The proof of Budget will be in follow-up
THERE IS NO UNDERESTIMATING the very difficult context in which Finance Minister Nirmala Sitharaman had to present the FY20-21 Budget, with economic growth for FY20 having been downgraded to just 4.8 per cent by the IMF, high inflation making some observers worry about the risk of stagflation, unemployment at a worrisome level and a dearth of investment from the domestic private sector. All of this in a very troubled global economic environment. The only bright spot has been the increase in Foreign Direct Investment.
The objectives for the finance minister were thus quite clear: on the one hand provide the measures needed to boost domestic consumption which has been lagging with a severe drag down impact on key sectors such as automotive and real estate, and on the other hand, improve conditions for industrial activity, investment and accelerate India’s move towards more high-tech activities. What has been announced with respect to helping domestic consumption should be able to help the economy as the significant tax alleviation measures and the plan to boost the agricultural sector and improve farmers’ conditions should have a direct positive impact . They touch mostly the categories of people who would immediately translate the savings on taxes or the improvement in revenues into increased personal consumption. In the same way, the fivefold increase of the bank deposit insurance should theoretically reassure individual depositors and help shift savings from under the mattress to banks accounts and help improve the condition of the banking sector and its lending capabilities. The picture is more blurred when it comes to improving conditions for investment and especially attracting more FDI. Here again the finance minister is relying significantly on tax incentives such as the abrogation of the Dividend Distribution Tax, which eliminate a financial burden on corporations, and the 100 per cent tax exemption for sovereign wealth funds investing in infrastructure projects.
In the same way, the opening of the education sector to FDI should lure foreign investors in that domain and help bring a much needed expansion and improvement of the capabilities of this sector so crucial to the future of the country. The announcement by the finance minister of the government intention to launch an IPO to sell a part of its holdings in the LIC is also a much welcome move. However, much will depend on what share of its holdings the government will be ready to relinquish, what kind of control it intends to retain on the company. So, don’t expect any move from private investors — especially foreign ones — until the modalities are clearly outlined.
On the positive side, one needs to mention the additional financial efforts announced for the development of technological activities in domains such as big data, quantum technology, renewable energy on which India has to bet on its future. Here again, this should help strengthen and heighten the country’s positioning and attractiveness as an emerging global high-tech hub able to attract foreign investment and talent. However, there is nothing in the Budget that will help address some key structural impediments to more investment — foreign and domestic — such as action on the major constraints in the domain of labour flexibility, land acquisition, the myriad of regulatory clearances still needed. There is no denying the significance of fourteen places rise of India’s ranking in the World Bank Ease of Doing Business Index to 63rd position, but much more is still needed. As importantly, the bureaucracy will have to follow-up on government decisions and show that it is truly dedicated in ensuring a greater tax predictability for foreign companies operating in India. Last but not least, as good as budget announcements can be, a crucial reality test for investors in the coming months will be whether, after a number of costly political diversions which have affected negatively India’s international image, the government will show that it is fully re-focusing on economic and social development as its absolute priority. Otherwise, all the ambitions about a 10 per cent growth for the next fiscal year and a $5-trillion GDP by 2024 will remain empty claims.
With the huge mandate that Prime Minister Modi has achieved in last year’s elections and the high expectations that this generated inside and outside the country there would be no excuse to miss a historic opportunity to get India to the kind of sustainable high growth this country can achieve — and deserves.
What has been announced should be able to help the economy as the significant tax alleviation measures and the plan to boost the agricultural sector and improve farmers’ conditions should have a direct positive impact