Published in The Financial Express on Sunday, 12 June 2016
Will the FY2016-17 Budget boost private investment?
Kishore Kumer Basak and Shashish Shami Kamal
The proposed budget for FY 2016-17 has set the target for gross domestic product (GDP) growth at 7.2 per cent. In order to achieve this growth, an additional Tk. 802.17 billion (80,217 crore) or 1.5 per cent of GDP is required as private investment (target for private investment is 23.3 per cent as a share of GDP). In this connection, the budgetary and fiscal measures for FY2016-17 aim at increasing the growth of domestic and export-oriented industries, raising infrastructural investment and allocating resources for development projects in the industrial sector. While following the conventional three-pillar approach, the budget has somewhat neglected precise outlines and implementation of institutional and policy reforms. In this context, it is essential to inquire whether the proposed budget is equipped with the necessary measures to increase the additional amount of private investment through industrial growth and achieve the estimated growth target. This analysis is based on the immediate reaction on the proposed National Budget FY 2016-17 by Centre for Policy Dialogue (CPD).
Widening of fiscal measures in various cases will contribute positively for the development of domestic market-oriented industries. This year budget has proposed to reinstate the slab of 15 per cent as customs duty (CD) in order to support domestic industries. Many of the intermediate products related to chemical, plastic, electric and electronic industries have been transferred to the new slab of 15 per cent from 25 per cent. This reduction of CD will benefit the related industries in slashing production cost. The concession of duty tax on capital goods of the previous year will continue indicating stability regarding import of capital goods. Equipment used to set up pharmaceutical industry, such as refrigerator, and Laboratory Stability/Humidity Chamber will be treated as capital goods (duty will be reduced from 25 per cent to 1.0 per cent) which, in turn, may reduce the set-up cost of new factories. On the other hand, the limit of tax-exempted turnover has been raised from Tk. 300 thousand (30 lakh) to Tk. 360 thousand (36 lakh) which will add profit surplus to small enterprises. On the other hand, withdrawal of VAT exemption from handmade loaf, bun and low-cost shoes and slippers made of rubber and plastic, locally manufactured hardboard, fabric woven by power looms will likely have adverse implications for the related small and medium-sized enterprises (SMEs). Then again, withdrawal of VAT from locally produced RDD and parts of wheat cluster is a welcome step.
Regarding the export-oriented industries, the prospect of positive changes in global demand in FY2016-17 will directly influence investors’ decision to invest. Cash incentives are to continue for 19 sectors (3.0 per cent to 20 per cent) including three latest (during the budget for FY2015-16) included sectors (furniture, plastic goods and potato starch). A total of Tk. 45 billion (4,500 crore) has been allocated as export incentives under various conditions while Tk. 5.0 billion (500 crore) is allocated exclusively for the jute sector. These incentives will increase the profit margin of exporters from various sectors and encourage them to increase their market share and explore non-traditional export destinations. On the other hand, the policy context for ready-made garment (RMG) is complex. RMG sector is critically important, as it holds the major share of investment in Bangladesh (CPD, 2016). Thus, investment by the wearing apparel and textiles has large implications on the overall trend in private investment. Foreign direct investment (FDI) in the RMG sector has not grown much since 2013. In this context, two fiscal measures targeting RMG sector are likely to ‘Neutralise’ the overall effect. The rise of AIT (Advance Income Tax) from 0.6 per cent to 1.5 per cent will be partly neutralised by reduced corporate tax rate (from 35 per cent to 20 per cent) for the sector. However, the revised AIT may become a burden for industries that are small in size and have low capacity. This may, in turn, discourage investment. That is why the rate of AIT needs to be revised considering the trade-off between the targets of revenue generation and investment promotion.
As a welcome initiative, the government is showing its commitment to safe environment in workplace and has proposed concessional facilities for fire equipment and inputs for pre-fabricated buildings which will be extended to non-RMG export-oriented industries. This will facilitate safe workplace for the workers in other industries as well.
ADP (annual development programme) allocation for industrial sector has shown an upturn in FY2016-17 (increased by 40.5 per cent over FY2015-16) after successive decline since FY2012-13. Allocation for industrial and economic services (Tk. 35.58 billion or 3,558 crore) has increased by 29.1 per cent and 30.1 per cent (from budget and revised budget for FY2016 respectively). However, overall progress of projects, related to the industries, is no different than the general progress of ADP implementation in the country. In the industrial sector, a total of 53 projects are currently being implemented, of which even projects are new. Out of 15 projects that are likely to be completed by FY2016-17, only nine projects have received sufficient allocation for completion in due time. And, the rest six projects may not be completed in due time. Surprisingly, the number of unapproved and unallocated project is 61, among which are 16 BISCIC Industrial Estate and eight Economic Zone projects. This is evident that development allocation for the industrial sector is not sufficient enough to initiate some of the very crucial investment-promoting projects at this very moment.
To increase private investment and growth, public investment in infrastructure has been heavily increased. However, ‘Crowd-in effect’ of this type of public investment will be tested through implementation of ‘mega projects’. Among the 10 ‘fast-track’ projects, eight account for a total allocation of Tk. 187.45 billion or Tk 18,745 crore (16.9 per cent of total ADP) in ADP for FY2017-17. Apart from the Padma Bridge project, which is expected to be completed by 2018, a number of other projects are expected to be completed around FY2022-23. At least three projects (Rampal Coal-Fired Thermal Power Plant, Rooppur Nuclear Power Plant and Padma Rail link) involve substantial debt servicing with relatively higher interest rate. Repayment of these loans may put pressure on overall debt burden. Only good progress in all the infrastructural projects that are scheduled to be completed by FY2016-17 will bring back investors’ confidence.
A few reform measures have been mentioned in budget FY17 in terms of administrative, institutional and policy perspective. The measures include establishment of new land management system, national strategy for Development of Statistics (NSDS), VAT and SD Act (deferred to FY2017-18), etc. Policies and laws need to be upgraded, amended or improved in some other cases like Customs Act, Companies Act, Foreign Private Investment Act, Mine Act, Port Act, Export and Import Control Act, and Inland Shipping Act, Weight and Measurement Act, Acquisition and Requisition of Immovable Properties Act. Administrative reforms are much required to facilitate small and medium investors in terms of providing hassle-free (one stop service) services for various legal documents and permissions.
Altogether, the budget for FY2016-17 promises of creating opportunities for higher investment and subsequently higher growth. However, higher investment is currently depended on availability of gas and power, timely completion of major infrastructure-related projects, administrative reforms, and setting up of economic zones with all the required facilities.
Kishore Kumer Basak is Senior Research Associate and Shashish Shami Kamal is Research Associate at the Centre for Policy Dialogue (CPD). email@example.com firstname.lastname@example.org