BackHas Union Budget 2017 made India a better investment destination?
Amid global and local uncertainties, the budget resistedthe tendency to be fiscally expansionist and didn't shock a system that isn't well-equipped to deal with shocks
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New Delhi: Arun Jaitley’s fourth budget, his government’s penultimate one, wasn’t presented in the best of circumstances, global and local.
The global economy isn’t in a great place. The impact of Brexit—on the UK, the European Union (EU) and the rest of the world—isn’t clear and US President Donald Trump’s early days in the White House have proved beyond doubt that he aims to do everything he said during the campaign—his supporters said at the time that critics were making the mistake of taking his words literally.
The International Monetary Fund (IMF) has kept its growth outlook for the global economy unchanged at 3.4%, but it is becoming clear that the estimate may not have fully factored in the impact of several things—including the extent to which the US’s protectionist policies could hurt global trade in products and services.
Meanwhile, there’s a sudden bullishness about oil that, if it turns out to be true, will not bode well for India, which has managed to balance its books largely on account of the bounty presented by low oil prices (New Delhi has kept end prices almost constant, taking up the tax on oil).
Locally, the latest gross domestic product (GDP) numbers indicate a slowing of growth and, more worryingly, a contraction in gross fixed capital formation; the earnings statements released by banks show that the bad loan problem plaguing the Indian banking system isn’t going to go quietly; and the short-term pain associated with demonetisation (the Indian government’s move, on 8 November to render invalid older high-value currency notes accounting for 86% of the cash in circulation by value) had turned sentiment, both consumer and business, negative.
So, how should foreign investors rate the budget which was presented on 1 February?
One parameter for evaluation has to be the numbers in the budget itself and the philosophy behind them. Jaitley has resisted the tendency (and calls) to be fiscally expansionist and has deviated very marginally from his fiscal deficit target of 3% of GDP. He hopes to end 2017-18 with a fiscal deficit of 3.2%. This is creditable.
In terms of expenditure, though, the numbers look a little more suspect, with the government expecting a mere 6% increase in revenue expenditure. And there’s no telling whether the government will be able to meet the target of Rs72,500 crore it has set itself to raise from divestment of its stake in state-owned companies. It will miss this financial year’s target, much like it did last.
The second parameter will probably be the “Ease of Doing Business" (capitalized because of the World Bank’s eponymous survey of the same name that rates countries on this), one of this government’s articulated objectives.
The scrapping of the Foreign Investment Promotion Board (FIPB) will help this cause, if done the correct way. Although 90% of foreign direct investment, or FDI, currently coming into the country comes in through the so-called automatic route, this process is anything but automatic. And the government also needs to quickly clarify what will happen to the remaining 10% that needs clearances from a combination of ministries.
Tax reforms and measures play an important role in how easy or difficult it is to do business in a country; and on that front, the budget has scrapped a controversial tax on foreign portfolio investors, or FPIs, on indirect transfers. Finally, the budget makes a mention (yet again) of labour reforms and four labour codes to replace the multiplicity of labour laws (many of which are archaic). Even if nothing much happens on this front, foreign investors can take heart from the fact that the government is at least willing to talk about this politically sensitive issue.
The third parameter has to be the local economy, and what the budget does for it in terms of reviving both investment and consumption.
On the growth front, by promising almost Rs4 trillion of investment in creating infrastructure, the budget may have done enough to ensure public investment keeps the wheels of the economy turning till such time private investment is ready to take over. There was enough in it for housing and banks (expectedly, stocks of companies in the two businesses did very well, and drove growth in stock market indices), two sectors that have the ability to amplify, or at the least, transmit growth. And it mentioned enough initiatives and reforms in the works, including a new labour code and the scrapping of FIPB, that will make it easier to do business in India.
Relief for the farm and the rural sectors came from an increase in spending, including in farm credit and the populist rural job guarantee scheme Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS, introduced by the previous government. The government spent more on the job guarantee scheme, especially in the second half of 2016-17, taking total spending in the course of the year to Rs47,500 crore, much higher than the budgeted Rs38,000 crore. The budget for 2017-18 allots Rs48,000 crore for the scheme. For the salaried, the relief came in the form of a tax cut of 5 percentage points for those who earn between Rs2.5 lakh and Rs5 lakh a year; a little over half of the 37 million people who file tax returns in India are in this income group, so the government’s sop is well targeted. For businesses with a turnover of less than Rs50 crore, there is a 5 percentage point cut in the applicable tax rate to 25%. This should provide some relief to medium and small enterprises, especially those that straddle the interstitial space between the formal and informal economy and which have been hit hard by demonetisation.
By far the biggest boost in sentiment, though, came from the fact that Union budget 2017-18 didn’t have any unpleasant surprises in store. The sudden spike in stock markets, a classic relief rally, soon after the finance minister’s speech ended, can be attributed to this, the absence of bad news. That may well be the greatest achievement of the budget: it had a little something for everybody; it didn’t bloat government finances; but perhaps most importantly, it didn’t shock a system that isn’t particularly well-equipped to deal with shocks right now.
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