Economic growth will remain high, supported by a revival in investment. The FY 2015-16 fiscal consolidation target has been relaxed to allow for increased infrastructure investment while structural reforms to improve the ease of doing business and the Make in India initiative should boost corporate investment. Export growth will be held back by the currency appreciation. The decline in oil prices will reduce pressures on the current account deficit, inflation and subsidies.
Improved public spending efficiency and increased revenue are required to fund needed public investment in physical and social infrastructure. Fiscal consolidation would also make room for the authorities to reduce requirements on banks to hold government bonds, which would release funds for private credit. Subsidy to food, fertiliser and oil products should be better targeted, and the envisaged sales tax (GST) and corporate tax reforms should be implemented swiftly. The reduction in inflation expectations provides room for monetary easing. Addressing non-performing loans would strengthen monetary policy transmission.
Investment failed to rebound in 2014, reflecting poor infrastructure and delays in administrative procedures. The government has deregulated the coal sector, taken measures to improve the business environment and opened up new sectors – including construction, rail and insurance — to foreign direct investment. The 2015/16 Budget raises investment in the rail sector. To revive corporate investment, further reforms are needed to reduce uncertainties surrounding land acquisition and tax regulations and to improve the quality of electricity and transport systems.