Budget Today

This month of January has been quite eventful. More clarity on Brexit, the assumption of office by President Trump, the passage of GST, demonetisation and the critical upcoming Uttar Pradesh, Punjab and Goa election are all significant events. 

The Union Budget will be delivered tomorrow against this background (and more). We expect that it will be a mildly expansionary budget to counter the short-term effects of demonetisation. The IMF has slashed 1% off their growth forecast for India to 6.6% pa; the World Bank has reduced their estimates by 0.5% to 7.0% pa. And, undoubtedly, there has been a short-term shock to the system across the board.

As such we expect the Finance Minister to give some leeway with a relaxation in his previously announced fiscal targets. Indications are that increasing the previously stated two year 3% budget deficit target to say, 3.4% of GDP, would allow the government to increase its spend on infrastructure projects. While this should not be a concern per se, the Ministry of Finance’s figures are based on key assumptions in nominal GDP growth and are dependent on significant variables – the price of oil, inflation and the introduction of the Goods and Services Tax (GST) in mid-2017.

Setting aside the remarkable acceptance of the pain of demonetisation, there is an underlying strategy which is fundamentally sound, and which we applaud. Namely, that the introduction of greater transparency in the way the Indian economy works by moving transactions involving individuals, the private sector and the public sector onto a digital platform.

This is a major step forward in relation to the ease of doing business in India as the transparency brought by digitisation allows the organised and informal corporate sectors to compete on a more level playing field. Moreover, the potential of increasing and improving government finances through a more visible potential tax pool is immense. These are exactly the steps that need to be taken as India grows into one of the world’s largest economies during this century.

Some of the expectations from the Finance Minister as as follows:

  1. that the Indian Government should continue to strive to make the operating environment more competitive, with specific focus on the levels of corporation tax and the impact of Dividend Distribution Tax;
  2. that Goods and Services Tax should be rolled out in as uniform, smooth, and fair way across sectors as is possible;
  3. that the Indian Government should work towards a simpler, fairer, and more predictable tax regime that encourages investment in important sectors such as manufacturing, infrastructure, finance, investment services, insurance, defence, oil and energy and digital and telecommunications; and,
  4. a request that the Indian Government give more definition and medium -term clarity on areas of major Government expenditure e.g. in defence and infrastructure so as to enhance investment decisions. 
  5. And all of this is taking place against the background of impending elections in 5 states. The election in Uttar Pradesh, with its 250 million inhabitants, is a critical event ahead of the General Election in 2019. Prime Minister Modi and the BJP swept the board in the 2014 Union Election. The announcement of the State result on 11th March is a forecast as to how the NDAs’ prospects may pan out at a national level in two years time. Option polls are notoriously unreliable. Currently they should give the BJP some degree of optimism. 

There remains much discussion and enquiry around the topic of Brexit. Prime Minister Theresa May has been more explicit as to the process and has said that a White Paper will be published outlining further details. With the index of ease of doing business in India improving it is becoming easier to do business in India. Not surprisingly, GST was identified as the single most effective reform in this process. Key areas of strength in India were ranked in area of priority as “availability of skilled labour”, “telecoms facilities”, “availability of support and service providers”. Power and ease of getting a connection continued to be seen an issue.

The first week of President Trump’s administration demonstrates the changing and unpredictable dynamics that increasingly exist in international trade. The interplay of potential corporate tax reductions, increased import tariffs as well as more rigorous visa policy is already having a very profound impact. It is reported that Indian BPOs are already examining their plans. The 300,000 to 350,000 Indian H1B visa holders in USA are voicing disquiet.

The statements and actions out of the White House are startling. They fly in the face of previous conventional wisdom. It is entirely possible that the result of President Trump’s statements is that products made by US companies exporting or indeed manufacturing in India become more expensive and less competitive. And all of this is happening against the background of Industrial Revolution 4.0.

At the end of the day, succeeding in India is all about intelligence, judgement and risk. 

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