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A New Beginning

Author: Administrator Account/Friday, February 24, 2017/Categories: Financial Planning

A New Beginning

The BJP Government was unanimously heralded as the big game-changer for the $2 trillion Indian economy. Within a short span of 45 days, government presented a Budget that has walked successfully the three-pronged difficult task of balancing controlling inflation, reviving growth and keeping fiscal deficit in check. Post Budget, expectations remain high to find India become a $5 trn economy in next few years. Approach is to go slow but get it right. The task is akin to a five-day test match. On the whole, Budget was neither overly ambitious and populist, nor heavy on its taxpayers. It signals directional globalizing changes forward with respect to a long list of priorities.

A number of measures have been taken that entail automatic chain of massive linkages like boost to housing, smart cities, defense manufacturing, insurance, banking and many others.

Most notable is that growth, accountability, ease of doing business and governance issues all were taken up simultaneously so as to achieve sustainable growth path. Improving ease of doing business itself will work as a trigger for growth. Government is also changing the systems & procedures, reducing number of layers of decision making bodies, merging ministries/departments and clearing project and acquisition proposals faster. A new Bureau of Indian Standards Act is getting formulated to evolve a National Standards Body for goods & services with emphasis on self-certification and market surveillance instead of inspectors visiting factories.

Much discussed retrospective taxation, an important cause of trust deficit between foreign companies and Indian government, has been to a significant extent clarified. FM has assured that in future there will be no retro tax. One view is that the retrospective taxation should have been scrapped altogether. This single action would have signaled to the world that India means business and respects its laws. This would have created confidence in the Indian businessman also who has been subjected to retrospective amendments quite often. The fact is that government does not want to take such a significant decision in a hurry.

 Positive Points

  • FM’s determination to adhere to the fiscal deficit target of 4.1% of GDP for 2014-15 set by Mr Chidambaram was a master stroke. With this act, he silenced his potential opponents and also conveyed the message of fiscal prudence. This if achieved can be a trigger for soft lending rates.
  • Budgets are famous for the ‘devil being in the detail’. This time there were no surprises in the fine print.
  • There is focus on boosting infrastructure and manufacturing in multiple ways.
  • Airports in tier 2 and 3 cities will be a powerful fillip to commerce.
  • Assured 24*7 power supply via 10-year tax holiday to generators and distributors and improving access to rural areas by building roadways with a fixed daily target.
  • Budget gave impetus to tourism. Many countries’ economies solely thrive on tourism. Boost to tourism will have a number of growth effects.
  • Hike in FDI in defense to 49% was a big positive. Though India is the world’s largest importer of defence equipment, it lacks the ‘buyers’ clout’. FDI in defensewill encourage manufacturing that will create the much-needed jobs. However, transfer of technology will require much more than the ceiling of 49%.
  • Hike in insurance FDI to 49% limit from 26% with full management and control through the FIPB route is another significant proposal, which will ensure the sector to get much-needed capital. This measure was long overdue. Several segments of insurance sector need be taken up on priority as part of move towards ‘Health for All’.
  • Liberalised norms for FDI in low-cost housing will be another big positive.
  • Seems tax reforms will be a continuous process. Market gain of foreign investors will be on par with that of domestic investors instead of being treated as business income-nil long-term capital gain. Government will correct taxes on imported goods to boost domestic manufacturing.
  • Boost to domestic financial savings has been provided. This alongwith long term forex funds inflow can work wonders. This will increase the savings and consumption potential of the middle class.
  • The proposal of 100 smart cities will require massive resources. Thrust on ‘Look East’ policy will facilitate long-term funds from countries like China, Japan and Singapore, eager to invest their surplus resources in return for higher yields.

This way Budget has facilitated India’s employment oriented growth through creating cities in India. Urbanisation and development are tightly linked. Developing countries are urbanising at a much faster pace than developed countries. India’s and China’s economic transformation and urbanisation is happening at 100 times the scale of the first country in the world to urbanise—the UK—and in mere one-tenth of the time.

  • In both the railway budget and the general budget, it was made clear that PPP (Public-Private-Partnership) will be the preferred mode for driving major infrastructure development projects. FM even announced the decision to set up an institution named 3P India with a corpus of Rs 500 cr, to provide support to mainstreaming the PPPs. PPPs represent a valuable device to leverage scarce public funds with private funding to finance critical infrastructure projects.
  • SME sector to become globally competitive has also been a focus area. Immense scope exists for foreign investment in the SME sector which is likely to be next engine of economic growth of the country.
  • SEZ package is being worked out to push exportsthereby reviving the economy and making it competitive.
  • Recapitalization of PSU banks seems to be in the offing as this would help banks to further expand & boost their financial inclusion programmes. This will be through sale of shares and not government–funded infusion, giving banks operational autonomy and setting up more debt recovery tribunals. This will also ensure banks becoming responsible in their lending habits lest these get reflected in stock prices. To be in line with BASEL III norms, there is requirement to infuse Rs 2,40,000 cr in Indian banks as equity by 2018.
  • Allowing banks to raise long-term resources with specific exemptions on CRR/SLR and exemption from priority sector requirements on infrastructure loans is a big salutary measure to correct banking sector’s asset liability mismatch problem.
  • An ambitious but achievable PSU divestment target of Rs 58425 cr has been fixed for 2014-15. Central PSUs are expected to work like business outfits.
  • Assurance has been given on implementation of GST. Introduction of GST will streamline the tax administration and avoid harassment of the business and result in higher revenue collection both for the Centre and the States.

Key Takeaways

Managing expectations and addressing the current economic issues of the country have been the clear objectives of all budgetary policy decisions.

Private companies have initiated efforts towards capacity building like defense sector signaling the end of defense PSU Hindustan Aeronautics’ virtual monopoly in domestic aerospace arena. Indian defense sector has raised global expectations. Global vendors and foreign leaders are vying with each other to get the first-mover advantage.

Short-term intense scrutiny of government’s performance needs to stop. It needs time to show its meaningful performance. Government has shown maturity in sensibly retaining the good measures initiated by the previous government.

Government has opted to defer the increase in gas pricing because it wants to study the issue well, which is inevitable.

In sum, the Budget has managed to translate practically all poll promises into policies. It has deftly refrained from excessive ambition of announcing big ticket measures but has prepared the nation for a lift-off later. CAD and capital flows will be key triggers of growth going forward. A roadmap of 5 years has been chalked out to assure certainty of economic policies to the business class.

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