonstrates the tricky balance state governments must maintain in India. On one hand, state governments remain keen to bolster traditional support bases to remain in power, on the other hand they recognize the need to develop infrastructure to compete nationally and internationally. If the Modi government continues to support competitive federalism, state governments will likely place more emphasis on infrastructure and industry in the future.
This article was first published on India Briefing.
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