Finance Minister Nirmala Sitharaman tried to give investment a push with a series of small measures in her maiden budget. Whether these steps are successful in pushing India’s corporate sector to invest more will depend on whether the budget inspires enough confidence that the government is indeed as friendly towards business and profits as Sitharaman said in her speech.
In the context of the macro-economy, pushing up investment when the savings rate is falling required larger capital inflows. This was seen clearly in the budget.
Tightrope walk on foreign investments
One key feature of the budget speech was a big emphasis on foreign investment, both equity and debt. Sitharaman removed FPI or foreign portfolio investment limits of 24 per cent to FDI or foreign direct investment sectoral caps, made the somewhat unfavourable NRI equity investment framework the same as the more favourable foreign institutional investor (FII) framework, announced foreign currency-denominated sovereign debt, and a number of other changes that will follow.
Even though, as she pointed out, India had continued to receive foreign investment last year despite a global slowdown, there are innumerable stories about foreign investors not finding India an attractive investment destination. High corporate tax rates and an uncertain tax regime and an uncertain policy environment such as the e-commerce policy have made India one of the top litigation countries for foreign companies. At a time when the US-China trade war is presenting interesting possibilities for India, creating a foreign investment-friendly environment can bring India jobs and investment.
At the same time, by increasing protectionism through proposing higher tariffs on a number of items, Sitharaman took a step back. Maybe this was the tightrope walk she had to do to keep the BJP’s ‘swadeshi’ elements happy.
Boost for small companies
The increase in the cap for small companies to Rs 400 crore to qualify for a 25 per cent corporate tax was a step in the right direction as it will allow the Rs 250 crore companies to grow large.
Perhaps in the next budget, the government will take the next step and reduce the corporate rate to 25 per cent for all, as it had promised in March 2015.
India’s credit needs
Financial sector reforms have seen small steps which might help in the short run. For example, the Rs 70,000 crore to be given to PSU banks for recapitalisation will ease the credit crunch in the economy a bit.
If not followed by liberalisation of the banking sector and more private bank licences, India’s credit needs cannot be met. Public sector banks will keep needing tax payer money year after year, as they have for decades.
The small window to help NBFCs to address the liquidity crisis and increasing RBI regulatory powers over NBFCs will also help, but without reforms in the bond market, in credit rating, bankruptcy, better regulation and supervision etc., the credit needs of India’s MSMEs, industry, infrastructure and housing will not be adequately addressed. For this, many more reforms will have to be carried out during the year.
Hopefully, as the new finance minister settles into her job, she will be able to address these in greater depth.
A large disinvestment target of Rs 1.05 lakh crore — with a declared intent to sell PSU shares as well as strategic disinvestment — is a positive signal.
While a lack of political will might have kept disinvestment low in the first term of the Modi government, the fact that it has been brought back to the table and is being spoken about and emphasised by the finance minister in her first budget speech suggests that with its bigger mandate and greater confidence, the government’s disinvestment agenda is likely to be pushed through this time.
Tax on the super-rich
The budget continued the anti-super rich message from Modi’s first term, with a tax on the super-rich. It has been reported that very few individuals in the country show more than Rs 3 crore taxable income. These are not really salaried employees who will pay taxes.
Tax evasion in India is easy, because exemptions for agricultural income allow the rich to escape taxes. It would be interesting if the data about the number of individuals in this bracket and the tax collected from them is revealed for last year, and after a year under the new regime.
Other key takeaways
Overall, Sitharaman kept to the fiscal deficit of 3.3 per cent of the GDP. She announced Rs 80,000 crore for all-weather roads under the next phase of the Pradhan Mantri Gram Sadak Yojana, and programmes for piped water, electricity and gas to every household in rural India.
This, along with the already announced Kisan Samman Yojana, the newly-announced scheme for fishermen, and housing for all by 2022, are the key schemes that will undoubtedly increase the outreach of the Prime Minister’s schemes to anyone who might possibly have been left out so far.
The vision on Antyodaya, or reaching the last person/last mile, is a political objective the BJP has repeatedly emphasised. This will undoubtedly reach the poorest in rural India, in remote villages and in coastal areas.
The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.
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